-----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, ALpPISPCz3sySUb56VWobRr2LTEFbhuYSPmZACMJK+/QL1UPTffn2Rsa0/RMG1YP YNUP2w3dYchCKnYdzv2P8A== 0000891554-01-501431.txt : 20010319 0000891554-01-501431.hdr.sgml : 20010319 ACCESSION NUMBER: 0000891554-01-501431 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 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: SEC FILE NUMBER: 001-05823 FILM NUMBER: 1570752 BUSINESS ADDRESS: STREET 1: CNA PLZ STREET 2: 235 CITY: CHICAGO STATE: IL ZIP: 60685 BUSINESS PHONE: 3128225000 MAIL ADDRESS: STREET 1: CNA PLAZA STREET 2: 235 CITY: CHICAGO STATE: IL ZIP: 60685 10-K 1 d25096_10k.txt 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, 2000 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 Exchange --------------------- Securities registered pursuant to Section 12(g) of the Act: None --------------------- 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 [_] 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] As of March 1, 2001, 183,264,248 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 $892 million. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the CNA Financial Corporation 2000 Annual Report to Shareholders are incorporated by reference into Parts I and II of this Report. Portions of the CNA Financial Corporation Proxy Statement prepared for the 2001 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report. - -------------------------------------------------------------------------------- ================================================================================ CNA FINANCIAL CORPORATION ANNUAL REPORT ON FORM 10K FOR THE YEAR ENDED DECEMBER 31, 2000 - -------------------------------------------------------------------------------- Item Page Number PART I Number - ------ ------ 1. Business............................................................ 3 2. Properties.......................................................... 10 3. Legal Proceedings................................................... 11 4. Submission of Matters to a Vote of Security Holders................. 11 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters........................................................... 11 6. Selected Financial Data............................................. 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 11 7A. Quantitative and Qualitative Disclosures about Market Risk.......... 11 8. Financial Statements and Supplementary Data......................... 11 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 11 PART III 10. Directors and Executive Officers of the Registrant.................. 12 11. Executive Compensation.............................................. 12 12. Security Ownership of Certain Beneficial Owners and Management...... 12 13. Certain Relationships and Related Transactions...................... 13 PART IV 14. Financial Statements, Schedules, Exhibits and Reports on Form 8-K... 14 PART I ITEM 1. BUSINESS CNA Financial Corporation (CNAF or the Company) was incorporated in 1967 and is an insurance holding company whose primary subsidiaries consist of property-casualty and life insurance companies. Collectively CNAF and its subsidiaries are referred to as CNA. CNA's property-casualty insurance operations are conducted by Continental Casualty Company (CCC), incorporated in 1897, and its affiliates, and The Continental Insurance Company (CIC), organized in 1853, and its affiliates. Life insurance operations are conducted by Continental Assurance Company (CAC), incorporated in 1911, and its affiliates. CIC became an affiliate of the Company in 1995 as a result of the acquisition of The Continental Corporation (Continental). The principal business of Continental is the ownership of a group of property and casualty insurance companies. CNA serves a wide variety of customers, including small, medium and large businesses; associations; professionals; and groups and individuals with a broad range of insurance and risk management products and services. Insurance products include property and casualty coverages; life, accident and health insurance; and retirement products and annuities. CNA services include risk management, information services, healthcare management, claims administration and employee leasing/payroll processing. CNA products are marketed through agents, brokers, managing general agents and direct sales. CNA's principal market is the United States with a continued focus on expanding globally to serve those with growing worldwide interests, as well as adding value in international market niches. CNA conducts its operations through seven operating segments: Agency Market Operations, Specialty Operations, CNA Re, Global Operations, Risk Management, Group Operations and Life Operations. These operating segments reflect the way CNA distributes its products to the marketplace, manages operations and makes business decisions. In addition to these seven segments, certain other activities are reported in a Corporate and Other segment. Discussions of each segment including the products offered, the customers served and the distribution channels used is set forth in the Management's Discussion and Analysis section of the 2000 Annual Report to Shareholders, incorporated by reference in Item 7, herein. Competition Due to market pressures, the insurance and reinsurance environment remains intensely competitive. Excess underwriting capacity continues to depress prices in the reinsurance market; however, the commercial property-casualty market is beginning to experience significant rate increases. CNA competes with a large number of stock and mutual insurance and reinsurance companies and other entities for both producers and customers, and must continuously allocate resources to refine and improve its insurance and reinsurance products and services. There are approximately 3,320 individual companies that sell property-casualty insurance in the United States. CNAF's consolidated property-casualty subsidiaries ranked as the 8th largest property-casualty insurance organization in the United States based upon 1999 statutory net written premiums. CNAF's reinsurance operations ranked as the 19th largest reinsurance organization in the world, based upon 1999 gross written premiums. There are approximately 1,470 companies selling life insurance in the United States. CAC is ranked as the 36th largest life insurance organization based on 1999 consolidated statutory premium volume. Dividends by Insurance Subsidiaries The payment of dividends to CNAF by its insurance subsidiaries without prior approval of the affiliates' domiciliary state insurance commissioners is limited by formula. This formula varies by state. The formula used by the majority of the states provides that the greater of 10% of prior year statutory surplus or prior year statutory net income, less the aggregate of all dividends paid during the 12 months prior to date of payment, is available to be paid as a dividend to the parent company. In addition, by agreement with the New Hampshire 3 Insurance Department, as well as certain other state insurance departments, dividend paying capacity for the Continental Insurance Company Pool is restricted to internal and external debt service requirements through September 2003 up to a maximum of $85 million annually, without the prior approval of the New Hampshire Insurance Department. As of December 31, 2000, approximately $881 million of dividend payments would not be subject to insurance department prior approval. However, all dividends must be reported to the domiciliary insurance department prior to declaration and payment. 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 powers 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. Such 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 by the state insurance regulator, 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 that must be provided to such involuntary risks. CNA's 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. Reform of the U.S. tort liability system is another issue facing the insurance industry. Over the last decade, many states have passed some type of reform, but more recently, a number of state courts have modified or overturned these reforms. Additionally, new causes of action and theories of damages continue to be proposed in state court actions or by legislatures. Continued unpredictability in the law means that insurance underwriting and rating is expected to be difficult in commercial lines, professional liability and some specialty coverages. Although the federal government and its regulatory agencies do not directly regulate the business of insurance, federal legislative and regulatory initiatives can impact the insurance business in a variety of ways. These initiatives and legislation include tort reform proposals; proposals to overhaul the Superfund hazardous waste removal and liability statute; additional financial services modernization legislation, which could include provisions to have an alternate federal system of regulation for insurance companies; and various tax proposals affecting insurance companies. The National Association of Insurance Commissioners (NAIC) has adopted risk based capital (RBC) requirements for both life insurance companies and property-casualty insurance companies. The requirements are to be utilized by state insurance departments as a minimum capital requirement identifying companies that merit further regulatory action. The formulas were not developed to differentiate adequately capitalized companies that operate with capital levels higher than the RBC requirements. Therefore, it is inappropriate and inadvisable to use the formula to rate or rank insurers. At December 31, 2000 and 1999, all of the Company's life and property-casualty companies had adjusted capital in excess of amounts requiring any regulatory action. Subsidiaries with insurance operations outside the United States are also subject to regulation in the countries in which they operate. 4 Reinsurance Information as to CNA's reinsurance activities is set forth in Note G of the Consolidated Financial Statements of the 2000 Annual Report to Shareholders, incorporated by reference in Item 8, herein. Employee Relations As of December 31, 2000, CNA had approximately 19,100 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 healthcare programs. See Note I of the Consolidated Financial Statements of the 2000 Annual Report to Shareholders for further discussion, incorporated by reference in Item 8, herein. Government Contracts CNA's premium revenue includes premiums under contracts involving U.S. government employees and their dependents. Such premiums were approximately $2.1 billion, $2.1 billion and $2.0 billion in 2000, 1999 and 1998. Business Segments Information as to CNA's business segments is set forth in Note M of the Consolidated Financial Statements of the 2000 Annual Report to Shareholders, incorporated by reference in Item 8, herein. Additional information as to CNA's business segments is set forth in the Management's Discussion and Analysis section of the 2000 Annual Report to Shareholders, incorporated by reference in Item 7, herein. 5 Supplementary Insurance Data The following table sets forth supplementary insurance data:
Years ended December 31, 2000 1999 1998 ---------- ---------- ---------- (In millions, except ratio information) Trade Ratios - GAAP basis (a) Loss ratio 81.2% 87.1% 81.8% Expense ratio 30.3 32.4 33.6 Combined ratio (before policyholder dividends) 111.5 119.5 115.4 Policyholder dividend ratio 0.9 0.3 1.1 Trade Ratios - Statutory basis (a) Loss ratio 80.4% 87.3% 81.5% Expense ratio 33.2 33.5 32.8 Combined ratio (before policyholder dividends) 113.6 120.8 114.3 Policyholder dividend ratio 1.2 0.3 1.0 Gross Life Insurance In-force Life (b) $ 462,799 $ 394,743 $ 317,720 Group 71,982 75,247 76,674 ---------- ---------- ---------- $ 534,781 $ 469,990 $ 394,394 ========== ========== ========== Other Data - Statutory basis (c) Property-casualty capital and surplus* $ 8,387 $ 8,679 $ 7,623 Life capital and surplus 1,274 1,222 1,109 Property-casualty written premiums to surplus ratio 1.0 1.0 1.4 Life capital and surplus-percent of total liabilities 24.5% 21.9% 20.5% Participating policyholders-percent of gross life insurance in force 0.4% 0.5% 0.5%
* Surplus includes equity of property-casualty companies' ownership in life insurance subsidiaries. (a) Trade ratios reflect the results of CNA's property-casualty insurance subsidiaries. Trade ratios are industry measures of property-casualty underwriting results. The loss ratio is the percentage of incurred claim and claim adjustment expenses to premiums earned. The primary difference in this ratio between statutory accounting practices (SAP) and accounting principles generally accepted in the United States of America (GAAP) is related primarily to the treatment of active life reserves (ALR). For GAAP, ALR are classified as loss reserves whereas for SAP, ALR are classified as unearned premium reserves. The expense ratio, using amounts determined in accordance with GAAP, is the percentage of underwriting expenses, including the amortization of deferred acquisition costs, to premiums earned. The expense ratio, using amounts determined in accordance with SAP, is the percentage of underwriting expenses (with no deferral of acquisition costs) to premiums written. The combined ratio (before policyholder dividends) is the sum of the loss and expense ratios. The policyholder dividend ratio, using amounts determined in accordance with GAAP, is the ratio of dividends incurred to premiums earned. The policyholder dividend ratio, using amounts determined in accordance with SAP, is the ratio of dividends paid to premiums earned. (b) Lapse ratios for individual life insurance, as measured by surrenders and withdrawals as a percentage of average ordinary life insurance in-force, were 12.7%, 10.9% and 14.7% in 2000, 1999 and 1998. (c) Other data is determined in accordance with SAP. Life statutory capital and surplus as a percent of total liabilities is determined after excluding Separate Account liabilities and reclassifying the statutorily required Asset Valuation Reserve to surplus. 6 The following table displays the distribution of gross written premiums for CNA's operations:
Percent of Total Gross Written Premiums -------------------------------- Years ended December 31, 2000 1999 1998 ---------- ---------- ---------- New York 7.3% 7.4% 8.3% California 6.0 7.1 8.0 Texas 4.7 5.4 5.6 Florida 4.8 4.6 4.5 Pennsylvania 3.8 4.1 4.4 New Jersey 3.4 3.5 4.0 Illinois 9.2 8.6 9.2 Maryland 5.6 4.5 2.1 United Kingdom 5.3 5.8 3.5 All other states, countries or political subdivisions (a) 49.9 49.0 50.4 ---------- ---------- ---------- Total 100.0% 100.0% 100.0% ========== ========== ==========
(a) No other individual state, country or political subdivision accounts for more than 3.0% of gross written premiums. Approximately 8.2%, 7.6% and 5.0% of CNA's gross written premiums are derived from outside of the United States for the years ended December 31, 2000, 1999 and 1998. The increase in foreign premiums are indicative of CNA's continued expansion overseas, which reflects greater awareness and working knowledge of international business to seize the opportunities of international economic growth. Premiums from any individual foreign country besides those stated in the table above are not significant. Property-Casualty Claim and Claim Adjustment Expenses The following loss reserve development table illustrates the change over time of reserves established for property-casualty claim and claim adjustment expenses at the end of the preceding eleven calendar years for CNA's property-casualty operations. 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 the originally reported reserve liability. The third section, reading down, shows re-estimates of the originally recorded reserves as of the end of each successive year, which is the result of the Company's property-casualty insurance subsidiaries' expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserves to the reserves originally established, and indicates whether the original reserves were adequate or inadequate to cover the estimated costs of unsettled claims. 7 The loss reserve development table for property-casualty companies 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 1990(a) 1991(a) 1992(a) 1993(a) 1994(a) 1995(b) 1996 -------- -------- -------- -------- -------- -------- -------- (In millions) Originally reported gross reserves for unpaid claims and claim expenses $ 20,812 $ 21,639 $ 31,044 $ 29,357 Originally reported ceded recoverable 2,491 2,705 6,089 5,660 -------- -------- -------- -------- Originally reported net reserves for unpaid claim and claim expenses $ 13,090 $ 14,415 $ 17,167 $ 18,321 $ 18,934 $ 24,955 $ 23,697 -------- -------- -------- -------- -------- -------- -------- Cumulative net paid as of: One year later $ 3,285 $ 3,411 $ 3,706 $ 3,629 $ 3,656 $ 6,510 $ 5,851 Two years later 5,623 6,024 6,354 6,143 7,087 10,485 9,796 Three years later 7,490 7,946 8,121 8,764 9,195 13,363 13,602 Four years later 8,845 9,218 10,241 10,318 10,624 16,271 15,793 Five years later 9,726 10,950 11,461 11,378 12,577 17,947 -- Six years later 11,207 11,951 12,308 13,100 13,472 -- -- Seven years later 12,023 12,639 13,974 13,848 -- -- -- Eight years later 12,592 14,271 14,640 -- -- -- -- Nine years later 14,159 14,873 -- -- -- -- -- Ten years later 14,693 -- -- -- -- -- -- Net reserves re-estimated as of: End of initial year $ 13,090 $ 14,415 $ 17,167 $ 18,321 $ 18,934 $ 24,955 $ 23,697 One year later 12,984 16,032 17,757 18,250 18,922 24,864 23,441 Two years later 14,693 16,810 17,728 18,125 18,500 24,294 23,102 Three years later 15,737 16,944 17,823 17,868 18,008 23,814 23,270 Four years later 15,977 17,376 17,765 17,511 17,354 24,092 22,977 Five years later 16,440 17,329 17,560 17,082 17,506 23,854 -- Six years later 16,430 17,293 17,285 17,176 17,248 -- -- Seven years later 16,551 17,069 17,398 17,017 -- -- -- Eight years later 16,487 17,189 17,354 -- -- -- -- Nine years later 16,592 17,174 -- -- -- -- -- Ten years later 16,586 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total net (deficiency) redundancy $ (3,496) $ (2,759) $ (187) $ 1,304 $ 1,686 $ 1,101 $ 720 ======== ======== ======== ======== ======== ======== ======== Reconciliation to gross re-estimated reserves: Net reserves re-estimated $ 16,586 $ 17,174 $ 17,354 $ 17,017 $ 17,248 $ 23,854 $ 22,977 ======== ======== ======== Re-estimated ceded recoverable 1,640 1,956 5,835 5,151 -------- -------- -------- -------- Total gross re-estimated reserves $ 18,657 $ 19,204 $ 29,689 $ 28,128 ======== ======== ======== ======== Net (deficiency) redundancy related to: Asbestos claims $ (3,421) $ (3,378) $ (1,690) $ (1,091) $ (1,057) $ (893) $ (992) Environmental claims (977) (936) (894) (452) (283) (201) (142) -------- -------- -------- -------- -------- -------- -------- Total asbestos and environmental (4,398) (4,314) (2,584) (1,543) (1,340) (1,094) (1,134) Other claims 902 1,555 2,397 2,847 3,026 2,195 1,854 -------- -------- -------- -------- -------- -------- -------- Total net (deficiency) redundancy $ (3,496) $ (2,759) $ (187) $ 1,304 $ 1,686 $ 1,101 $ 720 ======== ======== ======== ======== ======== ======== ======== Schedule of Property-Casualty Loss Reserve Development Calander Year Ended 1997(c) 1998(d) 1999(e) 2000(f) -------- -------- -------- -------- (In millions) Orginally reported gross reserves for unpaid claims and claim expenses $ 28,533 $ 28,317 $ 26,631 $ 26,408 Originally reported ceded recoverable 5,326 5,424 6,273 7,568 -------- -------- -------- -------- Originally reported net reserves for unpaid claim and claim expenses $ 23,207 $ 22,893 $ 20,358 $ 18,840 -------- -------- -------- -------- Cumulative net paid as of: One year later $ 5,954 $ 7,321 $ 6,546 $ -- Two years later 11,394 12,241 -- -- Three years later 14,423 -- -- -- Four years later -- -- -- -- Five years later -- -- -- -- Six years later -- -- -- -- Seven years later -- -- -- -- Eight years later -- -- -- -- Nine years later -- -- -- -- Ten years later -- -- -- -- Net reserves re-estimated as of: End of initial year $ 23,207 $ 22,893 $ 20,358 $ 18,840 One year later 23,470 23,920 20,785 -- Two years later 23,717 23,774 -- -- Three years later 23,414 -- -- -- Four years later -- -- -- -- Five years later -- -- -- -- Six years later -- -- -- -- Seven years later -- -- -- -- Eight years later -- -- -- -- Nine years later -- -- -- -- Ten years later -- -- -- -- -------- -------- -------- -------- Total net (deficiency) redundancy $ (207) $ (881) $ (427) $ -- ======== ======== ======== ======== Reconciliation to gross re-estimated reserves: Net reserves re-estimated $ 23,414 $ 23,774 $ 20,785 $ -- Re-estimated ceded recoverable 4,481 4,614 6,530 -- -------- -------- -------- -------- Total gross re-estimated reserves $ 27,895 $ 28,388 $ 27,315 $ -- ======== ======== ======== ======== Net (deficiency) redundancy related to: Asbestos claims $ (888) $ (644) $ (65) $ -- Environmental claims (154) 70 (17) -- -------- -------- -------- -------- Total asbestos and environmental (1,042) (574) (82) -- Other claims 835 (307) (345) -- -------- -------- -------- -------- Total net (deficiency) redundancy $ (207) $ (881) $ (427) $ -- ======== ======== ======== ========
(a) Reflects reserves of CNA's property-casualty insurance subsidiaries, excluding Continental reserves, which were acquired on May 10, 1995 (the Acquisition Date). 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) does not include Continental. (b) Includes Continental gross reserves of $9,713 million and net reserves of $6,063 million acquired on the Acquisition Date and subsequent development thereon. (c) Includes net and gross reserves of acquired companies of $57 million and $64 million. (d) Includes net and gross reserves of acquired companies of $122 million and $223 million. (e) Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of $784 million as of December 31, 1999. (f) Includes net and gross reserves of acquired companies of $9 million and $13 million. Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of $414 million as of December 31, 2000. 8 Additional information as to CNA's property-casualty claim and claim expense reserves and reserve development is set forth in Notes A and E of the Consolidated Financial Statements of the 2000 Annual Report to Shareholders, incorporated by reference in Item 8, herein. Investments Information as to the Company's investments is set forth in Notes B and C of the Consolidated Financial Statements of the 2000 Annual Report to Shareholders, incorporated by reference in Item 8, herein. Additional information as to the Company's investments is set forth in the Management's Discussion and Analysis section of the 2000 Annual Report to Shareholders, incorporated by reference in Item 7, herein. 9 ITEM 2. PROPERTIES CNA Plaza, owned by Continental Assurance Company, serves as the home office for CNAF 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 40% of the adjacent building is rented to non-affiliates. CNAF'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 CNAF's subsidiaries: ---------------------------------------------------------------------------- Amount Of Building Owned and Occupied or Leased by CNA or its Location Subsidiaries Principal Usage ---------------------------------------------------------------------------- CNA Plaza 333 S. Wabash 1,144,378 sq. ft.(1) Principal executive Chicago, Illinois offices of CNAF 180 Maiden Lane 1,115,100(1)(3) Property-casualty New York, New York insurance offices 55 E. Jackson Blvd. 440,292(1) Principal executive Chicago, Illinois offices of CNAF 401 Penn Street 254,589(1) Leased to tenants Reading, Pennsylvania 100 CNA Drive 251,363(1) Life insurance offices Nashville, Tennessee 1111 E. Broad St. 225,470(2) Property-casualty Columbus, Ohio insurance offices 40 Wall Street 199,238(2) Property-casualty New York, New York insurance offices 1110 Ward Avenue 186,687(1) Property-casualty Honolulu, Hawaii insurance offices 2405 Lucien Way 178,744(2) Property-casualty Maitland, Florida insurance offices 3500 Lacey Road 168,793(2) Property-casualty Downers Grove, Illinois insurance offices 333 Glen Street 164,032(2) Property-casualty Glens Falls, New York insurance offices 1100 Cornwall Road 147,884(2) Property-casualty Monmouth Junction, New Jersey insurance offices 600 North Pearl Street 139,151(2) Property-casualty Dallas, Texas insurance offices (1) Represents property owned by CNAF or its subsidiaries. (2) Represents property leased by CNAF or its subsidiaries. (3) Sold subsequent to December 31, 2000. 10 ITEM 3. LEGAL PROCEEDINGS Information as to CNA's legal proceedings is set forth in Note F of the Consolidated Financial Statements of the 2000 Annual Report to Shareholders, incorporated by reference in Item 8, herein. 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 74 of the 2000 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from page 1 of the 2000 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from pages 21 through 40 of the 2000 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated herein by reference from pages 34 through 38 of the 2000 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statements of Operations - Years Ended December 3l, 2000, 1999 and 1998 Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Cash Flows - Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity - December 31, 2000, 1999 and 1998 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 41 through 72 of the 2000 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT POSITION AND OFFICES HELD FIRST BECAME NAME WITH REGISTRANT AGE OFFICER OF CNA PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - --------------------------------------------------------------------------------------------------------------------------------- Laurence A. Tisch Chief Executive 78 1974 Co-Chairman of the Board of Loews Corporation since Officer, CNA January 1999. Chief Executive Officer of CNA and Director Financial of Automatic Data Processing, Inc. and Bulova Corporation. Corporation Prior to 1999, Mr. Tisch had been Co-Chairman of the Board and Co-Chief Executive Officer of Loews since 1994. Executive Officer of the Registrant since 1974. Bernard L. Hengesbaugh Chairman of the 54 1980 Chairman of the Board and Chief Executive Officer of CNA Board and Chief insurance companies since February 1999. Executive Vice Executive President and Chief Operating Officer of CNA insurance Officer, CNA companies from February 1998 until February 1999. Senior insurance Vice President of CNA insurance companies since November 1990. companies Executive Officer of the Registrant since 1996. Robert V. Deutsch Senior Vice 41 1999 Senior Vice President and Chief Financial Officer of CNA President and Financial Corporation and subsidiaries since August 1999. Chief Financial From June 1987 until August 1999, Mr. Deutsch was Executive Officer, CNA Vice President, Chief Financial Officer, Chief Actuary and Financial Assistant Secretary of Executive Risk, Inc. Executive Corporation Officer of the Registrant since 1999. Jonathan D. Kantor Senior Vice 45 1994 Senior Vice President, General Counsel and Secretary of the President, Registrant since 1998. Senior Vice President, General General Counsel Counsel and Secretary of CNA insurance companies since 1997. and Secretary, Prior thereto, Group Vice President of CNA insurance CNA Financial companies since 1994. Executive Officer of the Registrant Corporation since 1997. Thomas Pontarelli Senior Vice 51 1998 Senior Vice President of the Registrant since March 2000. President, CNA From January 1998 to March 2000, Mr. Pontarelli was Group Financial Vice President. Prior to that time, he was Chairman of the Corporation Board, Chief Executive and President of Washington National Insurance Company, Director of the Registrant since March 2000.
Officers are elected and hold office until their successors are elected and qualified, and are subject to removal by the Board of Directors. Additional information required in Item 10, 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 Item 11, 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 Item 12, 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. 12 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required in Item, 13, 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. 13 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...................................11 (a) 2. FINANCIAL STATEMENT SCHEDULES: Schedule I Summary of Investments..............................17 Schedule II Condensed Financial Information (Parent Company)....18 Schedule III Supplementary Insurance Information.................23 Schedule IV Reinsurance.........................................24 Schedule V Valuation and Qualifying Accounts...................24 Schedule VI Supplementary Information Concerning Property-Casualty Insurance Operations............24 Independent Auditors' Report......................................25 (a) 3. EXHIBITS: Exhibit Description of Exhibit Number ---------------------- ------ (3) Articles of incorporation and by-laws: Certificate of Incorporation of CNA Financial Corporation, as amended May 20, 1999 (Exhibit 3.1 to 1999 Form 10-K incorporated herein by reference.)...............................3.1 By-Laws of CNA Financial Corporation, as amended February 10, 1999 (Exhibit 3.2 to 1998 Form 10-K incorporated herein by reference.)...............................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............................4.1 (10) Material contracts: 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.)..............................10.1 14 Exhibit Description of Exhibit Number ---------------------- ------ (10) Material contracts (continued): 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.)............................10.2 CNA Employees' Supplemental Savings Plan, as amended through January 1, 1994 (Exhibit 10.3 to 1999 Form 10-K incorporated herein by reference.)............................10.3 CNA Employees' Retirement Benefit Equalization Plan, as amended through January 1, 1994 (Exhibit 10.4 to 1999 Form 10-K incorporated herein by reference.)..................10.4 Continental Casualty Company "CNA" Annual Incentive Bonus Plan Provisions (Exhibit 10.1 to 1994 Form 10K incorporated herein by reference.).........................................10.5 Continuing Services Agreement between CNA Financial Corporation and Dennis H. Chookaszian, dated February 9, 1999 (Exhibit 10.2 to 1998 Form 10-K incorporated herein by reference.)............................10.6 Employment Agreement between CNA Financial Corporation and Bernard Hengesbaugh, dated November 2, 2000 (Exhibit 10 to September 30, 2000 Form 10-Q incorporated herein by reference.)...................................................10.7 CNA Financial Corporation 2000 Long-Term Incentive Plan, dated August 4, 1999 (Exhibit 4.1 to 1999 Form S-8 filed August 4, 1999, incorporated herein by reference.)............10.8 Employment Agreement between CNA Financial Corporation and Robert V. Deutsch, dated August 16, 1999 (Exhibit 10 to September 30, 1999 Form 10-Q incorporated herein by reference.)...................................................10.9 Employment Agreement between CNA Financial Corporation and Thomas F. Taylor dated November 2, 1999 (Exhibit 10.14 to 1999 Form 10-K incorporated herein by reference.)...................................................10.10 Sale and Purchase Agreement between CNA Financial Corporation and PGI-WvF 180, L.P. dated October 13, 2000 for the sale of real property commonly known as 180 Maiden Lane...............................................10.11* (12) Computation of Ratio of Earnings to Fixed Charges.............12.1* (13) 2000 Annual Report............................................13.1* (21) Primary Subsidiaries of CNAF..................................21.1* 15 Exhibit Description of Exhibit Number ---------------------- ------ (23) Independent Auditors' Consent.................................23.1* *Filed herewith (b) Reports on Form 8-K: None. (c) Exhibits: None. (d) Condensed Financial Information of Unconsolidated Subsidiaries: None. 16 SCHEDULE I CNA FINANCIAL CORPORATION SUMMARY OF INVESTMENTS
December 31, 2000 --------------------------------------- (In millions) Cost or Amortized Fair Carrying Cost Value Value ------- ------- ------- Fixed maturity securities available-for-sale: Bonds: United States Government and government agencies and authorities - taxable $ 8,807 $ 9,051 $ 9,051 States, municipalities and political subdivisions - tax exempt 3,279 3,349 3,349 Foreign governments and political subdivisions 2,306 2,250 2,250 Public utilities 680 662 662 Convertibles and bonds with warrants attached 209 199 199 All other corporate bonds 11,244 11,087 11,087 Redeemable preferred stocks 54 54 54 ------- ------- ------- Total fixed maturity securities available-for-sale 26,579 26,652 26,652 ------- ======= ------- Equity securities available-for-sale: Common stocks: Banks, trusts and insurance companies 23 29 29 Public utilities 17 20 20 Industrial and other 928 2,167 2,167 Non-redeemable preferred stocks 207 196 196 ------- ------- ------- Total equity securities available-for-sale 1,175 $ 2,412 2,412 ------- ======= ------- Mortgage loans 22 22 Real estate 4 4 Policy loans 193 193 Other invested assets 1,119 1,116 Short-term investments 4,723 4,723 ------- ------- Total investments $33,815 $35,122 ======= =======
17 SCHEDULE II CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION
Financial Position December 31, 2000 1999 ------- ------- (In millions) Assets: Cash $ -- $ 4 Investment in subsidiaries 11,284 10,490 Amounts due from subsidiaries 262 409 Notes receivable from affiliates 454 534 Short-term investments -- 3 Other 6 19 ------- ------- Total assets $12,006 $11,459 ======= ======= Liabilities: Debt $ 2,355 $ 2,492 Other 4 29 ------- ------- Total liabilities 2,359 2,521 ------- ------- Stockholders' equity: Other comprehensive income 873 1,188 Other stockholders' equity 8,774 7,750 ------- ------- Total stockholders' equity 9,647 8,938 ------- ------- Total liabilities and stockholders' equity $12,006 $11,459 ======= =======
See accompanying Notes to Condensed Financial Information. 18
Results of Operations Years ended December 31, 2000 1999 1998 ------- ----- ----- (In millions) Revenues: Net investment income $ 11 $ 8 $ 13 Realized investment (losses) gains (4) 8 (2) Other income 38 25 25 ------- ----- ----- Total revenues 45 41 36 ------- ----- ----- Expenses: Administrative and general 208 206 189 Interest 175 160 148 ------- ----- ----- Total expenses 383 366 337 ------- ----- ----- Loss from operations before income taxes, equity in net income of subsidiaries and the cumulative effect of a change in accounting principle (338) (325) (301) Income tax benefit 118 114 105 ------- ----- ----- Loss before equity in net income of subsidiaries and the cumulative effect of a change in accounting principle (220) (211) (196) Equity in net income of subsidiaries 1,434 258 478 Cumulative effect of a change in accounting principle, net of tax of $95 -- (177) -- ------- ----- ----- Net income (loss) $ 1,214 $(130) $ 282 ======= ===== =====
See accompanying Notes to Condensed Financial Information. 19
Cash Flows Years ended December 31, 2000 1999 1998 ------- ------- ------- (In millions) Cash flows from operating activities: Net income (loss) $ 1,214 $ (130) $ 282 Adjustments to reconcile net income (loss) to net cash flows from operating activities: (Undistributed earnings) distributions in excess of earnings of affiliates (1,005) 350 (55) Cumulative effect of change in accounting principle, net of tax -- 177 -- Realized losses (gains) 4 (8) 2 Changes in: Amounts due from affiliates 147 (59) (53) Other, net 36 88 (64) ------- ------- ------- Total adjustments (818) 548 (170) ------- ------- ------- Net cash flows from operating activities 396 418 112 ------- ------- ------- Cash flows from investing activities: Change in short-term investments 3 -- 171 Capital contributions to subsidiaries, net (165) (198) (260) Purchase of preferred stock of subsidiaries -- -- (305) Loans to subsidiaries 80 (20) (309) Other, net 9 -- (3) ------- ------- ------- Net cash flows used by investing activities (73) (218) (706) ------- ------- ------- Cash flows from financing activities: Dividends paid to preferred shareholders (1) (13) (7) Proceeds from issuance of long-term debt -- 175 993 Principal payments on long-term debt (137) (158) (490) Issuance (redemption) of cumulative exchangeable preferred stock (150) (200) 200 Purchase of treasury stock (35) -- (102) Other, net (4) -- -- ------- ------- ------- Net cash flows (used by) from financing activities (327) (196) 594 ------- ------- ------- Net change in cash and cash equivalents (4) 4 -- Cash and cash equivalents, beginning of year 4 -- -- ------- ------- ------- Cash and cash equivalents, end of year $ -- $ 4 $ -- ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid (received): Interest $ 168 $ 169 $ 129 Federal income taxes (154) (279) 143 Non-cash transactions: Notes receivable for the issuance of common stock 4 19 44
See accompanying Notes to Condensed Financial Information. 20 Notes to Condensed Financial Information a. Basis of presentation The condensed financial information of CNA Financial Corporation (Parent Company) should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the CNA Financial Corporation 2000 Annual Report to Shareholders. Investments in subsidiaries are accounted for using the equity method of accounting. Certain amounts applicable to prior years have been reclassified to conform to classifications followed in 2000. b. Debt
December 31, 2000 1999 ------ ------ (In millions) Variable rate debt: Commercial paper $ 627 $ 675 Credit facility -- 77 Senior notes: 6.25%, due November 15, 2003 249 249 6.50%, due April 15, 2005 491 497 6.75%, due November 15, 2006 249 248 6.45%, due January 15, 2008 149 149 6.60%, due December 15, 2008 199 199 6.95%, due January 15, 2018 148 148 7.25% Debenture, due November 15, 2023 240 247 1.00% Urban Development Action Grant, due May 7, 2019 3 3 ------ ------ Total $2,355 $2,492 ====== ======
The Parent Company has a $750 million revolving credit facility (the Facility) that expires in May 2001. The amount available under the Facility is reduced by the Parent Company's outstanding commercial paper borrowings. As of December 31, 2000, there was $123 million of unused borrowing capacity under the Facility. The interest rate on the Facility is equal to the London Interbank Offered Rate (LIBOR), plus 27.5 basis points. Additionally, there is an annual facility fee of 12.5 basis points on the entire Facility. There were no borrowings under the Facility at December 31, 2000. The average interest rate on the borrowings under the Facility, excluding facility fees, for the year ended December 31, 1999 was 6.66%. The weighted average interest rate on commercial paper was 7.24%, 6.50% and 5.89% at December 31, 2000, 1999 and 1998. At December 31, 2000, the commercial paper program had a weighted average maturity of 22 days. To offset the variable rate characteristics of the Facility and the interest rate risk associated with periodically reissuing commercial paper and variable-rate bank loans, the Parent Company was party to interest rate swap agreements with several banks. The last of these agreements expired on December 14, 2000. These agreements required the Parent Company to pay interest at a fixed rate in exchange for the receipt of three-month LIBOR. The effect of the interest rate swap agreements was to decrease interest expense by approximately $2 million for the year ended December 31, 2000 and increase interest expense by approximately $4 million and $2 million for the years ended December 31, 1999 and 1998. The combined weighted average cost of Facility borrowings, and commercial paper borrowings, including Facility fees and interest rate swaps, was 7.36%, 6.47% and 6.36% at December 31, 2000, 1999 and 1998. 21 On February 15, 2000, Standard & Poor's lowered the Parent Company's senior debt rating from A- to BBB and lowered the Parent Company's preferred stock rating from BBB to BB+. As a result of these actions the facility fee payable on the aggregate amount of the Facility was increased to 12.5 basis points per annum and the interest rate on the Facility was increased to LIBOR plus 27.5 basis points from their previous levels of 9 basis points per annum and LIBOR plus 16 basis points. c. Management and administrative expenses The Parent Company has reimbursed, or will reimburse, its subsidiaries for the net of general management and administrative expenses, certain extra contractual obligations and investment expenses of $200 million, $203 million and $189 million in 2000, 1999 and 1998, respectively. d. Capital transactions In 2000, 1999 and 1998, the Parent Company contributed approximately $171 million, $207 million and $260 million to the capital of its subsidiaries. In 2000 and 1999, CNA subsidiaries returned capital to the Parent Company of approximately $6 million and $9 million. There were no returns of capital in 1998. e. Dividends from subsidiaries and affiliates In 2000, 1999 and 1998, the Parent Company received approximately $429 million, $608 million and $423 million in dividends from subsidiaries included in its consolidated financial statements. 22 SCHEDULE III CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION
Gross Insurance Reserves ----------------------------------------- Insurance Amortiz- Claim Claims and ation Deferred and Future Policy- Net Net Policy- of Deferred Acquisition Claim Policy Unearned holders' Premium Investment holders' Acquisition (In millions) Costs Expense Benefits Premium Funds Revenue Income Benefits Costs -------- -------- -------- -------- -------- -------- -------- -------- -------- December 31, 2000 Agency Market Operations $ 3,331 $ 604 $ 2,778 $ 880 Specialty Operations 799 216 603 161 CNA Re 1,089 195 888 263 Global Operations 1,089 136 657 305 Risk Management 637 163 610 86 Group Operations 3,675 142 3,068 17 Life Operations 876 601 1,104 168 Corporate and Other 24 23 169 -- Eliminations (46) -- (46) -- Consolidated Operations $ 2,418 $ 26,962 $ 6,669 $ 4,821 $ 602 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- -------- $ 2,418 $ 26,962 $ 6,669 $ 4,821 $ 602 $ 11,474 $ 2,080 $ 9,831 $ 1,880 ======== ======== ======== ======== ======== ======== ======== ======== ======== December 31, 1999 Agency Market Operations $ 4,799 $ 686 $ 4,339 $ 1,182 Specialty Operations 1,001 235 907 187 CNA Re 1,176 161 998 290 Global Operations 1,010 132 578 231 Risk Management 801 154 755 71 Group Operations 3,571 130 3,053 2 Life Operations 936 556 1,122 180 Corporate and Other 35 47 185 -- Eliminations (47) -- (47) -- Consolidated Operations $ 2,436 $ 27,356 $ 6,102 $ 5,103 $ 710 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- -------- $ 2,436 $ 27,356 $ 6,102 $ 5,103 $ 710 $ 13,282 $ 2,101 $ 11,890 $ 2,143 ======== ======== ======== ======== ======== ======== ======== ======== ======== December 31, 1998 Agency Market Operations $ 5,247 $ 744 $ 4,436 $ 1,239 Specialty Operations 1,092 245 949 175 CNA Re 944 163 707 252 Global Operations 941 110 589 224 Risk Management 823 144 765 98 Group Operations 3,733 133 3,171 5 Life Operations 823 525 997 178 Corporate and Other (26) 82 128 9 Eliminations (41) -- (41) -- Consolidated Operations -- -- -- -- -------- -------- -------- -------- $ 13,536 $ 2,146 $ 11,701 $ 2,180 ======== ======== ======== ======== Other Net Operating Premiums (In millions) Expenses Written* -------- -------- December 31, 2000 Agency Market Operations $ 299 $ 3,230 Specialty Operations 85 805 CNA Re 48 951 Global Operations 279 1,160 Risk Management 388 633 Group Operations 731 1,497 Life Operations 143 388 Corporate and Other 49 22 Eliminations (135) -- Consolidated Operations -- -- -------- -------- $ 1,887 $ 8,686 ======== ======== December 31, 1999 Agency Market Operations $ 347 $ 3,667 Specialty Operations 102 948 CNA Re 76 1,275 Global Operations 315 1,080 Risk Management 417 839 Group Operations 697 804 Life Operations 94 337 Corporate and Other 236 37 Eliminations (188) -- Consolidated Operations -- -- -------- -------- $ 2,096 $ 8,987 ======== ======== December 31, 1998 Agency Market Operations $ 427 $ 5,461 Specialty Operations 171 1,023 CNA Re 57 908 Global Operations 247 985 Risk Management 378 889 Group Operations 758 1,008 Life Operations 104 295 Corporate and Other 312 -- Eliminations 13 -- Consolidated Operations -- -- -------- -------- $ 2,467 $ 10,569 ======== ========
* Premiums written relate to property-casualty companies only. 23 SCHEDULE IV CNA FINANCIAL CORPORATION REINSURANCE Incorporated herein by reference from Note G on page 60 of the 2000 Annual Report to Shareholders. SCHEDULE V CNA FINANCIAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at Beginning Costs and Other End of (In millions) of Period Expenses Accounts Deductions Period ------- ------- ------- ------- ------- Year ended December 31, 2000 Deducted from assets: Allowance for doubtful accounts: Receivables $ 310 $ 16 $ -- $ 5 $ 321 ======= ======= ======= ======= ======= Year ended December 31, 1999 Deducted from assets: Allowance for doubtful accounts: Receivables $ 328 $ (6) $ -- $ 12 $ 310 ======= ======= ======= ======= =======
SCHEDULE VI CNA FINANCIAL CORPORATION SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
Consolidated Property-Casualty Entities --------------------------------------- As of and for the years ended December 31, 2000 1999 1998 -------- -------- -------- (In millions) Deferred acquisition costs $ 1,121 $ 1,126 Reserves for unpaid claim and claim adjustment expenses 26,408 26,631 Discount deducted from claim and claim adjustment expense reserves above (based on interest rates ranging from 3.5% to 7.5%) 2,413 2,376 Unearned premiums 4,821 5,103 Net earned premiums 8,893 10,010 $ 10,281 Net investment income 1,540 1,632 1,741 Incurred claim and claim adjustment expenses related to current year 6,331 7,287 7,903 Incurred claim and claim adjustment expenses related to prior years 427 1,027 263 Amortization of deferred acquisition costs 1,729 2,005 2,042 Paid claim and claim adjustment expenses 8,434 9,964 8,745 Net written premiums 8,686 8,987 10,569
24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders 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, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, and have issued our report thereon dated February 14, 2001, which report includes an explanatory paragraph as to a certain accounting change; such consolidated financial statements and report are included in the Company's 2000 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of CNA Financial Corporation and subsidiaries listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Chicago, Illinois February 14, 2001 25 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/ Robert V. Deutsch ----------------------------------- Robert V. Deutsch Senior Vice President and Chief Financial Officer (Principal Accounting Officer) Date: March 16, 2001 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/ Ronald L. Gallatin Director Dated - ------------------------------------ Ronald L. Gallatin March 16, 2001 /s/ Robert P. Gwinn Director - ------------------------------------ Robert P. Gwinn /s/ Walter L. Harris Director - ------------------------------------ Walter L. Harris /s/ Bernard L. Hengesbaugh Director - ------------------------------------ Bernard L. Hengesbaugh 26 Signature Title /s/ Walter F. Mondale Director - ------------------------------------ Walter F. Mondale /s/ Edward J. Noha Chairman of the Board - ------------------------------------ and Director Edward J. Noha /s/ Joseph Rosenberg Director - ------------------------------------ Joseph Rosenberg /s/ James S. Tisch Director Dated - ------------------------------------ James S. Tisch March 16, 2001 /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 27 EX-10.10 2 d25096_ex10-10.txt FIRST AMENDMENT TO SALE AND PURCHASE AGREEMENT SALE AND PURCHASE AGREEMENT BETWEEN THE SELLER POOL COMPANIES, as set forth on Exhibit A (SELLER) AND PGI-WvF 180 , L.P. (PURCHASER) TABLE OF CONTENTS Section Page ARTICLE I RECITALS 1.1 Real Property.................................................1 1.2 Personal Property.............................................1 1.3 Purchase and Sale.............................................1 ARTICLE II PURCHASE PRICE 2.1 Price.........................................................2 2.1.1 Deposit...............................................2 2.1.2 Balance of Purchase Price.............................2 2.2 Investment....................................................2 2.3 Interest on the Cash Deposit..................................3 ARTICLE III DUE DILIGENCE PERIOD 3.1 Due Diligence Materials.......................................3 3.2 Inspection of Property........................................3 3.3 Title and Survey..............................................4 3.4 Violations....................................................5 3.5 Seller's Obligations During Due Diligence Period..............6 3.5.1 27th Floor............................................6 3.5.2 Authority of Seller...................................6 3.6 Intentionally Deleted.........................................6 3.7 Seller's Payment to Purchaser.................................7 3.8 Purchaser's Termination Rights................................7 ARTICLE IV CONDITIONS TO THE PARTIES' OBLIGATIONS 4.1 Conditions to Purchaser's Obligation to Purchase..............8 4.1.1 Performance by Seller.................................8 4.1.2 Delivery of Title and Possession.....................10 4.1.3 Tenant Estoppels.....................................10 4.1.4 Seller's Representations.............................12 4.1.5 No Breach............................................12 4.2 Conditions to Seller's Obligation to Sell....................12 4.2.1 Performance by Purchaser.............................12 4.2.2 Receipt of Purchase Price............................12 ARTICLE V PURCHASER'S DELIVERIES TO SELLER 5.1 Deliveries...................................................12 5.1.1 Purchase Price.......................................12 5.1.2 Assignment of Leases and Contracts...................12 5.1.3 Bill of Sale.........................................12 5.1.4 State Transfer Tax Form..............................12 5.1.5 City Transfer Tax Form...............................12 5.1.6 27th Floor Lease.....................................13 5.1.7 Closing Statement....................................13 5.1.8 Cash - Prorations....................................13 5.1.9 Resolutions..........................................13 5.1.10 Required Items.......................................13 5.1.11 Other Documents......................................13 ARTICLE VI SELLER'S DELIVERIES TO PURCHASER 6.1 Delivery of Instruments and Documents........................13 6.1.1 Deed.................................................13 6.1.2 Assignment of Leases and Contracts...................13 6.1.3 Bill of Sale.........................................14 6.1.4 Notices to Tenants...................................14 6.1.5 FIRPTA Affidavit.....................................14 6.1.6 State Transfer Tax Form..............................14 6.1.7 City Transfer Tax Form...............................14 6.1.8 Closing Statement....................................14 6.1.9 Cash - Prorations....................................14 6.1.10 Estoppel Certificates................................14 6.1.11 Letters of Credit....................................14 6.1.12 Title Company Requirements...........................15 6.1.13 Assignment - Warranties/Guarantees...................15 6.1.14 Keys.................................................15 6.1.15 Licenses and Permits.................................15 6.1.16 Resolutions..........................................15 ii 6.1.17 Required Items.......................................15 6.1.18 Rent Roll............................................15 6.1.19 Utility Bills........................................15 6.1.20 Guarantee............................................15 6.1.21 Updated Representation Certificate...................16 6.1.22 Terminated Contracts.................................16 6.1.23 Assignment and Assumption of Contracts for Work in Progress.....................................16 6.1.24 G.S. Waiver..........................................16 6.1.25 Lien Waivers.........................................16 6.1.26 The 27th Floor Lease.................................16 6.1.27 The 27th Floor Lease Guarantee.......................16 ARTICLE VII BROKERS AND ADVISORS 7.1 Brokers and Advisors.........................................16 ARTICLE VIII THE CLOSING 8.1 Date and Manner of Closing...................................17 8.1.1 Funds and Documents..................................17 8.1.2 Title Insurance......................................17 8.2 Additional Title Insurance...................................17 ARTICLE IX PRORATION, FEES, COSTS AND ADJUSTMENTS 9.1 Prorations...................................................18 9.1.1 Leasing Costs Credited to Purchaser..................18 9.1.2 Leasing Costs During Contract Period.................19 9.1.3 Taxes................................................19 9.1.4 Security and Other Deposits..........................20 9.1.5 Rent.................................................20 9.1.6 Additional Rent......................................20 9.2 Seller's Closing Costs.......................................22 9.3 Purchaser's Closing Costs....................................22 iii ARTICLE X ESCROW 10.1 Escrow.......................................................22 ARTICLE XI RETURN OF DOCUMENTS AND FUNDS UPON TERMINATION 11.1 Return of Seller's Documents.................................22 11.2 Deposit......................................................23 11.3 No Effect on Rights of Parties; Survival.....................23 ARTICLE XII DEFAULT 12.1 Seller's Remedies............................................23 12.2 Purchaser's Remedies.........................................23 ARTICLE XIII REPRESENTATIONS AND WARRANTIES 13.1 Seller's Warranties and Representations......................24 13.1.1 Power and Authority..................................24 13.1.2 Proceedings..........................................25 13.1.3 Contravention........................................25 13.1.4 Leases and Contracts.................................25 13.1.5 Compliance...........................................26 13.1.6 Employees............................................26 13.1.7 Litigation...........................................27 13.1.8 Notice of Violations.................................27 13.1.9 Licenses and Permits.................................28 13.1.10 Allowances; Leasing Commissions......................28 13.1.11 Tax Proceedings......................................28 13.1.12 Insurance............................................29 13.1.13 Personal Property....................................29 13.1.14 Environmental and Engineering Reports................29 13.1.15 Utilities............................................29 13.1.16 Business Improvement District........................29 13.1.17 Non-Foreign Person...................................29 13.1.18 Access to Documents..................................29 13.1.19 Brokerage Agreements.................................29 iv 13.1.20 Work.................................................30 13.1.21 Rezoning.............................................30 13.1.22 Financial Statements.................................30 13.2 Purchaser's Warranties and Representations...................30 13.2.1 Power and Authority..................................30 13.2.2 Execution and Delivery...............................30 13.2.3 Independent Investigation............................31 13.2.4 Purchaser Reliance...................................31 13.3 No Other Warranties and Representations......................31 13.3.1 No Environmental Representations.....................31 13.3.2 Release of Claims....................................32 ARTICLE XIV CASUALTY AND CONDEMNATION 14.1 Insured Casualty.............................................32 14.2 Uninsured Casualty...........................................33 14.3 Condemnation.................................................33 14.4 Purchaser's Right to Participate and/or Consent..............34 14.5 General Obligations Law......................................34 ARTICLE XV CONDUCT PRIOR TO THE CLOSING 15.1 Conduct by Seller............................................34 15.2 Actions Prohibited...........................................35 15.3 Leases and Contracts During Due Diligence Period.............36 15.4 After Due Diligence Period...................................36 15.5 Conduct by Purchaser.........................................37 15.6 Confidentiality..............................................37 ARTICLE XVI NOTICES ARTICLE XVII TRANSFER OF TITLE AND POSSESSION 17.1 Transfer of Possession.......................................39 17.1.1 Delivery of Documents at Closing.....................39 v ARTICLE XVIII GENERAL PROVISIONS 18.1 Captions.....................................................39 18.2 Exhibits.....................................................39 18.3 Entire Agreement.............................................39 18.4 Modification.................................................39 18.5 Attorneys' Fees..............................................40 18.6 Governing Law................................................40 18.7 Time of Essence..............................................40 18.8 Survival of Warranties.......................................40 18.9 Assignment by Purchaser......................................41 18.10 Severability.................................................41 18.11 Successors and Assigns.......................................41 18.12 Interpretation...............................................41 18.13 Counterparts.................................................41 18.14 Recordation..................................................41 18.15 Limitation on Liability......................................41 18.16 WAIVER OF JURY TRIAL.........................................41 18.17 Further Assurances...........................................42 18.18 Non-Waiver of Rights.........................................42 18.19 Mortgage Transactions........................................42 18.20 Credit Lyonnaise Rouse (USA) ("Credit Lyonnaise") Transaction..................................................43 18.21 Indemnity by Seller..........................................44 18.22 Indemnity by Purchaser.......................................44 18.23 Counterparts.................................................44 18.24 Indemnification..............................................45 18.25 Definitions..................................................45 vi SALE AND PURCHASE AGREEMENT This Agreement, dated as of October 13, 2000, is made by and between the companies listed on Exhibit A (the "Seller Pool Companies"), located at 180 Maiden Lane, New York, New York 10038 ("Seller"), for which TCC ACQUISITION CORP., a Delaware corporation acts as Agent ("Agent"), and PGI-WvF 180, L.P., a New York limited partnership ("Purchaser"). ARTICLE I RECITALS 1.1 Real Property. Seller owns and holds fee title to that certain land (the "Land") described in Exhibit B, together with all improvements, buildings and structures and all fixtures and equipment (including, without limitation, all of the following (other than the property of tenants under Leases (the "Tenants") or of public or private utilities): plumbing, electrical, mechanical, elevator, communication, heating, air conditioning and ventilating components, lines and systems and boilers and each and every other type of physical improvement located at, on or affixed to the Land to the full extent such items constitute or are or can or may be construed as realty under the laws of the State of New York (collectively, the "Improvements") located thereon known as 180 Maiden Lane and located at New York, New York (collectively, the "Real Property"). 1.2 Personal Property. In connection with the Real Property, Seller has (i) obtained certain governmental permits and approvals, (ii) obtained certain contractual rights and other intangible assets, and (iii) acquired certain other items of tangible personal property more completely described in Exhibit C together with all of Seller's rights to the name of the Real Property (collectively, the "Personal Property"). The Real Property and the Personal Property together with all appurtenances, rights and privileges pertaining thereto including, without limitation, all of Seller's right, title and interest in and to the rights of way, streets, alleys, easements, strips or gores of land adjacent thereto are collectively referred to as the "Property." The parties agree that the Personal Property being conveyed by Seller to Purchaser is de minimis and no portion of the Purchase Price is attributable thereto. 1.3 Purchase and Sale. Seller now desires to sell and Purchaser now desires to purchase all of Seller's right, title and interest in and to the Property, upon the terms and covenants and subject to the conditions set forth below. 1 ARTICLE II PURCHASE PRICE 2.1 Price. In consideration of the covenants herein contained, Seller hereby agrees to sell and Purchaser hereby agrees to purchase the Property for a total purchase price of Two Hundred Ninety Million Six Hundred Fifteen Thousand and 00/100 Dollars ($290,615,000) subject to prorations and adjustments as set forth herein (the "Purchase Price"), which shall be paid by Purchaser as follows: 2.1.1 Deposit. Purchaser has, concurrently herewith, deliver to a TitleServ Agency of New York ("Escrow Agent") having an address at 9 West 57th Street, New York, New York 10019, pursuant to the terms of the Escrow Agreement attached hereto as Exhibit X by bank wire of immediately available funds or by delivering to Escrow Agent a clean, unconditional and irrevocable letter of credit in favor of Seller in such amount (the "Deposit Letter of Credit"), issued or confirmed for direct payment by Bank of New York or other bank which is rated AA and is reasonably acceptable to Seller, in the form of the letter of credit annexed hereto as Exhibit D, the sum of Fifteen Million and 00/100 Dollars ($15,000,000) (together with any interest earned thereon if the deposit was made in cash, the "Deposit"). 2.1.2 Balance of Purchase Price. Purchaser shall at the Closing (as defined in Section 8.1), deliver to Seller, by bank wire transfer of immediately available funds to an account designated by Seller no less than 3 days prior to Closing, (i) in the event that the Deposit was in cash, the additional sum of Two Hundred Seventy-Five Million Six Hundred Fifteen Thousand and 00/100 Dollars ($275,615,000) representing the balance of the Purchase Price or (ii) in the event that the Deposit was the Deposit Letter of Credit, the sum of Two Hundred Ninety Million Six Hundred Fifteen Thousand and 00/100 Dollars ($290,615,000) upon receipt of which, Escrow Agent shall return the Deposit Letter of Credit to Purchaser. The balance of the Purchase Price received by Seller at the Closing shall be adjusted to reflect prorations and other adjustments pursuant to Section 2.3 and Section 9.1 and, if applicable, Sections 3.5.1, 4.1.1.1, 4.1.1.2, 4.1.1.3 and 18.20. 2.2 Investment. Following the collection of the Deposit if in cash (the "Cash Deposit"), Escrow Agent shall invest the Cash Deposit in an interest-bearing account at Citibank, N.A. or, at the request of Purchaser, shall invest the Cash Deposit in short-term United States Treasury securities or other insured, low-risk, short-term securities mutually agreed upon by both parties. 2 2.3 Interest on the Cash Deposit. If the transaction does not close, any interest earned on the Cash Deposit shall be credited and delivered to the party receiving the Cash Deposit. If the transaction closes, at the Closing any interest earned on the Cash Deposit shall be credited to Purchaser. ARTICLE III DUE DILIGENCE PERIOD 3.1 Due Diligence Materials. Seller made available to Purchaser and Purchaser's representatives, for their review and approval during the period prior to the date hereof (the "Due Diligence Period"), copies of all Leases, subleases, license and concession agreements, Contracts, records, employment rosters and other information regarding employees who are employed at the Property, tenant files, accounting records, correspondence, service and management agreements, plans, specifications, "as-builts", surveys, permits and engineering and environmental reports, financial information (including, without limitation, books and records), appraisals and reports and any other information or documents reasonably requested by Purchaser (to the extent that any of such items are in Seller's possession or control and have not yet been delivered to Purchaser) (the "Due Diligence Materials"). The Due Diligence Materials were made available to Purchaser and its representatives at the offices of Seller or its property manager at reasonable times and upon reasonable telephone notice during the Due Diligence Period and Purchaser made copies of any such materials, all of which Purchaser will return to Seller in the event that this Agreement is terminated prior to Closing. In addition, Purchaser, at its sole cost and expense, was permitted, during the Due Diligence Period, to make a complete review and inspection of the physical condition of the Property, including, without limitation, the mechanical, electrical and HVAC systems, roof, facade and elevator inspections, and a complete ADA compliance, fire safety and environmental review. 3.2 Inspection of Property. During the term of this Agreement, Purchaser shall have the right to enter the Property subject to the following limitations: (A) any entry onto the Property by Purchaser, its agents or representatives, shall be during normal business hours, following reasonable prior telephone notice to Seller and delivery to Seller of satisfactory evidence of Purchaser's general liability insurance, and, at Seller's discretion, Purchaser, its agents or representatives shall be accompanied by a representative of Seller; (B) Purchaser shall not conduct any drilling, test borings or other invasive testing or disturbance of the Property for review of soils, compaction, environmental, structural or other conditions without Seller's prior written consent; (C) any discussions or interviews with any of the tenants of the Property or their personnel or counsel shall be conducted in the presence of Seller or its representatives; (D) Purchaser shall exercise reasonable diligence not to disturb the use or occupancy of any occupant of the Property; and (E) Purchaser shall indemnify, defend and hold Seller 3 harmless from all loss, cost, and expense (including, without limitation, reasonable attorney's fees and disbursements), resulting from any personal injury or property damage caused by any entry or inspections or other due diligence activities performed by Purchaser, its agents and representatives. Purchaser's obligations under this Section shall survive any termination of this Agreement. Seller hereby grants Purchaser from and after the date hereof, and continuing through the date of Closing the right to have discussions with and interview representatives of GS (hereinafter defined) and Stroock & Stroock & Lavan LLP ("SSL") provided that a representative of Seller is present during such discussions and interviews. During the term of this Agreement, Seller shall cooperate with Purchaser in scheduling any inspections, tests and tenant interviews in an expeditious fashion so as to enable Purchaser to fully investigate the Property, which Purchaser shall have the right to do at any time prior to Closing in accordance with the provisions of this Agreement, and shall provide Purchaser with the Due Diligence Materials, provided that subsequent to the Due Diligence Period, Purchaser shall have no right to terminate this Agreement based on its continued investigation of the Property except as specifically set forth in this Agreement. 3.3 Title and Survey. Purchaser acknowledges that prior to the execution and delivery of this Agreement, Purchaser has received a Certificate and Report of Title from New York Land Services Inc. (the "Title Company") and ordered a survey of the Property from a licensed surveyor (the "Survey"). On or prior to the Closing Date, Seller shall remove, discharge or insure over any lien or encumbrance on the Property which is not listed on Exhibit E attached hereto (the "Permitted Encumbrances") (a "Title Defect"), provided that Seller shall only be required to cure Title Defects that are liquidated in amount if the aggregate cost of the cure shall not exceed $2,500,000 (the "Title Cap"), except for monetary liens created by Seller (including the First Mortgage and the Second Mortgage, as defined below) all of which shall be cured by Seller regardless of cost. Notwithstanding the foregoing, Seller shall not be required to cure any mechanic's liens created by GS, or any of its affiliates in connection with the performance of work under the GS Lease. Any liens evidencing liquidated claims created by any Tenant (except the mechanic's liens created by GS described above) shall be cured by Seller, up to the amount of the Title Cap, and Seller shall have the right to bond such lien and to seek recovery from the Tenant, including by instituting suit for the amount expended by Seller to effect such cure. If such liens or encumbrances are not bonded or discharged, Purchaser shall have the right to terminate this Agreement as described in the last paragraph of this Section 3.3. Seller may use any proceeds of the sale to remove, discharge, insure over or otherwise satisfy (at Closing) any Title Defect. If, on the date on which the Closing occurs (the "Closing Date"), the Title Company fails to deliver to Purchaser and Purchaser's lender a title policy in form and substance substantially the same as the pro forma title policy attached hereto as Exhibit F, 4 Purchaser may, at its option, (i) accept title to the Property subject to any Title Defects and receive at Closing a credit against the Purchase Price in an amount required to cure, as determined by the Title Company, any such Title Defects, provided that the total amount of credit shall not exceed the amount of the Title Cap (excluding any monetary liens created by Seller which Seller shall cure regardless of the cost of cure (including the First Mortgage and the Second Mortgage) or (ii) if the Title Defects, excluding any monetary liens created by Seller, exceed the Title Cap, terminate this Agreement by written notice to Seller, in which event the Deposit shall be returned to Purchaser and thereafter neither party shall have any further rights or obligations hereunder, except those specifically stated to survive a termination of this Agreement. Notwithstanding anything to the contrary in the foregoing, Seller has advised Purchaser that it is currently disputing with the holder of a mortgage encumbering the Property the amount which may be due and owing to satisfy such mortgage and Seller acknowledges that it shall be Seller's obligation to deliver at Closing to the Title Company any instrument as shall be required by the Title Company to remove of record the mortgage, identified as Mortgages A-K (the "First Mortgage") in the Report of Title dated June 1, 2000 (the "Report of Title") issued by the Title Company; which obligation may include the deposit of a sum of money with an escrow agent until resolution of the dispute, a procedure more particularly described in the First Mortgage. In addition to the First Mortgage, Seller shall also remove of record at or prior to Closing the Mortgage identified as Mortgage L (the "Second Mortgage") on the Report of Title. With respect to any Title Defect as to which Seller did not have notice at least ten days prior to the Closing Date (a "New Exception"), Seller shall be entitled to a reasonable adjournment of the Closing Date provided for herein (which adjournment period shall not exceed thirty (30) days) time being of the essence during which to remove or cure any such New Exception, subject to the limitations on cure costs set forth in this Section 3.3. If the cost to cure the New Exception is less than the Title Cap and for a liquidated sum, Purchaser shall close with a credit for the cost of cure; if the cost to cure is greater than the Title Cap, Purchaser shall have the option (x) to close subject to Seller expending up to the Title Cap to cure such New Exception or Seller giving a credit to Purchaser at Closing for the amount necessary to effect such cure (up to the amount of the Title Cap), and so long as Seller cures all monetary liens created by Seller or (y) to terminate this Agreement as set forth in the preceding paragraph. 3.4 Violations. If the Land or the Improvements is or becomes subject to any notes or notices of violation of any Laws that have been noted in or issued by any federal, state or municipal department having jurisdiction prior to the date of this Agreement, and which have not been fully remedied or discharged of record ("Violations"), Seller shall remedy such Violations prior to Closing and shall discharge such Violations of record prior to Closing. Except as otherwise provided in the next sentence of this Section, in the event that any material Violations have not been cured prior to Closing, Purchaser may, at its option, (i) accept title to the Property subject to such Violations and receive a credit 5 at Closing in the amount necessary to effect such cure or (ii) terminate this Agreement by written notice to Seller, in which event the Deposit shall be returned to Purchaser and neither party shall have any further rights or obligations hereunder, except those specifically stated to survive a termination of this Agreement. Notwithstanding the foregoing, in the event that any of the Violations listed on Exhibit Z are the responsibility of any Tenant to cure pursuant to its Lease, Seller shall not be responsible to cure any such Violations, and Purchaser shall have no right to terminate as a result thereof so long as Seller is using commercially reasonable methods to enforce the Tenant's obligations to cure the Violations, which shall include Seller's request in writing that such Tenant cure such Violation. A copy of such request shall be delivered by Seller to Purchaser. 3.5 Seller's Obligations During Due Diligence Period. Seller shall, within the time periods set forth below, complete the following (the obligations described in Section 3.5.1 and Section 3.5.2 are hereinafter defined as "Seller's Due Diligence Obligations"): 3.5.1 27th Floor. Seller has entered into an amendment of the GS Lease to include the entire 27th Floor in the GS Lease, in form and substance reasonably acceptable to Purchaser (the "GS 27th Floor Amendment"). Seller shall cause to be executed and delivered at Closing a new lease for the entire 27th floor (the "27th Floor Lease"), between Purchaser, as Landlord, and The Continental Insurance Company, as Tenant, in the form of Exhibit G, which 27th Floor Lease shall be subordinate to the GS 27th Floor Amendment in accordance with the terms of the subordination provisions of Article 33 of the 27th Floor Lease without the need for any further documents or agreements. In the event that the Rent Commencement Date (as defined in the GS 27th Floor Amendment) has not occurred on or prior to the Closing Date, Seller shall be liable to Purchaser for the amount of Fixed Rent (as defined in the GS Lease) that would have been payable by GS for the time period from the Closing Date to the date that the Rent Commencement Date under the GS 27th Floor Amendment occurs (the "27th Floor Fixed Rent Differential"). If the amount of the credit cannot be calculated at Closing, Seller shall make such payment to Purchaser monthly and the 27th Floor Fixed Rent Differential payment obligations shall survive Closing. The Seller's obligation for the GS 27th Floor Fixed Rent Differential shall be guaranteed pursuant to the terms of the Guarantee (as defined below). 3.5.2 Authority of Seller. Seller has delivered confirmation, reasonably acceptable to Purchaser, that TCC Acquisition Corp. is authorized by the Seller Pool Companies, to enter into the Letter of Intent, dated August 16, 2000, between Seller and Purchaser ("LOI") with respect to the Property and that the Seller Pool Companies are authorized to enter into this Agreement. 3.6 Intentionally Deleted. 6 3.7 Seller's Payment to Purchaser. In the event that this Agreement has been terminated in accordance with its terms and Seller enters into a contract to sell the Property to GS or any of its Affiliates on or prior to December 31, 2000, Seller shall pay to Purchaser the amount of $1,000,000 in immediately available funds to an account designated by Purchaser no later than 3 business days after entering into such contract. If any payment required to be made by Seller under this Section is not made within the time period set forth herein, all outstanding amounts shall accrue interest at the rate of 10% per annum. The obligations of Seller set forth in this Section shall survive a termination of this Agreement. 3.8 Purchaser's Termination Rights. If Purchaser, after the date hereof, obtains knowledge at or prior to Closing of any matter entitling Purchaser to terminate this Agreement (individually or collectively, as applicable, a "Post Signing Termination Matter"), including without limitation a breach of a representation or warranty or an unacceptable Estoppel Certificate (as hereinafter defined), and the aggregate amount of the loss to Purchaser in connection with the Post Signing Termination Matter is reasonably quantifiable and is for an amount of $2,500,000 or less in the aggregate, Purchaser shall remain obligated to acquire the Property on the terms set forth in this Agreement and Seller shall indemnify Purchaser for all losses suffered in connection with such Post Signing Termination Matters up to the amount of $2,500,000 in the aggregate. If Purchaser obtains knowledge at or prior to Closing of any Post Signing Termination Matter which is reasonably quantifiable and the aggregate loss exceeds $2,500,000 in the aggregate, Purchaser may (x) terminate this Agreement and receive a return of the Deposit in which case the parties hereto shall have no further rights or obligations hereunder, except those specifically stated to survive a termination of this Agreement or (y) acquire the Property. If Purchaser shall acquire the Property, Purchaser agrees that (except as provided in Section 3.3.) it shall not have the right to raise a claim pursuant to Section 18.21 with respect to the Post Signing Termination Matter of which Purchaser had prior knowledge and Seller shall indemnify Purchaser for all losses suffered in connection with such Post Signing Termination Matter up to $2,500,000 in the aggregate. Seller's indemnity in this Section 3.8 shall be covered by the Guaranty. It is understood that the Post Signing Termination Matters shall not include any issues relating to the following: base year amounts; costs for cleaning; insurance; taxes and electricity; reduction of sundry income; income and expense of fitness center; or the physical condition of the Building (except that the Post Signing Termination Matters shall include matters related to Seller's obligations herein to (a) repair and maintain the Building from the date hereof to the date of Closing, (b) comply with its obligations pursuant to Article XIV and (c) perform the items set forth on Exhibits H and I) and Purchaser waives all rights to terminate this Agreement or to claim for indemnity or breach of representation with respect thereto. Purchaser shall notify Seller, promptly when it becomes aware of a Post Signing Termination Matter and in any event, prior to Closing. The obligations of 7 Seller pursuant to this Section 3.8 are in addition to the obligations of Seller pursuant to Section 18.21. ARTICLE IV CONDITIONS TO THE PARTIES' OBLIGATIONS 4.1 Conditions to Purchaser's Obligation to Purchase. Purchaser's obligation to purchase is expressly conditioned upon each of the following: 4.1.1 Performance by Seller. Performance in all material respects of the obligations and covenants of, and deliveries required of, Seller hereunder, including, without limitation, the following: 4.1.1.1 Capital Improvements. Seller shall complete, prior to the Closing, and in accordance with the original scope of work which supports the estimated costs as itemized, all work ("Work") shown in Exhibit H annexed hereto pursuant to Contracts and agreements approved in writing by Purchaser to the extent such Work has not been previously completed. The Contracts and agreements existing on the date hereof are approved or deemed approved and are listed on Exhibit H and Exhibit I (the "Prior Agreements"). To the extent that any of the Work shown on Exhibit H or Exhibit I is not completed as of the date of this Agreement, Purchaser shall have the right to reasonably supervise the performance and completion of the Work and to approve all Contracts and agreements (other than the Prior Agreements). In the event that any portion of the Work shown on Exhibit H or Exhibit I remains incomplete as of the Closing, Seller shall credit against the balance of the Purchase Price owed by Purchaser an amount equal to (a) the unpaid balances on any contracts for performance of the Work which have been executed by Seller and approved by Purchaser or which are Prior Agreements plus (b) the amount required to complete any Work which has not yet been contracted for, which amount shall be agreed to in good faith by Seller and Purchaser, (except in any case where the amount of the credit for any unfinished Work is set forth on Exhibit H in which case the amount so set forth shall be the amount of the credit) and Seller shall assign to Purchaser at Closing all of the Contracts and agreements for the Work approved by Purchaser and the Prior Agreements. Seller shall deliver at Closing lien waivers for Work that is shown on Exhibit H and Exhibit I that Seller has completed prior to Closing. 4.1.1.2 Ricker Auditorium. Seller and GS have entered into an amendment of the GS Lease to include an additional 8,111 rentable square 8 feet, identified in the GS Lease as the Ricker Auditorium, at an annual Fixed Rent in the amount of not less than Three Hundred Fifty Thousand Dollars ($350,000), to be co-terminus with the GS Lease, subject to Article 38 of the GS Lease, and otherwise on terms and conditions agreed upon between Seller and GS, with the approval of Purchaser (the "Ricker Amendment"). Any costs incurred in connection with the Ricker Amendment shall be for the account of Seller and paid for by Seller at or prior to Closing. At the Closing, in order to compensate Purchaser for Fixed Rent for the number of days between the Closing and the date GS is required to commence paying Fixed Rent, Purchaser shall receive a credit in the amount of the per diem Fixed Rent that Purchaser would have been entitled to receive from GS had Fixed Rent pursuant to the Ricker Amendment been payable on or before the Closing Date. Any revenue that Purchaser, as landlord, shall receive from the Ricker Auditorium attributable to the period from the Closing to the date GS is required to commence paying Fixed Rent shall be for the account of Seller and Purchaser shall collect such revenue in the normal course of business and shall remit such revenue net of any actual expenses incurred by Purchaser and attributable to the Ricker Auditorium during such period to Seller promptly upon receipt. The obligations of Purchaser in this Section shall survive Closing. 4.1.1.3 Management Office. Prior to the Closing, Seller and Purchaser shall identify available space in the Real Property for use by Purchaser as a management office. The location shall be at Purchaser's sole discretion from the available space and shall be selected by Purchaser prior to Closing. The costs of construction of the management office shall be shared equally between Seller and Purchaser; provided, however, that the maximum amount of Seller's contribution shall be Twenty-Five Thousand Dollars ($25,000). In the event that the construction of and payment for the management office are not completed prior to the Closing, Purchaser shall be entitled to a credit at the Closing in the amount of $25,000 less any amounts previously paid by Seller towards the cost of the management office. In the event that it is determined that Seller's share of the costs is less than $25,000, Purchaser shall promptly reimburse Seller for the excess amount paid by Seller. Purchaser shall make all decisions with respect to the design, construction, and layout of the management office. All contracts and agreements to be entered into for the construction of the management office shall be negotiated by Purchaser and, upon the request of Purchaser, executed by Seller, subject to the provisions set forth in this Section regarding payment of costs related to the management office. All work in connection with the management office shall be performed by Purchaser; provided, however, that in the 9 event that Purchaser shall desire to commence work prior to the Closing, Purchaser shall provide to Seller evidence of such insurance as shall be reasonably required by Seller naming Seller as an insured in respect of any and all claims for personal injury, death or property damage occurring in connection with Purchaser's performance of the work. Purchaser acknowledges and agrees that the existing management office located on the 27th floor will not be available to Purchaser to use as a management office. 4.1.1.4 Guarantee. At the Closing, Seller shall deliver to Purchaser a guarantee in the form attached hereto as Exhibit J (the "Guarantee") of CNA Financial Corp. (the "Guarantor"). 4.1.1.5 Contingent Obligations. Seller shall be liable for and shall pay to Purchaser upon demand any of the Contingent Obligations if and to the extent that any shall become due. This obligation of Seller should survive the Closing and be covered by the Guarantee. 4.1.2 Delivery of Title and Possession. Delivery at the Closing of (i) all the items listed in Section 6.1 hereof including, without limitation, the Deed (as defined in Section 6.1.1) and issuance of the Title Policy (as defined in Section 8.1.2) showing title in Purchaser in the condition described in Section 8.1.2, and (ii) possession as provided in Section 17.1. 4.1.3 Tenant Estoppels. Receipt by Purchaser of estoppel certificates (collectively, the "Estoppel Certificates") dated not more than 45 days prior to the Closing Date executed by each of (i) subject to clause (iii) below, GS, SSL, Weitz & Luxenburg, PC. and Nomura Asset Management (collectively, the "Major Tenants"), in the form attached hereto as Exhibit L with respect to all of the Major Tenants (provided that if any of the Leases for such Major Tenants prescribes the form or requirements of the estoppel certificate, then an estoppel certificate in conformity with the such form or requirements shall be an acceptable substitute for the form attached as Exhibit L and shall be deemed an acceptable estoppel certificate hereunder); (ii) subject to clause (iii) below, Tenants occupying in the aggregate not less than ninety percent (90%) of the total rentable area of the Property not occupied by the Major Tenants (collectively, the "Other Tenants"), in the form attached hereto as Exhibit L (except that if any of the Leases for Other Tenants prescribes the form or requirements of the estoppel certificate, then an estoppel certificate in conformity with the such form or requirements shall be an acceptable substitute for the form attached as Exhibit L and shall be deemed an acceptable estoppel certificate hereunder); and (iii) to the extent, if any, that estoppel certificates from the Major Tenants and/or Other Tenants are not all obtained, a certificate of Seller in the form of Exhibit N attached hereto (the 10 "Landlord Estoppel") with respect to each Major Tenant and/or Other Tenant from whom Seller has not obtained an estoppel certificate. Notwithstanding this Section 4.1.3(iii), in the event that an Estoppel Certificate is not obtained from any Major Tenant and Seller delivers a Landlord Estoppel therefor, Purchaser may either elect to terminate this Agreement in accordance with the terms hereof or waive the requirement for such Major Tenant Estoppel Certificate and accept a Landlord Estoppel in lieu of such Major Tenant Estoppel Certificate. If Purchaser elects to terminate this Agreement pursuant to the immediately preceding sentence, this Agreement shall immediately terminate and the Deposit shall be returned to Purchaser and the parties hereto shall have no liability hereunder except as specifically stated to survive a termination of this Agreement, except that if Purchaser shall elect to terminate this Agreement pursuant to the immediately preceding sentence, Seller shall have the right, but not the obligation, to elect to adjourn the Closing for a reasonable period of time not to exceed thirty (30) days in order to obtain a Tenant Estoppel from such Major Tenant that was not previously delivered. The Landlord Estoppel, if any, delivered hereunder and Seller's liability thereunder shall survive the Closing, on a Lease by Lease basis, until the delivery of an estoppel certificate from the Major Tenants and/or Other Tenant for which such Landlord Estoppel was substituted. For purposes of satisfying the 90% requirement set forth in the foregoing clause (ii), the Tenants shall conclusively be deemed to occupy the rentable area set forth opposite their names in Exhibit Y attached hereto. Seller agrees to deliver the appropriate form of Estoppel Certificate to each Tenant and to request execution of the same. No Estoppel Certificate shall be deemed obtained if it contains information materially inconsistent with the Rent Roll or Seller's representations and warranties made herein or the Leases delivered or made available to Purchaser, provided, however, that if any Estoppel Certificate would otherwise be deemed not obtained pursuant to this sentence, Purchaser's right to terminate this Agreement as a result shall be subject to Section 3.8. To the extent Seller elects to send any of the Major Tenants or Other Tenants an estoppel certificate in the form prescribed by, or in accordance with the requirements of, the Lease for such Tenant, Purchaser shall promptly review the form of such estoppel certificate proposed by Seller prior to Seller sending such form to such Tenant, and promptly confirm whether it is consistent with the requirements of such Lease. In the event that any Estoppel Certificate required to be delivered by a Tenant is dated more than thirty (30) days prior to the Closing, Seller shall deliver a certificate with respect to any such Estoppel Certificate that there have been no defaults or, to Seller's knowledge, events with which the passage of time or giving of notice would result in a default since the date of the Estoppel Certificate. 11 4.1.4 Seller's Representations. The representations and warranties by Seller set forth in Section 13.1 being true and correct in all material respects as of the Closing except as modified by notice (in accordance with Section 13.1) to which Purchaser does not object in writing within 3 business days after receipt of such notice. 4.1.5 No Breach. There shall be no material breach of a covenant, undertaking and/or agreement of Seller to be performed hereunder. 4.2 Conditions to Seller's Obligation to Sell. Seller's obligation to sell is expressly conditioned upon each of the following: 4.2.1 Performance by Purchaser. Performance in all material respects of the obligations and covenants of, and deliveries required of, Purchaser hereunder. 4.2.2 Receipt of Purchase Price. Receipt of the Purchase Price and any adjustments due Seller under Article IX at the Closing in the manner herein provided. ARTICLE V PURCHASER'S DELIVERIES TO SELLER 5.1 Deliveries. Purchaser shall, at or before the Closing, deliver to Seller each of the following: 5.1.1 Purchase Price. The Purchase Price as set forth in Article II, subject to adjustments and prorations in accordance with this Agreement. 5.1.2 Assignment of Leases and Contracts. Four executed counterparts of the Assignment and Assumption of Leases, Contracts and Other Property Interests (the "Assignment of Leases and Contracts") in the form of Exhibit O. 5.1.3 Bill of Sale. Four executed counterparts of a bill of sale (the "Bill of Sale") in the form of Exhibit P, pursuant to which Seller shall convey and transfer to Purchaser all of its right, title and interest in and to the Personal Property. 5.1.4 State Transfer Tax Form. An executed New York State Combined Real Estate Transfer Tax Return and Credit Line Mortgage Certificate (TP-584). 5.1.5 City Transfer Tax Form. An executed New York City Real Property Transfer Tax Return (RPT). 12 5.1.6 27th Floor Lease. An executed 27th Floor Lease. 5.1.7 Closing Statement. An executed settlement statement reflecting the adjustments and prorations required under this Agreement. 5.1.8 Cash - Prorations. The amount, if any, required of Purchaser under this Agreement. 5.1.9 Resolutions. Purchaser's resolutions authorizing this transaction and the assignment to the Affiliate to which the Agreement is being assigned and resolutions of the Affiliate authorizing the assumption of the Agreement. 5.1.10 Required Items. All other items or amounts required by the terms of this Agreement to be delivered at or prior to Closing by a party. 5.1.11 Other Documents. Such other documents, closing statements, and other instruments as may be reasonably required from Purchaser to consummate the purchase of the Property as contemplated by this Agreement. ARTICLE VI SELLER'S DELIVERIES TO PURCHASER 6.1 Delivery of Instruments and Documents. Seller shall, at or before the Closing, deliver to Purchaser the following instruments and documents: 6.1.1 Deed. A Bargain and Sale Deed without Covenants against Grantor's Acts (the "Deed") with respect to the Real Property, in the form of Exhibit Q executed and acknowledged by Seller, pursuant to which Seller shall convey title to the Real Property subject only to the Permitted Encumbrances. 6.1.2 Assignment of Leases and Contracts. Four executed counterparts of the Assignment of Leases and Contracts which shall assign to Purchaser the Leases and, to the extent not objected to by Purchaser, the Contracts, together with original executed counterparts (or copies if originals are not in Seller's possession which copies shall be certified by Seller as being true, correct and complete) of the leases affecting the Property enumerated in Exhibit R and any leases executed in accordance with this Agreement after the date hereof and all amendments and modifications thereto (collectively, the "Leases") and the service contracts, equipment leases, maintenance agreements and other contracts for goods, services and equipment entered into by Seller and affecting the Property enumerated in Exhibit S (the "Contracts") assigned thereby. 13 6.1.3 Bill of Sale. Four executed counterparts of the Bill of Sale which shall transfer to Purchaser all of Seller's right, title and interest in the Personal Property. 6.1.4 Notices to Tenants. Notices signed by Seller (or Seller's manager for the Improvements) addressed to each tenant under each Lease in the form of Exhibit T. 6.1.5 FIRPTA Affidavit. Executed copies of an affidavit in the form of Exhibit U, with respect to the Foreign Investment in Real Property Tax Act. 6.1.6 State Transfer Tax Form. An executed and acknowledged New York State Combined Real Estate Transfer Tax Return and Credit Line Mortgage Certificate (TP-584) together with all taxes shown due thereon. 6.1.7 City Transfer Tax Form. An executed and acknowledged New York City Real Property Transfer Tax Return (RPT) together with all taxes shown due thereon. 6.1.8 Closing Statement. An executed settlement statement reflecting the adjustments and prorations required under this Agreement. 6.1.9 Cash - Prorations. The amount, if any, required of Seller under this Agreement. 6.1.10 Estoppel Certificates. The Estoppel Certificates (and, if applicable, the Landlord's Estoppel(s)). 6.1.11 Letters of Credit. Originals of any letters of credit (collectively, "Letters of Credit") identified on the Rent Roll (as hereinafter defined) which are held by Seller as security deposits for the account of those Tenants listed on the Rent Roll, if such Letters of Credit in their present form (including amendments thereto) permit Purchaser to exercise the rights of beneficiary thereunder without amendment of such Letters of Credit; provided, however, that as for those Letters of Credit that require amendment in order to enable Purchaser to exercise the rights of beneficiary thereunder, copies thereof shall be delivered to Purchaser at Closing and Seller and Purchaser shall cooperate and expend commercially reasonable efforts to obtain such amendments after the Closing, for the benefit of and delivery to Purchaser. Should the issuer of any such Letter of Credit charge for such amendment, Seller shall pay all costs in connection therewith and Purchaser and/or Seller shall seek recovery of such costs from the Tenants who delivered the Letters of Credit if required to be paid by such Tenant, which amounts when received shall be paid to Seller. This Section 6.1.11 shall survive the Closing. 14 6.1.12 Title Company Requirements. Any and all reasonable and customary documents and/or affidavits executed and delivered by Seller, and/or Purchaser required by the Title Company. 6.1.13 Assignment - Warranties/Guarantees. An Assignment in favor of Purchaser in the form attached hereto as Exhibit V of any unexpired warranties and guarantees in Seller's possession to the extent assignable, relating to the construction, operation and/or repair of the Property, together with original copies of any such warranties and guarantees in Seller's possession or control. 6.1.14 Keys. Keys to all locks on the Property, except secured areas of Tenants to the extent such areas are permitted under Leases. 6.1.15 Licenses and Permits. Licenses and Permits (as hereinafter defined), plans and specifications, technical manuals, originals of all Tenant files and correspondence and any similar materials for the Property to the extent same have not been previously delivered to Purchaser and to the extent in Seller's possession or control and, to the extent originals are not available, copies of the foregoing. 6.1.16 Resolutions. A resolution of each of the Seller Pool Companies with respect to Agent's authority to act on such entities' behalf and authorizing each Seller Pool Company to enter into this Agreement and to consummate this transaction and binding each such entity to the obligations set forth in this Agreement, together with such other documentation as may be reasonably required by the Title Company or Purchaser in order to evidence Seller's due authorization. 6.1.17 Required Items. All other items or amounts required by the terms of this Agreement to be delivered at or prior to Closing by a party, which shall include originals of all Due Diligence Materials which shall be delivered to Purchaser, to the extent Seller or its managing agent has such originals, and to the extent originals are not available, copies of such Due Diligence Materials shall be delivered. 6.1.18 Rent Roll. A Rent Roll that has been updated as of a date not more than two (2) days before the Closing Date shall be delivered to Purchaser. 6.1.19 Utility Bills. All water, sewer and utility bills and copies of all operating statements relating to the Property, to the extent available and in Seller's possession, for the calendar year ending 12/31/99 and the period from 1/1/00 through the month prior to the month in which the Closing Date occurs. 6.1.20 Guarantee. The Guarantee. 15 6.1.21 Updated Representation Certificate. A certificate of Seller updating the representations and warranties set forth herein. 6.1.22 Terminated Contracts. To the extent that any Contracts (including, without limitation, the management agreement which shall be terminated at or prior to Closing) have been canceled or terminated on or before the Closing Date (other than termination by expiration of time), Seller shall deliver evidence of such cancellation or termination. 6.1.23 Assignment and Assumption of Contracts for Work in Progress. To the extent any work required to be completed by Seller under Prior Agreements or contracts approved by Purchaser pursuant to Section 4.1.1.1 has not been completed, an Assignment in favor of Purchaser in the form attached hereto as Exhibit O of any such contracts. 6.1.24 G.S. Waiver. The Original waiver by GS of its right, pursuant to Article 37 of the GS Lease, to purchase the Property (the "GS Waiver"). 6.1.25 Lien Waivers. Original Lien waivers in recordable form for any Work listed on Exhibit H and Exhibit I completed prior to the Closing, or, to the extent Seller shall be unable, using commercially reasonable efforts to obtain such lien waivers, other evidence, reasonably satisfactory to Purchaser and the Title Company, that Seller has paid for any portion of the Work listed on Exhibit H or Exhibit I that has been completed prior to Closing. 6.1.26 The 27th Floor Lease. The 27th Floor Lease executed by The Continental Insurance Company. 6.1.27 The 27th Floor Lease Guarantee. The 27th Floor Lease Guaranty executed by the Guarantor. ARTICLE VII BROKERS AND ADVISORS 7.1 Brokers and Advisors. Purchaser and Seller acknowledge and represent to one another than no investment banker, advisor, or brokers have been involved in this transaction on behalf of either of them other than The Georgetown Group ("Georgetown") and Newmark & Company Real Estate, Inc. ("Newmark"). Seller shall pay all brokerage commissions due to Georgetown and Purchaser shall pay all brokerage commissions due to Newmark. Seller agrees to indemnify and hold Purchaser harmless from and against all loss, liability or expense (including, without limitation, reasonable attorneys fees and disbursements) arising out of any claim or claims by Georgetown and any other broker, finder or similar agent (excluding Newmark) for commissions, fees or 16 other compensation in connection with this transaction, which claims are based on contracts between Seller and such other broker, finder or similar agent and are not based on any dealings between Purchaser and any other broker, finder or similar agent. Purchaser agrees to indemnify and hold Seller harmless from and against all loss, liability or expenses (including, without limitation, reasonable attorneys fees and disbursements) arising out of any claim or claims by Newmark and any broker, finder or similar agent (excluding Georgetown) for commissions, fees or other compensation in connection with this transaction, which claims are based on contracts between Purchaser and such other broker, finder or similar agent and are not based on any dealings between Seller and any other broker, finder or similar agent. This Section shall survive the Closing or termination of this Agreement. ARTICLE VIII THE CLOSING 8.1 Date and Manner of Closing. The closing of the transaction contemplated herein (the "Closing") shall occur at the offices of Debevoise & Plimpton, 875 Third Avenue, New York, New York or, at Purchaser's election, at the offices in Manhattan of Purchaser's lender or their counsel on January 16, 2001 (the "Final Closing Date"), time being of the essence, subject only to (i) Seller's adjournment rights with respect to New Exceptions or Major Tenant Estoppels, in which event Seller will give Purchaser not less than three business days' notice of the date of the Closing and (ii) Purchaser's and Seller's right, respectively, to extend the Closing Date on three business days' notice, to not later than January 31, 2001, time being of the essence (subject to Purchaser's right to an additional fifteen days' if Seller adjourns in accordance with (i) above.) 8.1.1 Funds and Documents. At the Closing all funds and instruments required to be delivered pursuant to Articles V and VI shall be or shall have been so delivered. 8.1.2 Title Insurance. The Title Company shall issue a standard 1992 form of American Land Title Association owner's policy of title insurance and a standard form of Lender's policy of title insurance (collectively, the "Title Policy") with liability in the amount of the Purchase Price or mortgage, as applicable, insuring that fee title to the Real Property vests in Purchaser or the priority of the mortgage, as applicable, subject only to the Permitted Encumbrances. 8.2 Additional Title Insurance. Purchaser may, at Purchaser's option, direct the Title Company to issue additional title insurance endorsements, at Purchaser's cost, provided that the Title Company's failure to issue any such additional endorsements shall not affect Purchaser's obligations under this Agreement. 17 ARTICLE IX PRORATION, FEES, COSTS AND ADJUSTMENTS 9.1 Prorations. At or prior to the Closing, the parties shall prorate, as of 11:59 p.m. the day prior to the Closing, all income and expenses with respect to the Property and payable to or by the owner of the Property, including, without limitation: (i) all real property taxes on the basis of the fiscal period for which assessed (if the Closing shall occur before the tax rate is fixed, the apportionment of taxes shall be based on the tax rate for the preceding period applied to the latest assessed valuation; (ii) "BID" payments required as a result of the Property being in a Business Improvement District; (iii) rents and other tenant payments and tenant reimbursement, if any, received under the Leases as provided in this Article; (iv) charges for water, sewer, electricity, gas, fuel, steam, vault taxes and other utility charges (other than those charges required to be paid directly to the utility company by a Tenant) all of which shall be read promptly before the Closing, unless Seller elects to close its own applicable account, in which event Purchaser shall open its own account and the respective charges shall not be prorated; (v) amounts prepaid and amounts accrued but unpaid on Contracts which are to be assumed by Purchaser; (vi) periodic fees for licenses, permits or other authorizations with respect to the Property; (vii) salaries, wages and fringe benefits with respect to Employees that Purchaser will employ after the Closing, and (viii) all other items customarily prorated in connection with transactions of the type contemplated by this Agreement. A further proration of (i) above shall be made between the parties when the final tax bill for the tax year in which the Closing occurs becomes available. Seller shall pay any taxes or fees assessed for periods prior to the Closing with respect to emergency generators and fuel tanks which are the property of Seller and are located on the Property. In conjunction with such prorations, Seller will assign to Purchaser all utility deposits which are assignable (and Seller shall be credited with such amounts) and notify, or cause to be notified, all utilities servicing the Property of the change in ownership and direct that all future billings be made to Purchaser at the address of the Property with no interruption of service. 9.1.1 Leasing Costs Credited to Purchaser. Seller shall credit Purchaser with an amount equal to any then outstanding tenant improvement allowance, landlord work obligations, leasing commissions, free rent periods, or any other monetary obligations with respect to executed leases or extensions, expansions or modifications thereof as of the date hereof and with respect to the Ricker Amendment, the GS 27th Floor Amendment, and the 27th Floor Lease, regardless of when the same shall be due as set forth on Exhibit EE. Notwithstanding the foregoing, the 25th floor of the Building has been leased to GS for a term to commence upon the expiration or sooner termination of the Lease to ASARCO Incorporated, the existing tenant of the 25th Floor, on the terms set forth on Exhibit W and otherwise in form and substance satisfactory to Purchaser, and 18 Purchaser shall be responsible for the tenant improvement allowance and landlord work obligations due under such lease amendment to the extent set forth on Exhibit W. The credit for any amounts accruing or payable more than thirty (30) days after the Closing shall be discounted to a net present value at an annual discount rate of 6%. 9.1.2 Leasing Costs During Contract Period. Subject to the provisions of Section 9.1.1 with respect to the Ricker Amendment, the GS 27th Floor Amendment, the 27th Floor Lease and the lease of the 25th Floor of the Building to GS, the amount of any Tenant improvement allowances, landlord work obligations, leasing commissions, free rent periods and any other monetary obligations, if any, due in respect of Leases or modifications, renewals, extensions or expansions of Leases entered into after the date hereof and prior to Closing (the "Contract Period") in accordance with Article 15 shall be the responsibility of Purchaser and shall be paid by Purchaser, (other than any free rent for any period prior to Closing which shall be for the account of Seller) as and when due, except that to the extent Seller has paid all or any part of such leasing commissions, tenant allowances, or other similar monetary payments for which Purchaser is responsible Seller shall provide Purchaser to its reasonable satisfaction with evidence of such payment and Purchaser shall reimburse Seller for such payments at Closing. 9.1.3 Taxes. If any proceeding for certiorari or other proceeding to determine the assessed value of the Property or the real property taxes payable with respect to the Property shall have been commenced prior to, and is pending as of, the Closing Date (a "Tax Protest"), Purchaser and Seller hereby agree that Joel Marcus of Pottish, Freyburg, Marcus & Velasquez shall be designated at Closing as the certiorari counsel who shall continue the prosecution of such proceeding or proceedings to completion. Purchaser shall have the authority to settle or compromise any claim relating to the 2000/2001 fiscal tax years without Seller's consent. With respect to any fiscal tax year prior to the 2000/2001 fiscal tax year, Seller shall have the authority to settle or compromise any claim relating to such period using Seller's certiorari counsel. The parties agree to cooperate with each other, and to execute any and all documents reasonably requested by the other party, in furtherance of the foregoing. Real property tax refunds and credits received after the Closing which are attributable to a fiscal tax year prior to the Closing shall belong to Seller and shall be paid promptly to Seller when received by Purchaser, net of reasonable out-of-pocket expenses of collection thereof and amounts owed Tenants. Any such refunds and credits attributable to the fiscal tax year during which the Closing occurs shall be apportioned between Seller and Purchaser after deducting the reasonable out-of-pocket expenses of collection thereof and payments required to be made to Tenants. This 19 apportionment obligation shall survive the Closing. Any such refunds and credits attributable to the fiscal tax year after the Closing shall belong to Purchaser. 9.1.4 Security and Other Deposits. At the Closing, Seller shall (i) credit to Purchaser with the amount of all refundable security deposits (plus interest accrued thereon to the extent required to be paid by the applicable Lease or applicable law) and (ii) deliver to Purchaser all Letters of Credit as required in Section 6.1.11. 9.1.5 Rent. Basic rents and payments or reimbursements for taxes, utilities and operating expenses and all other charges or reimbursables as and when collected under the Leases including without limitation charges for any special services provided to any Tenant, overtime HVAC or special cleaning (collectively, the "Rents") shall be prorated; provided, however, that all Rents collected after the Closing under the Leases shall be applied, on a Lease by Lease basis, first, to satisfy obligations attributable to the payment period in which Closing occurs, second, in payment of all current Rents due and payable for the period after the Closing, third, after Rents for all current periods have been satisfied in full in payment of Rents in arrears for the periods prior to the payment period in which the Closing occurs. At Closing, Seller shall assign to Purchaser all of its claims or causes of action against existing Tenants, if any. If at the time of Closing (as reflected in a Schedule to be delivered by Seller at Closing of all amounts known to Seller as due and payable by any Tenant for the period prior to Closing but uncollected as of Closing, whether or not past due) or thereafter there are Rents owed by Tenants to Seller, then Purchaser will make commercially reasonable efforts, without suit, to collect the same for the account of Seller and any such Rents, if received, shall have been received by Purchaser for the account of Seller and will be remitted by Purchaser to Seller within 15 days of receipt. Seller expressly agrees that if Seller receives any Rents directly from Tenants after the Closing Date, Seller shall remit same to Purchaser within 15 days after receipt thereof and Purchaser shall deliver to Seller the amount thereof, if any, to which Seller is entitled pursuant to the terms hereof within 15 days after receipt thereof. All prepaid Rents and charges for the period following the Closing shall be paid over (or credited) by Seller to Purchaser at Closing. After the Closing, Seller shall not be entitled to collect or attempt to collect Rents from Tenants due and owing to Seller, except those whose Lease or right to possession under the Lease has been terminated and in connection with which the Tenant has either vacated its premises or summary proceedings have been instituted. 9.1.6 Additional Rent. Charges to or contributions by Tenants under the Leases for the period under such Leases which includes the Closing Date, including without limitation, payments or reimbursements, whether for taxes, utilities, other operating expenses or otherwise, shall be apportioned on the basis 20 of the ratio which the expenses actually paid by each party for such period bears to the total of all expenses with respect to such period for which such payment was made by the Tenant. Such apportionments shall be adjusted as soon as practicable after the end of the current lease year in which the Closing occurs, and at such time Purchaser shall furnish Seller with statements in reasonable detail showing the calculation of such apportionments, rents and payments, and any adjustments shall be allocated for the portion to which it applies. If either Seller or Purchaser shall have collected more than its share of such amounts payable under any Lease pursuant to this Section, such party shall promptly remit to the other the amount of such excess. If any Tenant is entitled to refunds of any such rents or charges, such refunds shall be paid by the party hereto that received such rents or charges, provided, however, that any amounts collected by Seller to which Tenants are entitled shall be paid to Purchaser who shall remit such amounts to Tenants entitled thereto. Purchaser shall indemnify Seller from and against any claims by Tenants for amounts remitted by Seller to Purchaser pursuant to this Section. Purchaser shall prepare and deliver to Seller for its review and approval the operating expense and real estate tax escalation statements and adjustments for the calendar year 2000 no later than March 31, 2001. The reasonable costs incurred by Purchaser or its accountants in preparing such statements (including without limitation the costs of an audit) shall be paid by Seller. Upon Seller's approval of the same, Purchaser shall invoice Tenant's for the amounts set forth thereon. If Seller does not approve the same and Purchaser and Seller are unable to agree on the amounts to be billed to the Tenants within fifteen (15) days after Seller's receipt of Purchaser's initial statements, Purchaser may invoice Tenants for the amounts it in good faith determines to be correct and any dispute between Seller and Purchaser shall be resolved in good faith between the parties. Purchaser shall prepare and deliver to Seller for its review statements for the calendar year 2001 no later than March 31, 2002 and Seller and Purchaser shall follow the same procedures as described above. Seller hereby agrees, that provided Purchaser follows the procedures described in this Section 9.1.6, Seller shall have no claim against Purchaser in connection with any matter related to the escalation statements prepared by Purchaser in accordance with this Section. At least three (3) business days prior to Closing, Purchaser and Seller jointly shall prepare a closing statement, subject to and in accordance with the terms hereof, indicating the net amount due to either party as a result of the adjustments and prorations provided for herein. Any errors in the calculation of apportionments shall be corrected or adjusted as soon as practicable (but not more 21 often than monthly) after the Closing Date. If it is impracticable to apportion certain items hereunder on the Closing Date, such items shall be apportioned and paid as soon as practicable thereafter. Purchaser agrees to take necessary actions after Closing in a timely manner in order to make the adjustments and prorations provided for hereunder, including, without limitation, billings to Tenants. The provisions of this Section 9.1 (including, without limitation, Sections 9.1.1 through 9.1.6) shall survive Closing. 9.2 Seller's Closing Costs. Seller shall pay (i) the New York City and New York State transfer taxes in the amount required by law, (ii) Seller's own attorneys' fees and (iii) any brokerage or investment banking fee payable to Georgetown. 9.3 Purchaser's Closing Costs. Purchaser shall pay (i) all recording fees, and all mortgage recording taxes, (ii) the cost of the Title Report, the title premium for the Title Policy and any lender's title policy and the cost of any other title insurance endorsements ordered by Purchaser, (iii) survey costs, (iv) Purchaser's due diligence expenses, including all professional fees, (v) Purchaser's own attorneys' fees, and (vi) any brokerage or investment banking fees payable to Newmark in connection with this transaction. ARTICLE X ESCROW 10.1 Escrow. TitleServ Agency of New York will act as Escrow Agent pursuant to the agreement attached hereto as Exhibit X which shall be executed simultaneously with this Agreement. ARTICLE XI RETURN OF DOCUMENTS AND FUNDS UPON TERMINATION 11.1 Return of Seller's Documents. If this Agreement is terminated for any reason (other than the material default of Seller), Purchaser shall, within five days following such termination, deliver to Seller all documents and materials relating to the Property previously delivered to Purchaser by Seller, copies made by or on behalf of Purchaser of any documents during the Due Diligence Period or the Contract Period and copies of all reports, studies, documents and materials obtained by Purchaser from third parties in connection with the Property and Purchaser's investigation thereof. Such items shall be delivered without representation or warranty as to accuracy or completeness and with no right of Seller to rely thereon without the consent of the third party. 22 11.2 Deposit. If this Agreement is terminated for any reason other than Purchaser's default, which defaults shall be governed by Article XII, (i) then Purchaser shall be entitled to obtain the return of the Deposit or so much thereof as Purchaser has previously deposited with Escrow Agent. 11.3 No Effect on Rights of Parties; Survival. The return of documents and monies as set forth above shall not affect the right of either party to seek such legal or equitable remedies as such party may have under Article XII or otherwise hereunder with respect to the enforcement of this Agreement. The obligations under this Article XI shall survive termination of this Agreement. ARTICLE XII DEFAULT 12.1 Seller's Remedies. If, (i) at the closing, Seller is ready, willing and able to convey the Property to Purchaser in accordance with the terms hereof and Purchaser does not deliver the Purchase Price to Seller in accordance with the provisions of Section 2.1.2 or refuses to execute and deliver a closing document required to be executed and delivered to Seller or (ii) Purchaser takes any action that makes it impossible for Seller to fulfill any obligations required to be fulfilled by Seller prior to the Closing, then Seller may terminate this Agreement upon written notice to Purchaser and Seller may retain the Deposit as liquidated damages. Seller and Purchaser agree that upon the occurrence of one of the events listed in subclause (i) or (ii) of the preceding sentence it would be extremely impracticable and difficult to estimate any and all damage and harm, losses and expenses which Seller would suffer due to such failure, and insofar as a reasonable estimate of the total net detriment that Seller would suffer from such failure is the amount of the Deposit, Seller shall be entitled to retain the Deposit, which amount is not intended to be and is not a penalty, and which shall be Seller's sole remedy for damages arising from Purchaser's failure to complete the acquisition. 12.2 Purchaser's Remedies. If the sale and purchase of the Property is not completed as herein provided solely by reason of any material default of Seller, Purchaser shall be entitled to (i) terminate this Agreement by delivering notice to Seller and to obtain the return of the Deposit or (ii) treat this Agreement as being in full force and effect and pursue only the remedy of specific performance of this Agreement. Purchaser waives any right to pursue any other remedy at law or equity for such default of Seller, including, without limitation, any right to seek, claim or obtain damages, other than in the case of Seller's fraud, but in no case shall Purchaser seek punitive damages or consequential damages. Notwithstanding the foregoing, if Seller shall willfully default in any of its obligations under this Agreement that are solely within the control of Seller or one of its Affiliates (i.e. those obligations not in any manner involving third party execution or delivery of documents or cooperation), then Purchaser may seek damages 23 on account of such willful breach from Seller (not to exceed Fifteen Million Dollars ($15,000,000) in the aggregate), regardless of whether Purchaser has elected to acquire the Property. This provision shall survive Closing or termination of this Agreement provided however that any action must be commenced within one year of the scheduled Closing Date. ARTICLE XIII REPRESENTATIONS AND WARRANTIES 13.1 Seller's Warranties and Representations. The matters set forth in this Section 13.1 constitute representations and warranties by Seller which are now and (subject to actions taken by Seller in accordance with the provisions of Article IV and Article XV) shall, in all material respects, at the Closing be true and correct as restated on the Closing Date. If Seller learns of, or has a reason to believe that any of the following representations and warranties may cease to be true, Seller shall give prompt notice to Purchaser (which notice shall include copies of the instrument, correspondence, or document, if any, upon which Seller's notice is based). As used in this Section 13.1, the phrase "to the extent of Seller's actual knowledge" or "actually known to Seller" shall mean the actual knowledge of Tara Molnar, Assistant Vice President, National Property Management, CNA, the asset manager responsible for the Property and Michael Versace, on-site property manager employed by Cushman & Wakefield, Inc. ("C&W") There shall be no duty imposed or implied to investigate, inspect, or audit any such matters, and there shall be no personal liability on the part of such individuals. 13.1.1Power and Authority. Each of the Seller Pool Companies has the legal power, right and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and each is duly formed, validly existing and in good standing under the Laws of the State of each of its respective formation/organization/incorporation and is authorized to do business in the State of New York; each has granted Seller and Agent full power and authority to act on its behalf and has authorized Seller and Agent to consummate this transaction and bind each of them to the obligations set forth in this Agreement (and shall be liable, jointly and severally, for all of the obligations of Seller hereunder). Agent is a Delaware corporation, duly organized and validly existing and in good standing under the laws of the State of Delaware and has the requisite power and authority to carry on its business in the State of New York as it is now being conducted. This Agreement constitutes the legal, valid and binding obligation of Seller enforceable in accordance with its terms and Seller has the legal power, right and authority to enter into this Agreement and to consummate the transactions contemplated hereby. Each of the persons signing this Agreement on behalf of Seller is authorized to do so. 24 13.1.2 Proceedings. There is no pending or, to the extent of Seller's actual knowledge threatened condemnation or similar proceeding affecting any part of the Real Property. 13.1.3 Contravention. Neither Seller nor any Seller Pool Company nor Agent is prohibited from consummating the transactions contemplated by this Agreement or from executing or delivering this Agreement by any Law, or any agreement to which Seller or any Seller Pool Company or Agent is a party or by which it is bound. 13.1.4 Leases and Contracts. The Leases, listed on the Rent Roll and Contracts comprise all of the leases and contracts which will affect the Property on the Closing, true, correct and complete copies of which have been delivered to Purchaser, other than those leases and contracts entered into in accordance with Article XV. Except as disclosed in the Rent Roll attached hereto as Exhibit Y, which lists the tenants name, space, all leases, amendments, letter agreements and assignments and the dates thereof the expiration date of the lease and current rent and charges tenant security deposits, prepaid rent and arrearages, base year and base year amounts on account of operating expenses and real estate taxes (the "Rent Roll"), no base rent or additional rent or other fees or charges due under the respective Leases has been paid more than one (1) month in advance by any Tenant. Base Year and base year amounts on account of operating expenses and taxes are listed for information only and no representation and warranty is made with respect thereto. The Rent Roll lists all of the Leases as of the date of this Agreement. Except as otherwise set forth in the Rent Roll, all of the Leases are in full force and effect and none of them has been modified, amended, supplemented or extended. Except as otherwise set forth in the Rent Roll, as of the date hereof, no Tenant is in arrears in the payment of rent and Seller has not sent written notice to any Tenant claiming that such Tenant is in default, which default remains uncured. Except as otherwise disclosed to Purchaser as set forth on the Rent Roll, as of the date hereof, Seller has received no written notice of any claim by a Tenant against Seller or any prior landlord that has not been resolved for any security deposit or of any Tenant defense or off-sets to rent or additional rent. To the knowledge of Seller, Seller is not in default of any of its monetary obligations or in default of any material obligation as landlord under any Lease. No action or proceeding instituted against Seller by any Tenant is currently pending in any court with respect to the Property. There are no security deposits not set forth in the Rent Roll that have been paid (or, with respect to Letters of Credit, delivered) to Seller by or on behalf of any Tenant, or with respect to any of the Leases. Seller has not received any written notice from any Tenant claiming that Seller is in monetary or other material default under the Lease with such Tenant, which default remains uncured. 25 Exhibit S lists all of the Contracts in effect as of the date hereof with respect to the Property and there are no service, maintenance, supply or management contracts or similar agreements affecting the Property, either written or oral, which will remain in effect beyond the Closing, except for those described in Section 4.1.1.1 and except for contracts that can be cancelled on not more than 30 days' notice without penalty or fee except for penalty or fee which Seller agrees to pay; there are no agreements which will bind the Property (including all amendments, modifications and supplements thereto) after the Closing other than the Permitted Encumbrances. To Seller's knowledge, all of the Contracts are in full force and effect as of the date of this Agreement, (ii) no action or proceeding instituted against Seller by any party to a Contract (each, a "Contract Party") is presently pending in any court and Seller has not received any written notice from any Contract Party claiming that Seller is in monetary or other material default under the Contract with such Contract Party, which default remains uncured, (iii) to Seller's knowledge, Seller has paid all sums currently due and payable under the Contracts except for sums which are not more than 30 days' past due, (iv) Seller has delivered to Purchaser true, correct and complete copies of all Contracts and (v) except as set forth on Exhibit S, all Contracts are terminable upon not more than 30 days' notice without penalty or fee except for fees or penalties which Seller is willing to pay. 13.1.5 Compliance. Except as listed on Exhibit Z, Seller has not received written notice from any Governmental Authority that the Property is not in material compliance with all applicable Laws, except for such failures to comply, if any, which have been remedied. 13.1.6 Employees. Seller represents that the employees listed on Exhibit AA (the "Employees") are the only employees employed at the Property all of whom are employed by C&W and not by Seller, and that with the exception of the Property Manager, the Secretary and the Accountant/Bookkeeper, (collectively, the "Non-Union Employees"), all employees on Exhibit AA are Union Employees. Exhibit BB contains a true, correct and complete list of all the Union Contracts with respect to the Employees and to Seller's knowledge, all of the Union Contracts are in full force and effect. "Union Contracts" shall mean all contracts, agreements, collective bargaining agreements and union agreements related to all Employees. Purchaser agrees to assume or cause a company with whom it has a contractual relationship ("Employer Company") to assume the Union Contracts with respect to such Employees and to comply with the terms thereof with respect to the Employees from and after the Closing. Purchaser shall offer to hire or cause the Employer Company to offer to hire the Employees, other than the Non-Union Employees, commencing on the date of the Closing and shall assume all liabilities and obligations to such Employees accruing from and after the Closing under the Union Contracts, including, without limitation, all salaries 26 and wages, payable thereunder, all severance pay and other obligations as a result of any termination by Purchaser or the Employer Company of any of such Employees after the Closing and any liabilities or obligations under any employee benefit plans as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, maintained by Purchaser and with respect to any employee benefit or fringe benefit plans or arrangements maintained by Purchaser, in each case, to the extent such payments or benefits are required to be made or provided pursuant to the Union Contracts. Seller represents that (i) it has not entered into any voluntary modifications of the Union Contracts and (ii) it has made all payments required by the Union Contracts prior to the date of Closing. Seller will cause C &W to request from each of the Unions listed on Exhibit BB a letter dated prior to Closing stating the amount of any underfunded obligation, if any. Purchaser shall indemnify, defend and hold harmless Seller from and against any and all claims, liabilities, damages, costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements) arising from Purchaser's or the Employer Company's failure to pay and perform its obligations with respect to the Employees hired by Purchaser accruing from and after the Closing under this Section 13.1.6. Seller shall indemnify, defend and hold harmless Purchaser from and against any and all claims, liabilities, damages, costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements) arising from any failure by Seller to pay or perform any obligations to the Employees accruing prior to the Closing, provided, however, that Seller shall not be liable for payment of any severance pay, employee benefit plan obligations or other obligations (whether nor not relating to any period prior to the Closing) to or for the benefit of any of the Employees hired by Purchaser arising as a result of any termination of any such Employees by Purchaser or the Employer Company after the Closing. The indemnities set forth in this Section 13.1.6 shall survive the Closing. 13.1.7 Litigation. There is no pending litigation affecting the Property except for litigation which, to Seller's knowledge, is covered by insurance. Seller has not received written notice from any insurance company that it has denied coverage in any such insured litigation. Seller does not have any knowledge of any threatened material litigation. 13.1.8 Notice of Violations. Seller has not received any written notice from any governmental agency, lender or any Tenant that the Property (or any portion thereof) is in violation (which has not heretofore been corrected or otherwise satisfied and in connection with which all penalties have been paid) of (1) any of the requirements of restrictive covenants or other encumbrances affecting the Property (or any portion thereof) except as set forth on Exhibit CC and (2) any Laws bearing on the ownership, operation or use of the Property, including, without limitation, those relating to health, safety, building, fire, 27 zoning, accessibility, and land use except as set forth on Exhibit Z. No casualty has occurred with respect to the Property within eighteen (18) months preceding the date hereof that has not heretofore been repair or restored. 13.1.9 Licenses and Permits. Exhibit DD contains a list of all permits and licenses and applications for permits (including, but not limited to, a certificate of occupancy relating to the Improvements) from Governmental Authorities currently maintained by Seller in connection with its ownership of the Property (collectively, the "Licenses and Permits"), all of which Licenses and Permits (i) have been issued, or duly transferred, to Seller (to the extent assignable), (ii) have been paid for in full and (iii) Seller has not received any written notice revoking or threatening to revoke or terminating any License or Permit except that as of the date hereof, the Public Assembly Permit for the Ricker Auditorium has expired and although Seller has made timely application for renewal and has paid all application fees required to be paid in connection with the renewal, the current Public Assembly Permit has not been issued. Any fines or penalties imposed by any Governmental Authority in connection with the expired Public Assembly Permit shall be Seller's obligation to pay. This obligation of Seller shall survive Closing. Seller has delivered to Purchaser true, correct and complete copies of all of the Licenses and Permits. 13.1.10 Allowances; Leasing Commissions. Except as otherwise set forth on Exhibit EE attached hereto, Seller has paid or provided for all construction allowances, brokerage commissions, leasing commissions, takeover obligations or similar tenant inducements required to be paid, provided or credited with respect to the current lease term of any Lease (as opposed to any renewal, extension or expansion term of any Lease). Initial installations by Seller for Tenants required with respect to the current term of their respective Leases, except as set forth in Exhibit FF, have been completed in all material respects and Seller has performed all other material work required to be performed by the Seller under the Leases up to the date of the Closing. Except as otherwise set forth on Exhibit H and Exhibit I, Seller is not performing any ongoing construction work in, on or about the Property other than normal maintenance being performed by Seller in the ordinary course of business. Except as set forth in the Leases, there are no takeback or takeover obligations under any of the Leases or which would otherwise be enforceable against the owner of the Property after the Closing. 13.1.11 Tax Proceedings. Except as set forth on Exhibit GG , there are no tax reduction proceedings pending with respect to all or any portion of the Property. Except as disclosed on the tax bills with respect to the Real Property, Seller has no knowledge of, any tax abatements, deferrals or exemptions in effect with respect to the Property and Seller has received no written notice of any 28 proposed increase in the assessed value of the Property or of any proposed public improvement assessments. 13.1.12 Insurance. Exhibit HH attached hereto is a true, correct and complete list of the types and amounts of insurance coverage maintained by Seller and in force with respect to the Property. Except as otherwise set forth on Exhibit HH , Seller has not received any written notice from any of the insurers of the Improvements of any physical condition of the improvements with respect to which such insurer has required correction or change which has not been corrected or changed. 13.1.13 Personal Property. Except as set forth on Exhibit C, all of the Personal Property, if any, to be transferred by Seller to Purchaser has been paid for in full and is free of all liens, claims and encumbrances. 13.1.14 Environmental and Engineering Reports. Exhibit II is a list of environmental and engineering reports in Seller's possession or control relating to the Property, and true and complete copies of same have heretofore been delivered by Seller to Purchaser. 13.1.15 Utilities. Seller has received no written notice from any utility company or governmental or quasi-governmental entity of any fact or condition which could result in the discontinuation of presently available public utilities for the Property. 13.1.16 Business Improvement District. The Property is located in and subject to assessments imposed by a Business Improvement District. Seller has furnished to Purchaser copies of the current bills for assessments required to be paid in connection with the Business Improvement District. 13.1.17 Non-Foreign Person. Seller is a "United States Person" within the meaning of Section 1445(f)(3) and 7701(a)(30) of the Internal Revenue Code of 1986, as amended. 13.1.18 Access to Documents. To Seller's knowledge, Seller has provided Purchaser with access to any and all Leases, Contracts, Licenses and Permits, books and records, plans, documents and information relating to the Property and the ownership and operation thereof which are in the possession or control of Seller. 13.1.19 Brokerage Agreements. The only brokerage or leasing agreements relating to the Leases existing on the date hereof or that will be binding on Purchaser after the Closing are those set forth on Exhibit JJ (the "Brokerage Agreements"). Seller has delivered or caused to be delivered to 29 Purchaser true, correct and complete copies of each Brokerage Agreement listed on Exhibit JJ. 13.1.20 Work. Exhibit H and Exhibit I contains a list of all material work in progress by Seller at the Property, the Contracts or agreements entered into with respect to such work, a description of such work, an estimate of the percentage of such work which is complete and an estimate of the cost to complete. 13.1.21 Rezoning. There is no pending request by Seller for a rezoning of the Property or any other variance for the Property. 13.1.22 Financial Statements. Seller has delivered to Purchaser its audited Financial Statements for the period 1997 to 1999. Expenses in connection with the operation and ownership of the Property (other than with respect to the Ricker Auditorium and Fitness Center and the Continental Club) are shown on the books and records of Seller delivered to Purchaser and not instead on the books and records of any other entity (except in accordance with accounting, regulatory or reporting matters), it being understood that the foregoing representation is not a representation or warranty as to the amount of any such expenses. 13.2 Purchaser's Warranties and Representations. The matters set forth in this Section 13.2 constitute representations and warranties by Purchaser which are now and shall, at the Closing, be true and correct. 13.2.1 Power and Authority. Purchaser is a Delaware corporation, duly organized and validly existing and in good standing under the laws of the State of Delaware and has the requisite power and authority to carry on its business in the State of New York as it is now being conducted. This Agreement constitutes the legal, valid and binding obligation of Purchaser enforceable in accordance with its terms; Purchaser has the legal power, right and authority to enter into this Agreement and to consummate the transactions contemplated hereby. 13.2.2 Execution and Delivery. The execution and delivery of this Agreement and the performance by Purchaser of its obligations hereunder are not and will not violate any law, rule, judgment, regulation, order, writ, injunction or decree of any court or the United States of America or the State of New York or any political subdivision of either of the foregoing, to the extent any of the foregoing have jurisdiction over the Purchaser or the Property, or any decision or ruling of any arbitrator to which Purchaser is a party or by which Purchaser or the Property is bound or affected, such that Purchaser's performance hereunder would be materially and adversely impacted on account of such violation. 30 13.2.3 Independent Investigation. The consummation of this transaction shall constitute Purchaser's acknowledgment that it has independently inspected and investigated the Property and has made and entered into this Agreement based upon such inspection and investigation and its own examination of the condition of the Property and the representations and warranties of Seller set forth herein. 13.2.4 Purchaser Reliance. Purchaser is experienced in and knowledgeable about the ownership and management of commercial real estate properties, and it has relied and will rely exclusively on its own consultants, advisors, counsel, employees, agents, principals and/or studies, investigations and/or inspections with respect to the Property, its condition, value and potential except as expressly set forth in Section 13.1 or elsewhere herein. Purchaser agrees that, notwithstanding the fact that it has received certain information from Seller or its agents or consultants, Purchaser has relied solely upon and will continue to rely solely upon its own analysis and will not rely on any information provided by Seller or its agents or consultants, except as expressly set forth in Section 13.1. 13.3 No Other Warranties and Representations. Except as specifically set forth in this Article XIII or elsewhere herein, neither Seller nor Purchaser have made, make or have authorized anyone to make, any warranty or representation as to the Leases, the Contracts, any written materials delivered to Purchaser or the persons preparing such materials, the present or future physical condition, development potential, zoning, building or land use law or compliance therewith (including, without limitation, the Americans with Disabilities Act),operation, income generated by, or any other matter or thing affecting or relating to the Property or any matter or thing pertaining to this Agreement. Purchaser expressly acknowledges that no such warranty or representation has been made and that Purchaser is not relying on any warranty or representation whatsoever other than as is expressly set forth in this Article XIII or elsewhere herein. Purchaser shall accept the Property "as is" and in its condition on the date hereof subject only to the express provisions of this Agreement and ordinary wear and tear. 13.3.1 No Environmental Representations. Seller makes no representations or warranties as to whether the Property contains asbestos, radon or any hazardous materials or harmful or toxic substances, or pertaining to the extent, location or nature of same, if any. Further, to the extent that Seller has provided to Purchaser information from any inspection, engineering or environmental reports concerning asbestos, radon or any hazardous materials or harmful or toxic substances, Seller makes no representations or warranties with respect to the accuracy or completeness, methodology of preparation or otherwise concerning the contents of such reports. 31 13.3.2 Release of Claims. Purchaser acknowledges and agrees that Seller makes no representation or warranty as to, and Purchaser waives and releases Seller from any present or future claims arising from or relating to, the presence or alleged presence of asbestos, radon or any hazardous materials or harmful or toxic substances in, on, under or about the Property, including without limitation any claims under or on account of (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as the same may have been or may be amended from time to time, and similar state statutes, and any regulations promulgated thereunder, (ii) any other federal, state or local law, ordinance, rule or regulation, now or hereafter in effect, that deals with or otherwise in any manner relates to, environmental matters of any kind, (iii) this Agreement, or (iv) the common law. The provisions of this Section 13.3.2 shall not be deemed to limit the right of Purchaser to name Seller as a party defendant in any action brought by any third party including any governmental entity for damages which such third party alleges have been caused by environmental conditions affecting or related to the property which existed prior to the Closing. ARTICLE XIV CASUALTY AND CONDEMNATION 14.1 Insured Casualty. Promptly upon learning thereof, Seller shall give Purchaser written notice of any damage or destruction of the Property occurring prior to the Closing. If prior to the Closing the Property is materially damaged or destroyed, which damage or destruction is covered by insurance, Purchaser shall have the option of either (i) applying the proceeds of payment under any insurance policies toward the payment of the Purchase Price to the extent insurance payments have been received by Seller, receiving from Seller an amount equal to any applicable deductible under any such insurance policy and receiving an assignment from Seller of Seller's right, title and interest in any such awards or payments, or (ii) terminating this Agreement by delivering written notice of such termination to Seller within 30 days after Purchaser has received written notice from Seller of such material damage or destruction in which event this Agreement shall terminate immediately and Purchaser shall receive the return of the Deposit and thereafter neither party shall have any further rights or obligations hereunder except those specifically stated to survive a termination of this Agreement. If prior to the Closing an immaterial portion of the Property is damaged or destroyed, which damage or destruction is covered by insurance, then Purchaser shall have the option to either (i) cause Seller to commence to repair or replace such damage to or destruction of the Property or the applicable portion thereof or (ii) proceed to Closing with, the proceeds of any insurance policies and any applicable deductible under any insurance policies being applied toward the payment of the Purchase Price to the extent such insurance payments have been received by Seller and Seller shall assign to Purchaser all of Seller's right, title and interest in any such awards or payments. For purposes of this Section, the word 32 "material" shall mean any damage or destruction which Seller and Purchaser, in its respective reasonable judgment, believes will cost more than $10,000,000 to repair and/or replace. 14.2 Uninsured Casualty. In the event of any uninsured damage to or destruction of the Property or any portion thereof (notice of which shall be given to Purchaser by Seller promptly following its occurrence) prior to the Closing, which damage or destruction can, in Purchaser's reasonable judgment based upon the written advice of engineers and/or architect be repaired or replaced for a cost not to exceed $10,000,000. at Purchaser's option, Seller shall either (i) commence to repair or replace such damage to or destruction of the Property or the applicable portion thereof or (ii) proceed to Closing, whereupon Purchaser will accept the Property as it is together with a reduction of the Purchase Price in the amount of the engineer/architect's estimate of the cost to replace the damaged portion of the Property. If the cost of such repair or replacement exceeds $10,000,000, as reasonably determined by Purchaser then Purchaser may, at its option, by notice to Seller given within thirty (30) days after the date that the cost to repair or replace such damage is determined, unilaterally terminate this Agreement, in which event this Agreement shall terminate immediately, the Deposit shall be returned to Purchaser and thereafter neither party shall have any further rights or obligations hereunder except those expressly stated to survive a termination hereof. If Purchaser does not elect to terminate this Agreement as provided in this Section 14.2 , then this Agreement shall continue between Purchaser and Seller and Purchaser shall receive a credit, at Closing, in an amount equal to the estimated cost of such restoration as reasonably determined by Purchaser. 14.3 Condemnation. Promptly upon learning thereof, Seller shall give Purchaser written notice of any threatened or commenced or consummated condemnation. If prior to the Closing, a material portion (as hereinafter defined) of the Property is condemned, Purchaser may, at its option, by notice to Seller given thirty (30) days after Purchaser is notified of such actual or possible proceedings, terminate this Agreement, in which event the Deposit shall be returned to Purchaser and thereafter neither party shall have any further rights or obligations hereunder, except those expressly stated to survive the termination hereof. If Purchaser fails to do so, Purchaser shall be deemed to have elected to continue this Agreement, in which event Seller shall, at the Closing, assign to Purchaser its entire right, title and interest in and to any condemnation award (and Seller shall pay to Purchaser any such compensation and damages already received) and Purchaser shall have the sole right from the date thereof through the Closing to negotiate and otherwise deal with the condemning authority in respect of such matter. In the event that less than a material portion of the Property is condemned, this Agreement shall continue and Seller shall, at the Closing, assign to Purchaser its entire right, title and interest in and to any condemnation award (and Seller shall pay to Purchaser any such compensation and damages already received) and Purchaser shall have the sole right from the date hereof through the Closing to negotiate and otherwise deal with the condemning 33 authority in respect of such matter. For purposes of this Section 14.3, "material" shall mean a condemnation which Seller and Purchaser, in its respective reasonable judgment, believes effects more than five percent (5%) of the Building or affects access to or the ability to use the Property as presently used or has a material adverse effect on the income from the Property. 14.4 Purchaser's Right to Participate and/or Consent. In the event that there is a casualty or condemnation as set forth in Section 14.1-14.3 above and Purchaser does not terminate this Agreement, Purchaser shall (i) in the event of an insured casualty, have the right to participate in any insurance settlement and, if Purchaser elects to have Seller repair or replace such damage, approve (which approval shall not be unreasonably withheld or delayed) all plans and specification, contractors and material terms of any contracts for such repair or replacement, (ii) in the event of an uninsured casualty, if Purchaser elects to have Seller repair or replace such damage, have the right to approve (which approval shall not be unreasonably withheld or delayed) all plans and specifications, contractors and material terms of any contracts for such repair or replacement and (iii) in the event of a condemnation, have the right to participate in any condemnation award proceeding. 14.5 General Obligations Law. The parties understand and agree that the provisions of this Article XIV shall govern and supersede the provisions of Section 5-1311 of the General Obligations Law of the State of New York. ARTICLE XV CONDUCT PRIOR TO THE CLOSING 15.1 Conduct by Seller. Seller hereby covenants and agrees with Purchaser that during the Contract Period, Seller shall operate the Property in a first class manner in accordance with its past business practices. Without limiting the foregoing, Seller shall: (i) maintain in full force and effect the insurance policies described in Exhibit HH; (ii) between the date hereof and the Closing, Seller will advise Purchaser of any written notice Seller receives after the date hereof from any Governmental Authority relating to the violation of any Law regulating the condition or use of the Property; and (iii) reasonably cooperate with Purchaser's attempts to obtain subordination and/or non-disturbance and attornment agreements from Tenants to the extent requested by Purchaser's lender. 34 15.2 Actions Prohibited. During the Contract Period Seller shall not, without the prior written approval of Purchaser: (i) make any unreimbursed capital expenditures in an amount not to exceed $30,000 in the aggregate with respect to the Property other than (a) in the ordinary course of operating the Property, (b) required for maintenance and repair, (c) required by any of the Leases or the Contracts or by governmental requirements affecting the Property, (d) required by Section 4.1.1.1 or (e) required by Section 4.1.1.3 all of which shall be made at Seller's expense unless otherwise set forth in Section 4.1.1.1 and Section 4.1.1.3; (ii) sell, transfer, encumber or change the status of title of all or any portion of the Property; (iii) change or attempt to change, directly or indirectly, the current zoning of the Real Property; (iv) cancel, amend or modify any Licenses and Permits held by Seller with respect to the Property or any part thereof which would be binding upon Purchaser after the Closing. (v) grant any consent of landlord under a Lease unless such consent is for a de minimis matter or unless required by the terms of the Lease; (vi) bring (or permit, to the extent within Seller's knowledge and control, to be brought) Hazardous Materials or substances on or into the Property in violation of Environmental Laws; (vii) remove or dispose of (or permit, to the extent within Seller's knowledge and control, to be removed or disposed of) any Hazardous Materials or substances existing on or in the Property in violation of Environmental Laws; (viii) remove (unless the same are replaced with similar or comparable items of at least equal quality prior to the Closing) any fixtures, equipment or Personal Property included hereunder; (ix) create any encumbrances affecting title to the Land or sell or transfer any portion of or interest in the Property; (x) unless and until this Agreement shall be terminated in accordance with the terms hereof, Seller shall not solicit or pursue or entertain any offers to purchase the Property, nor shall Seller enter into any negotiations with third parties with respect to a sale of the Property; 35 (xi) enter into, amend, modify or terminate any Union Contract; or (xii) terminate the lease dated May 1, 1992 between Seller, as landlord, and ASARCO Incorporated, as tenant, as amended from time to time (the "ASARCO Lease") for the entire 25th Floor unless and until Seller has entered into an amendment of the GS Lease to include the 25th Floor or a new lease for such space has been entered into with GS; provided that such amendment or lease with GS (i) commences upon the expiration of the ASARCO Lease with respect to the 25th Floor, (ii) is on the same terms and conditions set forth on Exhibit W and (iii) is otherwise in form and substance reasonably acceptable to Purchaser. 15.3 Leases and Contracts During Due Diligence Period. Prior to the end of the Due Diligence Period, Seller may not enter into, cancel, amend, or modify any Contracts or any Leases without approval by Purchaser which approval will not be unreasonably withheld or delayed. In addition, Seller shall not consent to any assignment or sublease in connection with any Lease, unless required to do so pursuant to the terms of the Lease. To the extent that any Contracts (including, without limitation, the management agreement) have been canceled or terminated on or before the Closing Date (other than termination by expiration of time), Seller shall deliver evidence of such cancellation or termination to Purchaser at the Closing. 15.4 After Due Diligence Period. After the Due Diligence Period, if Purchaser does not terminate this Agreement, Seller may not enter into any new lease or contract (unless such contracts are terminable on thirty (30) days' notice) or cancel, amend or modify any Contracts or any Leases without Purchaser's consent, which consent may be withheld by Purchaser in its sole and absolute discretion. In addition, Seller shall not consent to any assignment or sublease in connection with any Lease unless required to do so pursuant to the terms of the Lease, subject to Purchaser's consent based on the standard for consent set forth in the relevant Lease. To the extent that any Contracts (including, without limitation, the management agreement) have been canceled or terminated on or before the Closing Date (other than termination by expiration of time), Seller shall deliver evidence of such cancellation or termination to Purchaser at the Closing. Notwithstanding the preceding sentence, Seller may enter into any new contracts without Purchaser's consent if doing so is in the ordinary course of operating the Property and the contract (i) will not be binding on Purchaser or (ii) is cancelable on 30 days or less notice without penalty or premium. If Seller shall request Purchaser's approval to any of the foregoing matters, Purchaser shall have ten days from its receipt of such request to give Seller notice of its approval or disapproval of such matter. If Purchaser does not give such notice, such matter shall be deemed approved by Purchaser. Any unreimbursed capital expenditure approved by Purchaser or deemed approved by Purchaser shall be at Purchaser's expense. 36 15.5 Conduct by Purchaser. No later than 75 days prior to Closing, Purchaser shall notify Seller in writing of any Contract that Purchaser does not desire to assume. Seller shall pay all costs associated with such termination(s) and terminate the same prior to Closing and provide written evidence of such termination to Purchaser at Closing. 15.6 Confidentiality. Seller and Purchaser shall, prior to the Closing, maintain the confidentiality of this sale and purchase and shall not, except as required by law or governmental regulation applicable to Seller or Purchaser, which, with respect to Seller, shall include Standard & Poor's and insurance regulators, disclose the terms of this Agreement or of such sale and purchase to any third parties whomsoever other than the principals of Georgetown, Newmark, the Title Company and such other persons whose assistance is required in carrying out the terms of this Agreement including, without limitation, any potential or actual lenders or partners of Purchaser. Neither Seller nor Purchaser shall at any time issue a press release or otherwise communicate with media representatives regarding this sale and purchase unless such release or communication has received the prior approval of the other party hereto. Purchaser agrees that the Confidentiality Agreement, dated as of June 23, 2000 from Purchaser for the benefit of Seller is in effect, that all documents and information regarding the Property of whatsoever nature made available to it by Seller or Seller's agents and the results of all tests and studies of the Property (collectively, the "Proprietary Information") are confidential and Purchaser shall not disclose any Proprietary Information to any other person except those assisting it with the analysis of the Property and any potential or actual lenders or partners of Purchaser, and only after procuring such person's agreement to abide by these confidentiality restrictions. This Section 15.5 shall survive the Closing or termination of the Agreement. ARTICLE XVI NOTICES All notices, demands or other communications given hereunder shall be in writing and shall be deemed to have been duly delivered upon the receipt by facsimile transmission as evidenced by receipt transmission report, or upon the delivery by overnight express delivery service or by hand or 3 business days after mailing by certified mail postage prepaid, return receipt requested, addressed as follows: If to Purchaser, to: PGI-WvF 180, L.P. c/o Paramount Group, Inc. 1633 Broadway, Suite 1801 New York, New York, 10019 Attention: Albert P. Behler 37 Phone: 212-237-3110 Fax: 212-974-6435 Paramount Group, Inc. 1633 Broadway, Suite 1801 New York, New York, 10019 Attention: Daniel A. Lauer Phone: 212-237-3109 Fax: 212-237-3197 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, New York 10019 Attention: Eugene A. Pinover, Esq. Phone: 212-728-8254 Fax: 212-728-8111 If to Seller, to: Margaret M. Steck Vice President CNA CNA Plaza - 14 North Chicago, IL 60685 and Thomas Pontarelli Senior Vice President CNA CNA Plaza - 40 South Chicago, IL 60685 and Jacquelyne Belcastro, Esq. CNA CNA Plaza - 43 South Chicago, IL 60685 38 with a copy to: Barry Mills, Esq. Debevoise & Plimpton 875 Third Avenue New York, New York 10022 or to such other address or to such other person as any party shall designate to the others for such purpose in the manner hereinabove set forth. ARTICLE XVII TRANSFER OF TITLE AND POSSESSION 17.1 Transfer of Possession. Possession of the Property shall be transferred to Purchaser at the Closing subject to the Permitted Encumbrances. 17.1.1 Delivery of Documents at Closing. At the Closing, Seller shall deliver to Purchaser originals or copies of any additional documents, instruments or records in the possession of Seller or its agents which are necessary for the ownership and operation of the Property. ARTICLE XVIII GENERAL PROVISIONS 18.1 Captions. Captions in this Agreement are inserted for convenience of reference only and do not define, describe or limit the scope or the intent of this Agreement or any of the terms hereof. 18.2 Exhibits. All Exhibits referred to herein and attached hereto are a part hereof. 18.3 Entire Agreement. This Agreement contains the entire agreement between the parties relating to the transaction contemplated hereby and all prior or contemporaneous agreements, including without limitation, the LOI, understandings, representations and statements, oral or written, are merged herein. 18.4 Modification. No modification, waiver, amendment, discharge or change of this Agreement shall be valid unless the same is in writing and signed by the party against which the enforcement of such modification, waiver, amendment, discharge or change is or may be sought. 39 18.5 Attorneys' Fees. Should any party hereto employ an attorney for the purpose of enforcing or construing this Agreement, or any judgment based on this Agreement, in any legal proceeding whatsoever, including insolvency, bankruptcy, arbitration, declaratory relief or other litigation, the prevailing party shall be entitled to receive from the other party or parties thereto reimbursement for all reasonable attorneys' fees and all costs, including but not limited to service of process, filing fees, court and court reporter costs, investigative costs, expert witness fees and the cost of any bonds, whether taxable or not, and such reimbursement shall be included in any judgment, decree or final order issued in that proceeding. The "prevailing party" means the party in whose favor a judgment, decree, or final order is rendered. This provision shall survive Closing. 18.6 Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of New York, subject to any adjournment rights set forth in this Agreement. 18.7 Time of Essence. Time is of the essence to this Agreement and to all dates and time periods set forth herein. 18.8 Survival of Warranties. Except as otherwise specifically set forth in this Agreement, only the warranties and representations contained in Sections 13.1 and 13.2 and the provisions of Section 13.3 shall survive the Closing, the delivery of the Deed and the payment of the Purchase Price, provided that (i) the representations and warranties set forth in Sections 13.1.1-13.1.3, 13.2.1, 13.2.2 and 13.1.17 shall survive indefinitely and all other representations and warranties set forth in Article 13 shall survive for a period of 12 months after the Closing, except to the extent that Purchaser or Seller, as the case may be, shall have commenced, on or before such 12 month anniversary (the "Warranty Period"), a legal proceeding based on the breach thereof as of the date of the Closing, and (ii) the maximum total liability for which Seller shall be responsible with respect to all representations and warranties and each Landlord Estoppel shall not exceed Seven Million Five Hundred Thousand Dollars ($7,500,000) in the aggregate, and no claim for breach of representation or warranty may be made unless the claims, individually or in the aggregate, shall be in excess of $100,000 after taking account all prior claims, and if such claims in the aggregate exceed $100,000, Purchaser may make claims for all breaches without regard to the $100,000 deductible. Unless otherwise expressly herein stated to survive, all other representations, covenants, conditions and agreements contained herein shall merge into and be superseded by the various documents executed and delivered at the Closing and shall not survive the Closing. The liability of the Seller to Purchaser for any matter disclosed by Seller or learned by Purchaser prior to the Closing shall be governed by Section 3.8. At Closing, Seller shall deliver to Purchaser a guarantee in the form of Exhibit J from the Guarantor agreeing to guarantee the obligations of Seller with respect to representations and warranties of Seller set forth herein and Seller's statements in the Landlord Estoppels up to the amount of $7,500,000. 40 The liability of Seller pursuant to this Section 18.8 is in addition to and independent of any liability of Seller pursuant to Section 3.8. 18.9 Assignment by Purchaser. Purchaser may not assign its rights under this Agreement except to an Affiliate (as herein defined) provided, that any such Affiliate shall expressly assume, in writing, the covenants, undertakings, warranties, representations and all other obligations of Purchaser under this Agreement, whether before or after Closing and upon such assignment Purchaser shall be released from its obligations hereunder. 18.10 Severability. If any term, covenant, condition, provision or agreement herein contained is held to be invalid, void or otherwise unenforceable by any court of competent jurisdiction, the fact that such term, covenant, condition, provision or agreement is invalid, void or otherwise unenforceable shall in no way affect the validity or enforceability of any other term, covenant, condition, provision or agreement herein contained. 18.11 Successors and Assigns. All terms of this Agreement shall be binding upon, inure to the benefit of and be enforceable by, the parties hereto and their respective legal representatives, successors and assigns (subject to Section 18.9). 18.12 Interpretation. Seller and Purchaser acknowledge each to the other that both they and their counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or Exhibits hereto. 18.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed original; such counterparts shall together constitute but one agreement. 18.14 Recordation. This Agreement may not be recorded and any attempt to do so shall be of no effect whatsoever. 18.15 Limitation on Liability. In any action brought to enforce the obligations of Seller under this Agreement, the judgment or decree shall be enforceable against Seller only to the extent of its interest in the Property, including any proceeds thereof, and no other property or assets of Seller shall be subject to levy, execution or lien for the satisfaction of any remedies against Seller unless Seller has committed fraud, in which event there shall be no limit to the liability of Seller. This provision shall survive the Closing. 18.16 WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, 41 DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER THIS AGREEMENT OR THE OTHER AGREEMENTS, INCLUDING, WITHOUT LIMITATION, ANY PRESENT OR FUTURE MODIFICATION THEREOF OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR THE OTHER AGREEMENTS (AS NOW OR HEREAFTER MODIFIED) OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION IS NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND THE PARTIES HEREBY AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF ANY RIGHT THEY MIGHT OTHERWISE HAVE TO TRIAL BY JURY. THIS SECTION SHALL SURVIVE CLOSING OR TERMINATION OF THIS AGREEMENT. 18.17 Further Assurances. Seller, Agent and Purchaser each agree to do such further acts and things and to execute and deliver such additional agreements and instruments as the other may reasonably require to consummate, evidence or confirm the sale or any other agreement contained herein in the manner contemplated hereby. This Section shall survive the Closing. 18.18 Non-Waiver of Rights. No failure or delay of either party in the exercise of any right given to such party hereunder shall constitute a waiver thereof unless the time specified herein for exercise of such right has expired, nor shall any single or partial exercise of any right preclude other or further exercise thereof or of any other right. The waiver of any breach hereunder shall not be deemed to be a waiver of any other or any subsequent breach hereof. 18.19 Mortgage Transactions. Notwithstanding anything to the contrary set forth herein, Purchaser may, if it so elects, take such steps as Purchaser shall deem necessary or desirable to encumber the Property at or immediately prior to the Closing with a mortgage (the "Mortgage") that encumbers other premises located in the City and State of New York (a "Mortgage Transaction"). Seller shall use reasonable efforts to cooperate (which cooperation shall be at Purchaser's sole cost and expense) in so effecting a Mortgage Transaction, if so desired by Purchaser, provided that such structuring shall not increase Seller's liabilities or obligations hereunder or adversely affect Seller's rights hereunder and provided further that the following conditions shall be satisfied prior to the Mortgage encumbering the Property: (i) there shall only be one Mortgage and one 42 Mortgage lender (" Mortgagee"), (ii) the Mortgage shall be prepayable at any time, (iii) Purchaser shall deposit with Agent an irrevocable Letter of Credit acceptable to Seller, drawn on a Bank acceptable to Seller in its sole discretion, in an amount equivalent to 125% of the Mortgage, naming Agent as beneficiary and giving Agent the absolute right to draw down the Letter of Credit on the date following the date of Closing (the "Pay-off Date"), if the Closing does not occur, (iv) Purchaser shall deliver a pay-off letter from the Mortgagee stating the full amount required to satisfy the Mortgage on the Pay-off Date, and the per diem amount required for each day thereafter, and, (v) Purchaser shall deliver to Seller a cash deposit in an amount sufficient to pay the first two monthly installments due on the note secured by the Mortgage. In providing such assistance, Seller shall execute such documents, if any, as may be reasonably required by Purchaser to effectuate such encumbrance ("Mortgage Documents") and otherwise comply with the provisions of this Section 18.19, provided that the Mortgage Transaction and the Mortgage Documents shall not (a) require Seller to execute any contract, make any commitment, or incur any obligations, contingent or otherwise, to third parties which are not fully released as part of the Closing, (b) delay the Closing, and (c) otherwise be contrary to or inconsistent with the terms of this Agreement. Any Mortgage Document that Purchaser shall request Seller to execute shall be prepared and submitted to Seller at least five (5) business days prior to the date that Seller's execution thereof is requested. Seller shall execute any such Mortgage Document only if it conforms in all respects to the provisions of this Agreement relating to a Mortgage Document. Purchaser hereby agrees to indemnify, defend and hold Seller, its respective partners and the heirs, successors and assigns thereof, harmless from, against and in respect of, and shall on demand reimburse Seller, its respective partners and the heirs, successors and assigns thereof for, any and all loss, liability, damage or expense, including but not limited to reasonable attorneys' fees and disbursements, arising out of or in any way connected with the Mortgage Transaction or any Mortgage Document which would not have been incurred if there was no Mortgage Transaction. 18.20 Credit Lyonnaise Rouse (USA) ("Credit Lyonnaise") Transaction. Prior to Closing, Seller may (i) enter into an agreement with Credit Lyonnaise pursuant to which Credit Lyonnaise will agree to surrender its leasehold interest on a portion of the 19th floor of the Property on or prior to December 31, 2000, (the "Credit Lyonnaise Surrender") and otherwise on terms and conditions reasonably acceptable to Purchaser and Seller and (ii) enter into an amendment to the GS Lease (the "19th Floor Amendment") pursuant to which GS will agree to lease the portion of the 19th floor surrendered by Credit Lyonnaise on terms and conditions set forth on Exhibit LL and otherwise reasonably acceptable to Purchaser. Seller's right to enter into the Credit Lyonnaise Surrender or the 19th Floor Amendment shall be contingent upon Seller's entering into the other such agreement. In the event that the Credit Lyonnaise Surrender and the 19th Floor Amendment have not both been executed prior to Closing, Purchaser shall receive a credit at Closing in the amount of One Million One Hundred Ninety Two Thousand ($1,192,000) Dollars and shall be required to close. In the event that the 43 Credit Lyonnaise Surrender and the 19th Floor Amendment are in full force and effect at Closing, but the Fixed Rent pursuant to the 19th Floor Amendment is not payable by GS on the Closing Date, Seller shall pay to Purchaser (or credit against he Purchase Price) the difference between (x) the per diem Fixed Rent that would be payable by GS pursuant to the 19th floor Amendment and (y) the per diem fixed rent that is payable by Credit Lyonnaise, from the Closing Date until the date that GS is required to begin paying Fixed Rent, or, in the event that the Credit Lyonnaise lease is terminated prior to the Closing Date and the GS obligation to pay Fixed Rent has not commenced, the amount of Fixed Rent that GS would be obligated to pay pursuant to the 19th Floor Amendment from the Closing Date until the date that Fixed Rent is payable by GS pursuant to the 19th Floor Amendment. If the amount of the payment or credit cannot be calculated at Closing, Seller shall make such payments to Purchaser monthly and such payment obligations shall survive Closing and shall be covered by the Guarantee. 18.21 Indemnity by Seller. Seller shall indemnify, defend, and hold Purchaser harmless from and against any and all loss, cost, expense (including reasonable attorneys' fees and disbursements), damage or liability arising out of, directly or indirectly, (a) tort claims, (including those for bodily injury, wrongful death, or property damage) against Purchaser or the Property based on causes of action which arose, accrued or relate to facts occurring prior to the Closing, not caused by Purchaser, its agents, contractors and other representatives and (b) claims by Tenants (including, without limitation, claims with respect to overcharges of rent or additional rent but only to the extent of amounts received by Seller from Tenants), employees, contractors or parties under the Contracts and utility companies, with respect to matters that occurred or obligations which accrued prior to the Closing. The provisions of this Section 18.21 shall survive the Closing for the statute of limitation with respect to each specific claim. 18.22 Indemnity by Purchaser. Purchaser shall indemnify, defend, and hold Seller harmless from and against any and all loss, cost, expense (including reasonable attorneys' fees and disbursements), damage or liability arising out of, directly or indirectly, (a) tort claims, (including those for bodily injury, wrongful death, or property damage) against Seller or the Property based on causes of action which arose, accrued or relate to facts occurring after the Closing not caused by Seller, its agents, contractors and other representatives and (b) claims by Tenants, employees, contractors under the Contracts, utility companies, and the holder of any mortgage on the Property (or any portion thereof), with respect to matters that occurred or obligations which accrued after the Closing. The provisions of this Section 18.22 shall survive the Closing for the statute of limitations with respect to each specific claim. 18.23 Counterparts. This Agreement may be executed in any number of counterparts, and each counterpart hereof shall be deemed an Original instrument. But all counterparts together shall constitute but one agreement. Facsimile signatures shall be deemed originals. 44 18.24 Indemnification. If, pursuant to this Agreement, Seller has agreed to indemnify Purchaser with respect to a particular matter, Seller shall be deemed to have agreed to indemnify Purchaser for all losses, costs, liabilities, damages and expenses (including, without limitation (provided Purchaser shall prevail in the enforcement of the indemnity in connection with such matter) reasonable attorneys' fees and disbursements, court costs and enforcement costs) suffered or incurred by Purchaser with respect to such matter, provided, however, that in no event shall Seller's liability exceed the maximum amounts, if any, provided for in this Agreement, including, without limitation, in Section 3.8, and 18.8. 18.25 Definitions. The following terms used but not otherwise defined herein shall have the following meanings. "Affiliate" as used with respect to Seller or any other Person, shall mean any Person controlled, controlled by or under common control with Seller. The term "control" and the correlative terms controlled, controlled by and under common control with shall mean the power to direct the management and policies of such Person. "Affiliate" as used with respect to Purchaser, shall mean (i) Werner Otto and/or his direct descendants, (ii) Wilhelm von Finck, Sr., Wilhelm von Finck, Jr. and their descendants (iii) trusts for the benefit of any person(s) described in clauses (i) and (ii) and (iv) entities which one or more of the persons or entities described in clauses (i), (ii) or (iii) control. As used herein, "descendants" shall include legally adopted persons; and "control" shall mean the ability to direct the management and operation of the entity and the ability of another party to approve management decisions shall not be deemed a lack of control. "business day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks are permitted or required to be closed in the State of New York. "Closing Date" shall mean the date on which the Closing occurs as provided in Section 8.1. "Environmental Laws" mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, each as amended, together with all other applicable laws (including rules, regulations, codes, plans, contaminant levels, clean-up levels, injunctions, judgments, orders, decrees, rulings, and charges thereunder) of federal, state, local, and foreign governments (and all agencies thereof) concerning pollution or protection of the environment, including laws relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, or chemical, industrial, hazardous, or toxic or other materials or wastes into ambient air, surface water, ground water, or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, 45 transport, or handling of pollutants, contaminants, or chemical, industrial, hazardous, or toxic or other materials or wastes; all to the extent applicable to the Property or any operations conducted thereat. "Governmental Authority" means any agency, bureau, commission, court, department, official political subdivision, tribunal or other instrumentality of any government whether federal, state, local, domestic or foreign. "Hazardous Materials" means any substance, material, waste, gas or particulate matter which (i) is regulated by the United States Government, the State of New York, any other state with jurisdiction, or any local governmental authority, or (ii) the exposure to, or manufacture, possession, presence, use, generation, storage, transportation, treatment, release, disposal, abatement, cleanup, removal, remediation or handling of is prohibited, controlled or regulated by any Environmental Law, or (iii) requires investigation or remediation under any Environmental Law or common law; provided, however, that solvents, paints, cleaning materials and any other substances commonly used in connection with the operation and/or maintenance of the Property shall not be included in the foregoing definition so long as such materials are used, stored and disposed of in accordance with Environmental Laws. "Laws" shall mean any applicable law, rule, regulation (including, without limitation, the Americans with Disabilities Act) or municipal ordinances, orders or requirements that have been noted in or issued by any federal, state or municipal department with competent jurisdiction. "Person" shall mean an association, corporation, stock company, estate, general partnership (including any Registered Limited Liability Partnership or Foreign Limited Liability Partnership), limited association, limited liability company, foreign limited liability company, joint venture, limited partnership, natural person, real estate investment trust, business trust or other trust, custodian, nominee or other individual in its own or any representative capacity. In addition, the term means the heirs, executors, administrators, legal representatives, successors and assigns of that "Person" where the context so permits. SIGNATURE PAGES TO FOLLOW 46 IN WITNESS WHEREOF, this Agreement has been executed as of the date first set forth above. SELLER POOL COMPANIES: BOSTON OLD COLONY INSURANCE COMPANY By: _________________________ Name: Title: THE BUCKEYE UNION INSURANCE COMPANY By: _________________________ Name: Title: COMMERCIAL INSURANCE COMPANY OF NEWARK, N.J. By: _________________________ Name: Title: THE CONTINENTAL INSURANCE COMPANY By: _________________________ Name: Title: 47 THE CONTINENTAL INSURANCE COMPANY OF NEWARK, NEW JERSEY By: _________________________ Name: Title: THE FIDELITY AND CASUALTY INSURANCE COMPANY OF NEW YORK By: _________________________ Name: Title: FIREMEN'S INSURANCE COMPANY OF NEWARK, NEW JERSEY By: _________________________ Name: Title: THE GLENS FALLS INSURANCE COMPANY By: _________________________ Name: Title: KANSAS CITY FIRE AND MARINE INSURANCE COMPANY By: _________________________ Name: Title: 48 THE MAYFLOWER INSURANCE COMPANY, LTD. By: _________________________ Name: Title: NATIONAL BEN FRANKLIN INSURANCE COMPANY OF ILLINOIS By: _________________________ Name: Title: NIAGARA FIRE INSURANCE COMPANY By: _________________________ Name: Title: PURCHASER: PGI-WvF 180, L.P. By: _________________________ Name: Title: 49 FIRST AMENDMENT TO SALE AND PURCHASE AGREEMENT THIS FIRST AMENDMENT TO SALE AND PURCHASE AGREEMENT (this "Amendment"), dated as of the 26th day of January, 2001, is made by the SELLER POOL COMPANIES listed on Exhibit A attached hereto having an office at CNA Plaza, 333 South Wabash Avenue, Chicago, Illinois 60685 ("Seller") and MAIDEN LANE, L.P. a New York limited partnership having an office at c/o Paramount Group, Inc, 1633 Broadway, Suite 1801, New York, New York 10019 ("Purchaser"). W I T N E S S E T H: WHEREAS, Seller and PGI-WvF 180, L.P., a New York limited partnership, entered into a Sale and Purchase Agreement (as the same may be amended from time to time, referred to hereinafter as the "Sale Agreement") for the sale of that certain premises (the "Property") known as 180 Maiden Lane, New York, New York; WHEREAS, PGI-WvF 180, L.P. has changed its name to Paramount 180, L.P. pursuant to that Second Amendment to Limited Partnership Agreement of PGI-WvF 180, L.P., dated as of December 15, 2000; WHEREAS, Paramount 180, L.P. has assigned its interest in the Sale Agreement to Purchaser pursuant to that certain Assignment and Assumption of Sale and Purchase Agreement dated as of January 4 2001; WHEREAS, Purchaser has elected to extend the Closing Date until January 30, 2001 pursuant to Section 8.1(ii) of the Sale Agreement; and WHEREAS, Seller and Purchaser desire to amend and modify the Sale Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree that the Sale Agreement is hereby amended as follows: 1. All capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Sale Agreement. 2. Exhibit A of the Sale Agreement is hereby deleted in its entirety, and Exhibit A attached hereto is hereby substituted therefor, as Exhibit A to the Sale Agreement. 3. Each of the entities executing this Amendment hereby agrees that it is the Seller pursuant to the Sale Agreement and hereby ratifies, confirms and agrees to be bound by the terms of the Sale Agreement, as modified by this Amendment. 4. Each entity constituting Seller hereby agrees that upon request of Purchaser it shall execute any documents, instruments, agreements or certificates which Purchaser, in its reasonable discretion, deems necessary or advisable in order to correct any document, instrument, agreement or certificate executed by Seller at or prior to Closing in connection with the Sale Agreement or in order to consummate the transaction contemplated by the Sale Agreement, as modified by this Amendment. 5. Each entity constituting Seller hereby jointly and severally agrees to indemnify, defend and hold harmless Purchaser, its partners and their respective officers, directors, members, partners and affiliates from and against any and all loss, cost, damage, liability or expense (including, without limitation, reasonable attorneys fees and disbursements) suffered or incurred by such entity as a result of any discrepancies between the legal and valid names of any entity constituting Seller and the name of any entity constituting or purporting to constitute a Seller as shown in the Sale Agreement, this Amendment or any document, instrument, agreement or certificate executed by any entity constituting or purporting to constitute a Seller at or prior to Closing. 6. The terms "this Agreement" or "Sale Agreement" as used herein or in the Sale Agreement prior to the execution of this Amendment shall mean the Sale Agreement as modified hereby. 7. Except as amended hereby, the terms and provisions of the Sale Agreement remain unmodified and in full force and effect and are hereby in all respects ratified and confirmed. 8. This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, Seller and Purchaser have caused this Amendment to be executed as of the day and year first above written. SELLER: BOSTON OLD COLONY INSURANCE COMPANY THE BUCKEYE UNION INSURANCE COMPANY COMMERCIAL INSURANCE COMPANY OF NEWARK, N.J. THE CONTINENTAL INSURANCE COMPANY THE CONTINENTAL INSURANCE COMPANY OF NEW JERSEY THE FIDELITY AND CASUALTY COMPANY OF NEW YORK FIREMEN'S INSURANCE COMPANY OF NEWARK, NEW JERSEY THE GLENS FALLS INSURANCE COMPANY -2- KANSAS CITY FIRE AND MARINE INSURANCE COMPANY THE MAYFLOWER INSURANCE COMPANY, LTD. NATIONAL-BEN FRANKLIN INSURANCE COMPANY OF ILLINOIS NIAGARA FIRE INSURANCE COMPANY By: Name: Margaret M. Steck as Vice President of each of the companies listed above PURCHASER: MAIDEN LANE, L.P. By: Paramount 180, L.P., its general partner By: MRI-180 GP, LLC, its managing general partner By: ____________________________ Name: Title: -3- EXHIBIT A SELLER POOL COMPANIES 1. Boston Old Colony Insurance Company 2. The Buckeye Union Insurance Company 3. Commercial Insurance Company of Newark, N.J. 4. The Continental Insurance Company 5. The Continental Insurance Company of New Jersey 6. The Fidelity and Casualty Company of New York 7. Firemen's Insurance Company of Newark, New Jersey 8. The Glens Falls Insurance Company 9. Kansas City Fire and Marine Insurance Company 10. The Mayflower Insurance Company, Ltd. 11. National-Ben Franklin Insurance Company of Illinois 12. Niagara Fire Insurance Company EX-12.1 3 d25096_ex12-1.txt COMPUTATION OF RATIOS EXHIBIT 12.1 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31, 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- (In millions, except ratios) Income (loss) before income tax, net of minority interest $ 1,782 $ (41) $ 329 $ 1,358 $ 1,345 Adjustments: Interest expense 206 202 219 198 200 Interest element of operating lease rental 32 35 47 34 32 ------- ------- ------- ------- ------- Earnings before fixed charges $ 2,020 $ 196 $ 595 $ 1,590 $ 1,577 ======= ======= ======= ======= ======= Fixed charges: Interest expense $ 206 $ 202 $ 219 $ 198 $ 200 Interest element of operating lease rental 32 35 47 34 32 ------- ------- ------- ------- ------- Total fixed charges $ 238 $ 237 $ 266 $ 232 $ 232 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges (1) 8.5 0.8 2.2 6.8 6.8 ======= ======= ======= ======= =======
(1) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges of consolidated companies. Fixed charges consist of interest and that portion of operating lease rental expense which is deemed to be an interest factor for such rentals. EX-13.1 4 d25096_ex13-1.txt ANNUAL REPORT CNA CHARTING THE COURSE - -------------------------------------------------------------------------------- When CNA set out to turn the company's performance around two years ago, we began evaluating each aspect of our business with a fresh perspective. We were determined to target those areas where our expertise added the most value for our clients and, ultimately, our shareholders. This intensive look at our business is engaging literally thousands of employees. As a result, we've changed a great deal at CNA during the past two years - simplifying our business, clarifying our goals and applying renewed discipline and accountability to our performance. CNA is charting the course to a future of profitable growth by focusing on what we do best, and it's a journey that will continue to drive the creation of shareholder value. This Annual Report details our substantial progress to date and the strategies that will take us where we want to go. - -------------------------------------------------------------------------------- CNA - WHO WE ARE CNA Financial Corporation is a holding company for property-casualty and life insurance companies and other related businesses. The CNA insurance group of companies is one of the largest writers of commercial property-casualty insurance in the United States - using underwriting to help businesses manage their risks. CNA is the country's second largest commercial insurance writer, the eighth largest property-casualty company and the 36th largest life insurance company. CNA's insurance products include standard commercial lines, specialty lines, surety, reinsurance, marine and other property and casualty coverages; life and accident insurance; group long term care, disability and life insurance; and pension products and annuities. CNA services include risk management, information services, underwriting, loss control and claims administration. Its products and services are marketed through agents, brokers and managing general agents. "CNA" is a registered service mark, trade name and domain name of CNA Financial Corporation authorized for use by its subsidiaries. CNA's major subsidiaries include The Continental Insurance Company, incorporated in 1853, Continental Casualty Company, incorporated in 1897, and Continental Assurance Company, incorporated in 1911. The company operates in all 50 states, as well as major international markets around the world. CNA's financial strength is reflected in revenues of $15.6 billion in 2000, and at year-end 2000, assets of $62.1 billion and stockholders' equity of $9.6 billion. CNA Financial Corporation stock is traded primarily on the New York Stock Exchange, and is approximately 87 percent owned by Loews Corporation. - -------------------------------------------------------------------------------- Table of Contents 2 Letter to Shareholders 6 Enhancing Underwriting Expertise 8 Continuing Our Commitment to Life and Group 10 Improving Service and Efficiency 12 Maintaining a Disciplined Financial Approach 14 Building Worldwide Capabilities 16 Developing People and Partners 18 Building a Strong Reputation 20 Financial Highlights (1991-2000) 21 Management's Discussion and Analysis 41 Consolidated Financial Statements 74 Directors and Officers IBC Company Information - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
As of and for the Years Ended December 31 (In millions, except per share data and ratios) 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Results of Operations Revenues $ 15,614 $ 16,403 $ 17,162 $ 17,199 $ 16,988 - ----------------------------------------------------------------------------------------------------------------------------- Net operating income (loss) $ 354 $ (145) $ (152) $ 488 $ 578 Net realized investment gains 860 192 434 478 387 Cumulative effect of a change in accounting principle, net of tax -- (177) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 1,214 $ (130) $ 282 $ 966 $ 965 ============================================================================================================================= Earnings per share Net operating income (loss) $ 1.92 $ (0.85) $ (0.86) $ 2.59 $ 3.08 Net realized investment gains, net of tax and minority interest 4.69 1.04 2.35 2.58 2.09 Cumulative effect of a change in accounting principle, net of tax and minority interest -- (0.96) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 6.61 $ (0.77) $ 1.49 $ 5.17 $ 5.17 ============================================================================================================================= Financial condition Invested assets $ 35,122 $ 35,560 $ 37,177 $ 36,203 $ 35,412 Total assets 62,068 61,219 62,432 61,675 60,455 Reserves 39,054 39,271 40,509 39,829 39,981 Debt 2,729 2,881 3,160 2,897 2,765 Stockholders' equity 9,647 8,938 9,157 8,309 7,060 Book value per common share $ 52.64 $ 47.66 $ 47.89 $ 44.01 $ 37.27 Return on average stockholders' equity 13.1% -1.4% 3.2% 12.6% 14.0% Statutory surplus Property-casualty companies* $ 8,387 $ 8,679 $ 7,593 $ 7,123 $ 6,349 Life insurance companies 1,274 1,222 1,109 1,224 1,163 =============================================================================================================================
* Surplus includes equity of property-casualty companies' ownership in life insurance subsidiaries. 1 LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- Bernard L. Hengesbaugh Chairman and Chief Executive Officer Dear Shareholder: I am pleased to report continued progress during 2000 in our efforts to improve CNA's operating performance and to enhance shareholder value. As this year's results indicate, we have a lot of additional work to do before we attain the full measure of shareholder value that is within our reach. But we are on the right path. We are beginning to achieve operating improvements through simplification, focus and improved discipline. Simplifying and clarifying our business today is also helping us chart a course for a profitable and productive future for CNA. That course is being developed around strategies focused on what we do best for our customers. 2 CONTINUED IMPROVEMENT During the past two years, CNA exited non-core businesses, sharpened our focus on the risks of business customers and strengthened the fundamentals of our operations. We are beginning to see the results of these efforts with the continued improvement in our earnings. Our net income for 2000 was $1.2 billion, an increase of $1.3 billion over the net loss of $130 million in 1999. While this significant increase in net income is attributable largely to realized gains on our superb Global Crossing and Canary Wharf investments, operating performance also improved. Net operating income of $354 million in 2000, improved $500 million over 1999's loss of $145 million. This came on operating revenues of $14.3 billion in 2000, compared with operating revenues of $16.1 billion in 1999. This is an indicator of improved margins in our business. Our performance during 2000 increased CNA's book value per share to $52.64 at the end of the year, a 10 percent increase compared with $47.66 at year-end 1999. TWO KEY ELEMENTS The two priorities that have driven the CNA turnaround since inception - underwriting discipline and cost-effective operations - continued in 2000. First, our underwriting actions were favorably influenced by three factors: 1. An underwriting, pricing, loss control and claims team more attuned to underwriting excellence than even one year ago. 2. Continued strong partnerships with agents and brokers who are willing to work with us to solve problems. 3. A generally supportive marketplace. (Reinsurance was a notable exception to this through most of the year.) As happened in 1999, the re-underwriting and pricing actions resulted in renewal retention rates lower than historical levels with only modest new business writings, and consequent reductions in premium volume. On the business renewed, we achieved increases in the 14 to 20 percent range, thereby improving future profit potential both from the rate increases and the improved quality of the business retained. Second, we are maintaining our commitment to drive unnecessary costs out of the business. In spite of our decreased premium volume, our expense reduction efforts are starting to show in the expense ratio and in real dollars of underwriting and acquisition expenses. Having said that, this management team is not satisfied with these results. We have more to do to complete this fundamental improvement process. But we are establishing the momentum for profitable growth and increased shareholder value over the long term. MILESTONES During 2000, we reached some significant milestones on our path to improved operating performance. o Six of our seven business segments reported improved net operating results for 2000. o We launched our eBusiness initiative, supported by a long term commitment to invest more than $150 million over the next several years in support of this strategy. 3 o We began to see improved service levels through our new, centralized processing facility in Maitland, Florida. o We sold our life reinsurance business to MARC, the U.S. life subsidiary of Munich Re. This allowed us to focus better on our core strategies. o We affirmed our ongoing commitment to our Individual Life, Long Term Care and Retirement Services businesses after a comprehensive analysis. CHARTING THE COURSE Looking forward, the people of CNA have responded enthusiastically to solving the challenges we face - not just within our own company, but also new and emerging challenges that face our industry and our clients in this new century. During 2000, I was privileged to meet with more than 15,000 of our employees to discuss our direction. I am more convinced than ever that our success is assured by our talented people who work on the front lines with our customers every day. As you will see from our Statement of Direction on the facing page, our commitment is simple and straightforward. Our future is centered on providing significant value to our customers through great underwriting. This commitment will be the core of our strategies and everything we do. To sharpen and simplify our focus, we're creating three new organizations as announced on January 29, 2001: Worldwide Field Operations, unifying CNA's domestic and international branches, led by Gary Owcar; Global Specialty Underwriting and Claims, extending our underwriting expertise worldwide, headed by Peter Wilson; and Technology Solutions, combining eBusiness Operations, information technology and business processing systems for the property-casualty organization, led by Robert James. In addition, we have combined CNA Life and Group Operations under the leadership of Robert Patin, who joined us earlier this year as chief executive officer of this unit, having served eight years as chairman and CEO of Washington National Corporation. Through these changes, we are improving our ability to communicate and collaborate within our organization on behalf of our clients, and we are removing the "internal walls" so that we have the opportunity to provide solutions to our clients' needs. Three of these four new organizations draw very capable people promoted from within CNA - a very healthy sign. But we have also continued our success in attracting talented and experienced insurance and technology people from outside CNA. These people recognize the opportunity that now exists to be part of the re-emergence of CNA as a winner in coming years. IN THE FUTURE When you combine the momentum of our financial improvement and our newly focused direction, I believe you can see why we are optimistic about the future of CNA. We have outstanding franchise value, including a broad base of thousands of customers . . . we have excellent partnerships with outstanding agents and brokers . . . we maintain a strong balance sheet . . . and we have the resources to make targeted investments that will enhance our ability to serve our customers. 4 CNA STATEMENT OF DIRECTION - -------------------------------------------------------------------------------- Businesses face changing risks worldwide that demand great underwriting. The people of CNA are dedicated to being the experts in understanding these risks and in building well-reasoned products and services that serve the best interest of our customers. By doing so, CNA will be very profitable. Great underwriting requires expertiese across many disciplines and about many different businesses. The people of CNA are committed to investing continuously in research about the businesses wer serve, training to advance our skills, and the technology to get the job done well. Only the highest caliber of people can deliver great underwriting. The people of CNA are dedicated to building a disciplined and diverse organization that expects and regards superior results deivered with integrity and mutual respect. We have made the tough decisions to improve our performance, we are demonstrating the strength of our business model and we are providing a solid platform for profitable growth and enhanced shareholder value. BOARD CHANGES Finally, I want to salute two directors who will be retiring from our board in May: Robert Gwinn and Walter Mondale. Bob Gwinn, former Chairman and CEO of Encyclopaedia Brittanica, served for over 40 years on our board with great dedication and distinction. Walter Mondale, who served on our board for 12 years, has been a steady source of insight and sound advice. We will miss them both. Early this year, we announced that Walter Harris, president and CEO of Tanenbaum-Harber Company, had become the newest member of our Board of Directors. He brings more than two decades of insurance industry leadership, and we are pleased to have Walter's experience and perspective on our Board. In summary, it has been a year of significant effort and progress in improving the fundamentals at CNA. We clearly have more work to do. But we are a stronger organization today than even a year ago, and we are more confident of delivering enhanced value for you in the years ahead. Thank you for your continued support. Sincerely, Bernard L. Hengesbaugh Chairman and Chief Executive Officer CNA insurance companies March 10, 2001 5 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- INTRODUCTION The following discussion highlights significant factors influencing the consolidated results of operations and financial condition of CNA Financial Corporation (CNAF) and its subsidiaries (collectively CNA or the Company). Loews Corporation (Loews) owns approximately 87% of the outstanding common stock of CNAF. This discussion should be read in conjunction with the Consolidated Financial Statements and the related Notes, appearing on pages 41 through 72, and the five-year summary of selected financial highlights appearing on page 1. The discussion also includes an overview of each of the Company's seven operating segments, the products offered, the customers served, the distribution channels used and an analysis of operating results. The provisions for restructuring and other related charges, recorded in prior years, are discussed on a consolidated basis on page 32. Because distinct investment portfolios are not maintained for each insurance segment, the discussion of investment results, including investment income and realized investment gains, is also on a consolidated basis and begins on page 32. CONSOLIDATED OPERATIONS Business Overview CNA is one of the largest insurance organizations in the United States. Based on 1999 net written premiums, CNA is the eighth largest property-casualty company and the 36th largest life insurance company. CNA conducts its operations through the seven operating segments listed below. In addition to the seven operating segments, certain other activities are reported in a Corporate and Other segment. Agency Market Operations Specialty Operations CNA Re Global Operations Risk Management Group Operations Life Operations These operating segments reflect the way in which CNA distributes its products to the marketplace and the way in which it manages operations and makes business decisions. A more detailed description of each segment is included later in this discussion. Operating Results The following chart summarizes the consolidated results of operations for each of the last three years. Consolidated Operations
Years ended December 31 (In millions, except per share data) 2000 1999 1998 - -------------------------------------------------------------------------------- Revenues: Net earned premiums $ 11,474 $ 13,282 $ 13,536 Net investment income 2,080 2,101 2,146 Other revenues 739 705 799 - -------------------------------------------------------------------------------- Total revenues 14,293 16,088 16,481 Claims, benefits and expenses 13,804 16,331 16,567 Restructuring and other related charges -- 83 246 - -------------------------------------------------------------------------------- Operating income (loss) before income tax and minority interest 489 (326) (332) Income tax (expense) benefit (107) 211 200 Minority interest (28) (30) (20) - -------------------------------------------------------------------------------- Net operating income (loss) 354 (145) (152) Net realized investment gains, net of tax and minority interest 860 192 434 Cumulative effect of a change in accounting principle, net of tax and minority interest -- (177) -- - -------------------------------------------------------------------------------- Net income (loss) $ 1,214 $ (130) $ 282 ================================================================================ Basic and diluted earnings (loss) per share: Net operating income (loss) $ 1.92 $ (0.85) $ (0.86) Net realized investment gains, net of tax and minority interest 4.69 1.04 2.35 Cumulative effect of a change in accounting principle, net of tax and minority interest -- (0.96) -- - -------------------------------------------------------------------------------- Basic and diluted earnings (loss) per share available to common stockholders $ 6.61 $ (0.77) $ 1.49 ================================================================================ Weighted average outstanding common stock and common stock equivalents 183.6 184.2 184.9 ================================================================================
21 The following table summarizes net income excluding after-tax realized investment gains/losses (net operating income) by segment. Net Operating Income by Segment
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Agency Market Operations $ 110 $(201) $ (54) Specialty Operations 131 49 58 CNA Re 57 (13) 68 Global Operations 42 64 18 Risk Management 29 19 (88) Group Operations 36 (6) (48) Life Operations 169 145 105 Corporate and Other (220) (202) (211) - -------------------------------------------------------------------------------- Net operating income (loss) $ 354 $(145) $(152) ================================================================================
2000 Compared with 1999 Net earned premiums decreased $1,808 million, or 14%, to $11,474 million in 2000 as compared with 1999. This decline was attributable to $1,354 million related to the CNA Personal Insurance business (Personal Insurance) transaction (see Note O to the Consolidated Financial Statements for discussion of the Personal Insurance transaction), as well as continued efforts to re-underwrite business and obtain adequate rates for exposure underwritten. Net operating income was $354 million, or $1.92 per share, in 2000 as compared with a net operating loss of $145 million, or $0.85 per share, in 1999. Net operating income increased $499 million in 2000, primarily as a result of the improvement of $451 million for the property-casualty segments, $42 million for Group Operations and $24 million for Life Operations, partially offset by a decline for Corporate and Other of $18 million. The improvement in the property-casualty net operating income was principally attributable to improved underwriting results of $554 million, partially offset by decreased investment income and increased expenses, including increased interest expense related to the cost of reinsurance. The improvement in 2000 results was primarily due to significant rate increases across the entire book of business, favorable catastrophe experience, reduced prior year reserve strengthening and the non-recurrence of $54 million in restructuring and related charges incurred in 1999. After-tax catastrophe losses for 2000 improved by $189 million, including $62 million related to Personal Insurance. See Note O to the Consolidated Financial Statements for a discussion of the Personal Insurance transaction. In addition, net operating income in both 2000 and 1999 benefited from a change in estimate for certain insurance-related assessments resulting from regulatory changes in the basis on which certain of these assessments are calculated. The after-tax impact of these releases was $60 million in 2000 and $51 million in 1999. Net income for 2000 was $1,214 million, or $6.61 per share, as compared with a net loss for 1999 of $130 million, or $0.77 per share. Net realized gains increased $668 million in 2000 primarily attributable to sales of equity securities. Included in the net loss for 1999 was a charge of $177 million, net of tax, or $0.96 per share, for the cumulative effect of a change in accounting principle for insurance-related assessments. 1999 Compared with 1998 The Company had a net operating loss for 1999 of $145 million, or $0.85 per share, compared with a net operating loss of $152 million, or $0.86 per share, for 1998. The net operating loss for 1999 includes $363 million in loss and allocated loss adjustment expense reserve strengthening for prior periods. After-tax catastrophe losses were approximately $35 million higher in 1999 as compared with 1998. The 1999 net operating loss also included $54 million in after-tax restructuring and other related charges, as compared with $160 million in after-tax restructuring and other related charges in 1998. The 1999 net operating loss also reflects an after-tax benefit of $51 million resulting from regulatory changes in the basis on which certain insurance-related assessments are calculated. Discussions of the results of operations from the Company's segments follow. AGENCY MARKET OPERATIONS Business Overview Agency Market Operations builds on the Company's long and successful relationship with the independent agency distribution system to market a broad range of property-casualty insurance products and services to small and middle market businesses. Business products include workers' compensation, commercial packages, general liability, umbrella and commercial auto, as well as a variety of creative risk management services. In addition, Agency Market Operations includes a professional employer organization, CNA UniSource, which provides various employer-related services. Personal Insurance included personal auto and homeowners coverage and also offered personal umbrella, separate scheduled property, boat-owners and other recreational vehicle insurance. These operations were transferred to The Allstate Corporation (Allstate) effective October 1, 1999. See Note O to the Consolidated Financial Statements for discussion of the Personal Insurance transaction. Agency Market Operations is comprised of the following four groups: Commercial Insurance, CNA E&S, CNA UniSource and Personal Insurance. 22 Commercial Insurance (CI) provides standard property-casualty insurance products such as workers' compensation, general and product liability, property, commercial auto and umbrella coverage to a wide range of businesses. The majority of CI customers are small and middle-market businesses, with less than $1 million in annual insurance premiums. Most insurance programs are provided on a guaranteed cost basis, although customized loss sensitive programs are also available for larger middle-market customers. CI is a market leader in applying industry segmentation techniques to design products and services tailored to the needs of its targeted customer groups. CI's operating model focuses on underwriting performance, exposure based pricing, relationships with selective distribution sources and aligning resources closer to CI's customers. The model includes more than 35 branches that provide underwriting, loss and sales for all of CI's lines of business. In addition, these branches provide claim services for the workers' compensation business. Also, there are eight claim service centers which provide customers and claimants, for all non-workers' compensation lines of business, with efficient and quality service and focus on the total claims outcome through specialized claim handling and timely claims reporting. The branches and service centers are all located in the United States. Further, a centralized processing center in Maitland, Florida, handles all policy processing and accounting, and also acts as a call center for all branches to optimize customer service. CNA E&S (E&S) provides specialized insurance and other financial products for selected commercial risks on both an individual customer or program basis. Risks insured by E&S are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. By combining superior insurance and financial expertise with an in-depth understanding of each customer's unique and changing risks, E&S develops innovative business solutions that are valued by the customer and producer. E&S's products are distributed throughout the United States through specialist producers, program agents, and CI's agents and brokers. E&S has specialized underwriting and claims resources in Chicago, New York City, Denver and Columbus. CNA UniSource is a business solutions provider offering outsourcing services and products that relieve businesses of many administrative tasks, allowing them more time to focus on their core business. CNA UniSource provides human resources (HR) information technology, payroll processing and professional employer organization services. CNA UniSource is also engaged in delivering Internet-based HR and payroll administrative services and implementing HR information outsourcing for large-scale businesses. CNA UniSource's results are included in other revenues and expenses in the segment results. Personal Insurance: On October 1, 1999, certain CNA subsidiaries completed a transaction with Allstate to transfer substantially all of CNA's personal lines insurance business. See Note O to the Consolidated Financial Statements for discussion of the Personal Insurance transaction. Operating Results
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Net written premiums $ 3,230 $ 3,667 $ 5,496 ================================================================================ Net earned premiums $ 3,331 $ 4,799 $ 5,247 Claims, benefits and expenses 3,772 5,791 6,050 Restructuring and other related charges -- 60 96 - -------------------------------------------------------------------------------- Underwriting loss (441) (1,052) (899) Net investment income 604 686 744 Other revenues 151 80 48 Other expenses 185 77 52 - -------------------------------------------------------------------------------- Pre-tax operating income (loss) 129 (363) (159) Income tax (expense) benefit (19) 162 105 - -------------------------------------------------------------------------------- Net operating income (loss) $ 110 $ (201) $ (54) ================================================================================ Ratios Loss and loss adjustment expense 80.9% 90.4% 83.1% Expense 29.8 31.0 32.6 Dividend 2.5 0.5 1.4 - -------------------------------------------------------------------------------- Combined 113.2% 121.9% 117.1% ================================================================================
2000 Compared with 1999 Agency Market Operations' net written and earned premiums were impacted by the transfer of Personal Insurance to Allstate. The 1999 net written premiums through October 1, 1999 (the transfer date) were largely offset by the impact of the ceded unearned premium relating to Personal Insurance. As a result, 1999 net written and earned premiums included $379 million and $1,354 million related to Personal Insurance. Excluding the impact of Personal Insurance, Agency Market Operations' net written premiums decreased $58 million, or 2%, to $3,230 million in 2000 as compared with 1999. Net earned premiums for Agency Market Operations, excluding Personal Insurance, decreased $114 million, or 3%, to $3,331 million in 2000 as compared with 1999. These declines were due to the continued effort to re-underwrite business and obtain adequate rates for exposure underwritten, partially offset by a change in the structure of reinsurance which reduced ceded premiums. The combined ratio improved 8.7 points to 113.2% for 2000 as compared with 1999 and underwriting results improved $611 million. The loss ratio improvement of 9.5 points is comprised of underwriting actions including the increased use of reinsurance, the continued efforts to achieve adequate rates for exposure underwritten, the 23 non-renewal of unprofitable business and lower catastrophe losses than in 1999. Also, the 1999 loss ratio included adverse loss development related to automobile, workers' compensation and packaged general liability exposures. The expense ratio improved 1.2 points principally as a result of decreased underwriting expenses and the absence of restructuring-related charges, partially offset by a decrease in ceding commissions received relating to a change in the structure of reinsurance. The dividend ratio increase of 2.0 points is attributable to favorable development in dividend reserves in 1999 not present in 2000. Net operating income increased $311 million based on improved underwriting results, partially offset by lower investment income and an increase in interest expense related to the cost of reinsurance. Net operating income in both 2000 and 1999 benefited from a change in estimate for certain insurance-related assessments due to changes in the basis on which certain of these assessments are calculated. The after-tax impact of this change was $30 million in 2000 and $25 million in 1999. CI achieved an average rate increase of approximately 15% in 2000. The improvement in the reported loss ratio for the 2000 accident year is the first for CI since 1993 and this improvement is expected to accelerate as the benefits of rate increases and underwriting actions are fully realized. CI's effective retention rate is in the low 70 percent range. 1999 Compared with 1998 Agency Market Operations' net written and net earned premiums were impacted by the transfer of Personal Insurance to Allstate. Net written and earned premiums from Personal Insurance decreased by $1,310 million and $268 million in 1999. Excluding the impact of Personal Insurance, Agency Market Operations' net written and earned premiums decreased $519 million and $180 million in 1999 as compared with 1998. These decreases reflect the impact of the increased use of reinsurance and efforts to achieve adequate pricing and the shedding of unprofitable business. The combined ratio for 1999 increased 4.8 points due to an increase in the loss ratio of 7.3 points, partially offset by decreases in the expense and dividend ratios of 1.6 points and 0.9 points. The increase in the loss ratio is due principally to increased adverse loss reserve development in 1999, partially offset by the beneficial effects of reinsurance agreements executed in 1999. The 1999 adverse loss reserve development included development related to automobile, workers' compensation and packaged general liability exposures. The decrease in the expense ratio is attributable to lower restructuring and other related charges in 1999 as compared with 1998. Additionally, Agency Market Operations' 1999 expense ratio benefited 0.9 points from regulatory changes in the basis on which certain insurance-related assessments are calculated. Underwriting losses for 1999 were $1,052 million as compared with $899 million in 1998 due to deterioration in the combined ratio partially offset by reductions in volume. Agency Market Operations had a net operating loss of $201 million for 1999 as compared with a $54 million loss in 1998. The larger loss was due primarily to the deterioration in underwriting results as described above. SPECIALTY OPERATIONS Business Overview Specialty Operations provides a broad array of professional, financial and specialty property-casualty products and services through a network of brokers, managing general agencies and independent agencies. Specialty Operations provides creative solutions for managing the risks of its clients, including architects, engineers, lawyers, healthcare professionals, financial intermediaries and corporate directors and officers. Specialty Operations is composed of three principal groups: CNA Pro, CNA HealthPro and CNA Guaranty and Credit. CNA Pro is one of the largest providers of non-medical professional liability insurance and risk management services in the United States. CNA Pro's products include errors and omissions, directors and officers, employment practices liability coverages and a broad range of fidelity products. Products are distributed on a national basis through a variety of channels including brokers, agents and managing general underwriters. CNA Pro's customers include architects and engineers, lawyers, accountants and real estate agents and brokers, along with a broad range of large and small corporate clients and not-for-profit organizations. CNA HealthPro offers a comprehensive set of specialized insurance products and clinical risk management consulting services designed to assist healthcare providers in managing the quality-of-care risks associated with the delivery of healthcare. Key customer segments include individual, small group and large corporate purchasers of malpractice insurance. Caronia Corporation, an operating company of CNA HealthPro, provides third-party claims administration for medical professional liability insureds. CNA Guaranty and Credit provides credit insurance on short-term trade receivables for domestic and international clients, reinsurance to insurers who provide financial guarantees to issuers of asset-backed securities, money market funds and investment grade corporate debt securities and credit enhancement products that focus on asset backed transactions. These products are distributed through brokers, captive agents, financial institutions and directly to customers. In addition, CNA Guaranty and Credit includes R.V.I. Guaranty Co. Ltd. (RVI), a 50% owned, but not controlled, affiliate. RVI is the largest monoline residual value insurer in the world, offering coverages to protect the insured against a decrease in the market value of a properly maintained asset at the termination of a lease. 24 Other Operations consist principally of Hedge Financial Products (Hedge), which focused on securitization of insurance risk and the embedding of financial protections within traditional insurance programs, and agricultural and entertainment insurance businesses. During 1999 and 1998, the Company decided to exit Hedge and the agriculture and entertainment insurance businesses. Operating Results
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Net written premiums $ 805 $ 948 $ 1,023 ================================================================================ Net earned premiums $ 799 $ 1,001 $ 1,092 Claims, benefits and expenses 819 1,166 1,251 Restructuring and other related charges -- -- 5 - -------------------------------------------------------------------------------- Underwriting loss (20) (165) (164) Net investment income 216 235 245 Other revenues 26 19 27 Other expenses 35 30 44 - -------------------------------------------------------------------------------- Pre-tax operating income 187 59 64 Income tax expense (56) (10) (6) - -------------------------------------------------------------------------------- Net operating income $ 131 $ 49 $ 58 ================================================================================ Ratios Loss and loss adjustment expense 75.4% 90.6% 87.0% Expense 27.0 25.9 28.1 - -------------------------------------------------------------------------------- Combined 102.4% 116.5% 115.1% ================================================================================
2000 Compared with 1999 Net written premiums for Specialty Operations for 2000 declined $143 million, or 15%, to $805 million as compared with 1999. Net earned premiums declined $202 million, or 20%, to $799 million as compared with 1999. These premium declines relate principally to 1) active decisions to renew only those accounts which meet current underwriting guidelines supporting the ongoing commitment to underwriting discipline, 2) a $46 million decline related to Hedge and the agriculture and entertainment lines of business, 3) an increase in the retrospective return premium relating to favorable loss experience in the retrospectively rated architects' and engineers' business and 4) a $30 million decline due to the increased use of reinsurance for the medical professional liability lines of CNA HealthPro. The combined ratio improved 14.1 points to 102.4% for 2000 as compared with 1999 and underwriting results improved $145 million. These improvements are the result of the ongoing commitment to underwriting discipline reflected by a 15.2 point decline in the loss ratio, partially offset by a 1.1 point increase in the expense ratio. The 2000 loss ratio was impacted by favorable loss experience in the retrospectively rated architects' and engineers' business and the increased use of reinsurance for the medical professional liability lines, partially offset by large loss experience in the guaranty and credit business. The 1999 loss ratio was unfavorably impacted by adverse loss experience mainly in the medical malpractice lines of business. Acquisition and underwriting expenses have decreased year-over-year, but the expense ratio has increased due to the reduced net earned premium base. Net operating income has increased $82 million in 2000 as compared with 1999, principally from the improvement in the underwriting results, partially offset by lower net investment income. Specialty Operations achieved on average, premium-weighted retention levels in the high 70 percent range across its entire book of business in 2000. CNA HealthPro achieved an average rate increase of 18% in 2000, including an average rate increase of 17% in the institutions and physicians products. For CNA Pro, rate increases and other underwriting actions have been initiated for the directors' and officers' product in late 2000. 1999 Compared with 1998 Net written premiums for Specialty Operations for 1999 declined $75 million, or 7%, to $948 million as compared with 1998. Net earned premiums for 1999 declined $91 million, or 8%, to $1,001 million as compared with 1998, due primarily to declines in CNA HealthPro and businesses exited. Net earned premiums for CNA HealthPro declined $40 million, due mainly to new ceded reinsurance agreements covering 1999 risks and the efforts to achieve adequate price increases and eliminate unprofitable business. Hedge, agriculture and entertainment net earned premiums decreased a combined $46 million from 1998 due to the exit from these lines of business. The combined ratio for 1999 increased 1.4 points due principally to a 3.6 point increase in the loss ratio as a result of adverse claim experience in the medical malpractice and non-medical professional liability lines of business. The impact of adverse claim experience in these lines of business was to increase the 1999 loss ratio for Specialty Operations by 6.6 points over its 1998 level. The 1999 loss ratio was favorably impacted by 4.1 points due to the exit from the agricultural insurance line of business. The expense ratio declined 2.2 points in 1999 due principally to businesses exited. The underwriting loss for 1999 was $165 million, essentially unchanged from 1998, due to the offsetting impacts of a higher loss ratio and a lower expense ratio. Net operating income for 1999 declined principally because of lower net investment income. CNA RE Business Overview CNA Re operates globally as a reinsurer in the broker market, offering both treaty and facultative products. CNA Re's operations include the business of CNA Reinsurance Company Limited (CNA Re U.K.), a United Kingdom reinsurance company, and United States operations based in Chicago. While CNA Re's primary product is traditional treaty reinsurance, it also offers facultative and financial reinsurance. CNA Re also participates in Lloyd's of London through CNA Corporate Capital Ltd., which provides capital to Lloyd's Syndicate 1229. 25 CNA Re U.K. writes in both the London market and other European markets through its headquarters in London and offices in Amsterdam, Milan, Singapore and Zurich. As one of the largest reinsurers in this market, CNA Re U.K. has ratings of A (Strong) from Standard & Poor's (S&P), A (Excellent) from A.M. Best and A3 (Good) from Moody's. CNA Re U.K. writes United States and international treaty and professional liability business, including medical malpractice, errors and omissions and directors' and officers' coverages. The United States operations of CNA Re provide products to the North American markets. Treaty products include working layer property, working layer casualty, property catastrophe, workers' compensation, products liability, general liability, professional liability, specialty and excess and surplus lines. In addition, financial reinsurance products are offered as well as property and casualty facultative reinsurance. In 2000, CNA Re instituted a new global operating structure by creating six specialized underwriting centers of excellence and three centers of functional excellence that span geographic boundaries. This structure allows the organization to better utilize the specialized expertise of its people worldwide and take advantage of market opportunities. Operating Results
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Net written premiums $ 951 $ 1,275 $ 908 ================================================================================ Net earned premiums $ 1,089 $ 1,176 $ 944 Claims, benefits and expenses 1,186 1,369 1,005 Restructuring and other related charges -- -- 1 - -------------------------------------------------------------------------------- Underwriting loss (97) (193) (62) Net investment income 195 161 163 Other revenues 5 (1) 5 Other expenses 14 (5) 11 - -------------------------------------------------------------------------------- Pre-tax operating income (loss) 89 (28) 95 Income tax (expense) benefit (32) 15 (27) - -------------------------------------------------------------------------------- Net operating income (loss) $ 57 $ (13) $ 68 ================================================================================ Ratios Loss and loss adjustment expense 81.6% 84.9% 74.9% Expense 27.3 31.5 31.7 - -------------------------------------------------------------------------------- Combined 108.9% 116.4% 106.6% ================================================================================
2000 Compared with 1999 Net written premiums for CNA Re for 2000 decreased $324 million, or 25%, to $951 million as compared with 1999. Net earned premiums decreased $87 million, or 7%, to $1,089 million as compared with 1999. These declines reflect decisions not to renew contracts that management believed did not meet its underwriting profitability targets, partially offset by modest rate increases. The combined ratio improved 7.5 points to 108.9% in 2000 as compared with 1999 and underwriting results improved $96 million. The improvement in the underwriting results is attributable to improvements in both the loss and expense ratios. The loss ratio improvement is attributable mainly to favorable 2000 catastrophe experience as compared with 1999 catastrophe results that were negatively impacted by a series of European windstorms, Hurricane Floyd and other international catastrophes. The improvement in the expense ratio was related to decreased contingent commissions in 2000. Net operating income increased $70 million in 2000 as compared with 1999 due to the improvement in the underwriting results and an increase in investment income. A significant portion of CNA Re's treaty business renewals are effective on January 1. Reinsurance renewals for the January 1, 2001 cycle were the latest experienced in the past several years. The delay was driven by a significant difference between the improvement in the terms, conditions and rates required by reinsurers and what clients considered acceptable. The retrocessional and catastrophe markets exhibited the greatest amount of tightening. Casualty lines, however, continued to be a challenge. CNA Re has been able to achieve targeted rate increases but at a lower retention level than expected. 1999 Compared with 1998 Net written premiums for CNA Re increased $367 million, or 40%, to $1,275 million as compared with 1998. Net earned premiums increased $232 million, or 25%, to $1,176 million as compared with 1998. This growth occurred in both foreign and domestic markets in the professional and standard lines of business. Growth was experienced via expansion of treaty relationships with existing clients, the continued development of new product lines and growth in global facultative operations. CNA Re's 1999 combined ratio increased by 9.8 points as compared with 1998, primarily as a result of a 10.0 point increase in the loss ratio. The underwriting results for 1999 were dramatically impacted by the series of European windstorms, Hurricane Floyd and other international catastrophes, which contributed to an aggregate 9.4 point increase in the 1999 loss ratio relative to 1998. Net operating income in 1999 was adversely affected by $122 million in after-tax catastrophe losses, compared with $50 million in after-tax catastrophe losses in 1998. GLOBAL OPERATIONS Business Overview Global Operations provides products and services to United States-based customers expanding overseas and foreign customers. The major product lines include marine, commercial and contract surety, warranty and specialty products, as well as commercial property and casualty coverages. Global Operations is composed of five principal groups: Marine, Surety, Warranty, CNA Global and First Insurance Company of Hawaii (FICOH). Marine completed the acquisition of Maritime Insurance Co., Ltd. (Maritime Ltd.), based in the United Kingdom, and its Canadian subsidiary, Eastern Marine Underwriters (EMU) on July 1, 1998, 26 strengthening CNA's position as a global marine insurer. In 1999, CNA launched the marketing brand, CNA Maritime, which unites three industry leaders, MOAC, Maritime Ltd. and EMU, to serve global ocean marine needs. MOAC, a leading provider of ocean marine insurance in the United States, offers hull, cargo, primary and excess marine liability, marine claims and recovery products and services. Business is sold through national brokers, regional marine specialty brokers and independent agencies, which work closely with MOAC's nine branch offices located throughout the United States. Maritime Ltd. is a leading marine cargo and related marine insurance specialist with markets extending across Europe and throughout the world. As foreign subsidiaries, Maritime Ltd. and EMU are included in the results of, and are managed by, CNA Global. Growth is expected to result from leveraging the relationships with CNA's domestic producers, implementing e-commerce and providing customers with services and products throughout the world. On September 22, 2000, CNA Maritime launched the first phase of OMMnism (Ocean Marine Manager network interface), an automated cargo insurance system accessible over the Internet. This first phase of OMMnism allows potential customers to receive real-time quotes, issue certificates, pay by credit card, and access an array of other convenient policy services, such as on-line reports and first notice of loss services. The core of CNA Maritime's global cargo strategy will occur through interactive products such as OMMnism. Surety consists primarily of CNA Surety Corporation (CNA Surety), which is traded on the New York Stock Exchange (SUR) and is the largest publicly traded provider of surety bonds, with approximately 8% of that market. Among its United States competitors, CNA Surety has one of the most extensive distribution systems and one of the most diverse surety product lines, offering small, medium and large contract and commercial surety bonds. CNA Surety provides surety and fidelity bonds in all 50 states through a combined network of approximately 37,000 independent agencies. Growth is expected to come from CNA Surety's broad product and distribution resources and international expansion. CNA owns approximately 64% of CNA Surety. Warranty is one of the largest warranty underwriters in the United States, providing extended service contracts, warranties and related insurance products that protect the consumer or business from the financial burden associated with the breakdown, under-performance or maintenance of a product. Warranty's key market segments consist of vehicle, retail, home, commercial and original equipment manufacturers. Each market segment distributes its product via a sales force employed or contracted through a program administrator. CNA National Warranty Corporation (CNA Warranty) sells vehicle warranty services in the United States and Canada. In July 1998, Warranty expanded into the home warranty segment with the acquisition of a 90% interest in Home Security of America, Inc., one of the largest home warranty administrators in the United States. Also, in January 1998, the Company acquired a joint venture interest in Specialty Underwriters, a provider of innovative equipment maintenance management services to companies worldwide. These entities are service administrators whose products are backed by insurance coverages provided by CNA's insurance affiliates. CNA Global is responsible for coordinating and managing the direct business of the foreign property-casualty operations of CNA. This business identifies and capitalizes on strategic indigenous opportunities outside the United States by continuing to build its own capabilities and by initiating acquisitions, strategic alliances and start-up operations that allow for expansion into targeted markets. In addition, CNA Global provides United States-based customers expanding their operations overseas with a single source for their commercial insurance needs. To this end, CNA Global has placed underwriters within commercial insurance branches. CNA Global currently oversees operations in Europe, Latin America, Canada and Asia. CNA Insurance Company (Europe) Limited (CIE) is based in London, with offices in France, Germany, the Netherlands and Denmark. In Europe, CNA Global's operations include the results of U.K.-based Maritime Ltd. and CIE. On July 1, 2001, a planned merger of CIE into Maritime Ltd. is expected to be completed. Through its network of offices, CNA Global built on the successes of several CNA specialty products (including travel and accident, warranty and financial lines insurance) and introduced those products across Europe in 2000. During 2000, the Company had a majority and controlling interest in Omega A.R.T. (Omega), a workers' compensation company domiciled in Argentina. Omega ranks as the fifth largest workers' compensation company in Argentina based on premium volume. The short- to mid-term growth opportunities for CNA Global are in the more mature foreign insurance markets, such as Europe and Canada, and in specialty insurance products. In the longer term, emphasis will be on the emerging insurance markets in Latin America and Asia. First Insurance Company of Hawaii is the oldest and largest domestic property-casualty insurer in Hawaii and offers commercial and personal lines solely in that state. Distributed through 30 independent agencies, the business mix has historically been approximately 70% commercial and 30% personal lines. On November 1, 1999, Tokio Marine & Fire Insurance Co. Ltd. (Tokio) and CNA executed an agreement to increase Tokio's ownership share from 40% to 50%, resulting in equal ownership by CNA and Tokio. Concurrently, Tokio merged their Hawaii-based operations into FICOH. As CNA retains control over FICOH, its operations are consolidated with CNA's operations. CNA viewed this transaction as a positive step in the ongoing strategic relationship between CNA and Tokio. CNA's partnership with Tokio is expected to generate growth opportunities and facilitate international expansion. Additionally, CNA foresees growth opportunities through collaborative partnerships between FICOH and other CNA businesses. 27 Operating Results
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Net written premiums $ 1,160 $ 1,080 $ 985 ================================================================================ Net earned premiums $ 1,089 $ 1,010 $ 941 Claims, benefits and expenses 1,128 1,037 991 Restructuring and other related charges -- -- 1 - -------------------------------------------------------------------------------- Underwriting loss (39) (27) (51) Net investment income 136 132 110 Other revenues 116 120 82 Other expenses 123 100 80 - -------------------------------------------------------------------------------- Pre-tax operating income 90 125 61 Minority interest (24) (28) (25) Income tax expense (24) (33) (18) - -------------------------------------------------------------------------------- Net operating income $ 42 $ 64 $ 18 ================================================================================ Ratios Loss and loss adjustment expense 60.3% 56.9% 62.2% Expense 43.1 45.5 42.8 Dividend 0.1 0.3 0.4 - -------------------------------------------------------------------------------- Combined 103.5% 102.7% 105.4% ================================================================================
2000 Compared with 1999 Net written premiums for Global Operations in 2000 increased $80 million, or 7%, to $1,160 million as compared with 1999. Net earned premiums increased $79 million, or 8%, to $1,089 million as compared with 1999. These increases were driven by growth in the commercial casualty and property lines in the European operations, as well as growth in the commercial warranty and surety lines. The combined ratio increased 0.8 points to 103.5% in 2000 as compared with 1999 and underwriting results declined $12 million. The decline in underwriting results is mainly attributable to adverse current and prior year loss experience in the vehicle warranty insurance line of business. Net operating income decreased $22 million in 2000 as compared with 1999 due to the decline in underwriting results and an increase in other expenses related to the non-insurance operations in the warranty business. Global operations achieved pricing increases in 2000 that averaged approximately 3% across the businesses in this segment. Retention rates were in the mid 70 percent range. Retention rates do not apply to the Surety and Warranty businesses. 1999 Compared with 1998 Net written premiums in 1999 increased $95 million, or 10%, as compared with 1998. Net earned premiums increased $69 million, or 7%, to $1,010 million as compared with 1998. CNA Global contributed $56 million of the increase, the majority of which was attributable to a full year's premiums from Maritime Ltd. Surety contributed increased net earned premium of $29 million, due to generally favorable domestic economic conditions for public construction and expansion internationally. Warranty net earned premiums increased $24 million over 1998, due mainly to increased sales of new automobile warranties. Partially offsetting this growth was a decrease in net earned premiums in MOAC of $49 million due to competitive marine market conditions. Underwriting results improved $24 million from 1998 due to a decrease in the combined ratio of 2.7 points. This was due primarily to improved loss ratios in MOAC, Surety and CNA Global partially offset by an increase in the loss ratio in Warranty. The improvement in the MOAC and CNA Global loss ratios was due to a change in the mix of business that reduced exposure to catastrophes and large property losses. The decrease in Surety's loss ratio was due to favorable loss experience in 1999 compared with 1998. The increase in the loss ratio in Warranty was due to unfavorable loss experience in its automotive business. Net operating income for 1999 increased $46 million as compared with 1998 primarily from the improved underwriting results and increased investment income. RISK MANAGEMENT Business Overview Risk Management serves the property-casualty needs of large domestic commercial businesses, offering customized strategies to address the management of business risks. Also, Risk Management, primarily through RSKCoSM, provides total risk management services relating to claims, loss control, cost management and information services to the commercial insurance marketplace. Risk Management includes two groups: Risk Transfer and RSKCoSM. Risk Transfer writes casualty and property lines of insurance. The casualty business focuses on workers' compensation, commercial auto liability and general liability through traditional and innovative advanced financial risk products. Excess products provide umbrella, excess workers' compensation and high excess coverages. Casualty offerings target Fortune 1000 businesses. Over the last three years, domestic and global property insurance capabilities have been increased, providing primary, quota share and excess of loss property facilities. Capabilities include providing property, inland marine, global and boiler and machinery coverages to large accounts and Fortune 100 businesses. RSKCoSM was formed in 1998 and provides total risk management services (integrated and single component) related to claims, loss control, cost management and information services to the commercial insurance marketplace. RSKCo'sSM capabilities include: Claim Services provides services that allow customers to select from a single source the desired level of service ranging from an integrated claims package to any component service. Loss Control provides pre-loss prevention services that include industrial hygiene, laboratory, ergonomics, field consulting and training, property, environmental and transportation loss control. Driver training is provided through Smith System Driver Improvement Institute, Inc., a wholly owned subsidiary. 28 Cost Management provides post-loss cost control services through case management, medical bill review, preferred provider organizations and other unique partnerships to reduce lost work days through rapid response, quality care and effective coordination. Information Services provides services including data access, reporting tools, information and benchmarking analysis, consulting and custom reporting services. Operating Results
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Net written premiums $ 633 $ 839 $ 889 ================================================================================ Net earned premiums $ 637 $ 801 $ 823 Claims, benefits and expenses 760 936 1,018 - -------------------------------------------------------------------------------- Underwriting loss (123) (135) (195) Net investment income 163 154 144 Other revenues 318 316 230 Other expenses 324 307 227 Non-insurance restructuring and other related charges -- 10 88 - -------------------------------------------------------------------------------- Pre-tax operating income (loss) 34 18 (136) Income tax (expense) benefit (5) 1 48 - -------------------------------------------------------------------------------- Net operating income (loss) $ 29 $ 19 $ (88) ================================================================================ Ratios Loss and loss adjustment expense 95.8% 94.3% 89.1% Expense 23.5 22.6 30.7 Dividend -- -- 3.9 - -------------------------------------------------------------------------------- Combined 119.3% 116.9% 123.7% ================================================================================
2000 Compared with 1999 Net written premiums for Risk Management in 2000 decreased $206 million, or 25%, to $633 million as compared with 1999. Net earned premiums decreased $164 million, or 20%, to $637 million as compared with 1999. These declines resulted from a continued focus on re-underwriting the book of business, as well as the increased utilization of reinsurance. Despite the combined ratio increase of 2.4 points to 119.3% in 2000 as compared with 1999, underwriting results improved by $12 million. Increases in both the loss and expense ratios led to the unfavorable change in the combined ratio. The loss ratio increase of 1.5 points is principally the result of adverse property and casualty experience for both the current and prior accident years. Acquisition and underwriting expenses have decreased year-over-year, but the expense ratio has increased due to a reduced net earned premiums base in the current year. Net operating income improved $10 million primarily as a result of improved underwriting results, improved net operating income for RSKCoSM, increased investment income and restructuring-related charges incurred in 1999 that did not recur in 2000. These improvements were partially offset by an increase in interest expense related to the cost of reinsurance. Net operating income in both 2000 and 1999 benefited from a change in estimate for certain insurance-related assessments due to regulatory changes in the basis on which certain of these assessments are calculated. The after-tax impact of this change was $30 million in 2000 and $26 million in 1999. Risk Management has been involved in numerous underwriting initiatives to improve results. Risk Management achieved double-digit price increases in 2000 on average across its book of business while maintaining premium-weighted retention in the low 80 percent range. Risk Management's underwriting initiatives continue to focus on risk selection, increased attachment points and strengthened underwriting terms and conditions through increasing deductibles and limiting the scope of coverages. Risk Management has also launched a quality initiative designed to increase net operating income through the review and improvement of all activities that create, market and support products and services. 1999 Compared with 1998 Net written premiums for 1999 declined $50 million, or 6%, to $839 million as compared with 1998. Net earned premiums for 1999 declined $22 million, or 3%, to $801 million as compared with 1998. This decrease resulted from Risk Management's decision to take advantage of a favorable reinsurance market and cede a larger portion of its direct premiums, the redesign of existing risk management programs and decreased business as a result of pricing actions taken in a difficult market. Risk Management's underwriting loss decreased $60 million in 1999 as the combined ratio for 1999 decreased 6.8 points due to decreases in the expense and dividend ratios of 8.1 points and 3.9 points, partially offset by an increase in the loss ratio of 5.2 points. The increase in the loss ratio was principally the result of adverse loss development related primarily to asbestos exposures, offset in part by the beneficial effects of reinsurance agreements executed in 1999. Risk Management's expense ratio benefited 4.9 points from regulatory changes in the basis on which certain insurance-related assessments are calculated and a decrease in restructuring-related charges of $78 million. The decrease in the dividend ratio is due to favorable development in dividend reserves. Despite reserve strengthening, overall results increased to a net operating income of $19 million from a net operating loss of $88 million in 1998. Positively influencing results were underwriting expense savings, reinsurance programs, the impact of favorable regulatory changes in the basis on which certain insurance-related assessments are calculated and reduced restructuring-related charges compared with those recorded in 1998. 29 GROUP OPERATIONS Business Overview Group Operations provides a broad array of group life and health insurance products and services to employers, affinity groups and other entities that purchase insurance as a group. Group Operations also provides health insurance to federal employees, retirees and their families (Federal Markets); managed care and self-funded medical excess insurance; medical provider network management and administration services; and reinsurance for life and health insurers. Group Operations includes four principal groups: Group Benefits (formerly Special Benefits), Provider Markets, Life Reinsurance and Federal Markets. Group Benefits provides group term life insurance, short- and long-term disability, statutory disability, long term care and accident products. Products are marketed through a nationwide operation of 31 sales offices, third party administrators, managing general agents and insurance consultants. Provider Markets is composed of two major businesses. CNA Health Partners provides comprehensive managed care services to employers offering self-funded medical plans. Services offered include network development and management, medical management, medical claims administration, consulting services and management services. Group reinsurance assumes reinsurance on health, life and other related products written on a group basis, as well as excess risk coverages related to healthcare. Life Reinsurance reinsures individual life and health products marketed by unaffiliated life insurance companies throughout North America. Sales are generated through an internal sales force. On December 31, 2000, CNA sold its Life Reinsurance business. See Note O to the Consolidated Financial Statements for discussion of the Life Reinsurance transaction. Federal Markets is the second largest provider of health insurance benefits to federal employees, insuring approximately one million members under the Mail Handlers Benefit Plan (MHBP) offered through the Federal Employees Health Benefit Plan (FEHBP), and also underwrites conversion policies and supplemental coverages for members. Federal Markets is responsible for all claim management activities under the plan, such as large case management, hospital and provider bill negotiations, fraud detection activities and vendor contracts. Operating Results
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Net earned premiums $ 3,675 $ 3,571 $ 3,733 Net investment income 142 130 133 Other revenues 49 40 24 - -------------------------------------------------------------------------------- Total operating revenues 3,866 3,741 3,890 Benefits 3,068 3,053 3,171 Expenses 748 699 763 Restructuring and other related charges -- 5 39 - -------------------------------------------------------------------------------- Pre-tax operating income (loss) 50 (16) (83) Income tax (expense) benefit (14) 10 35 - -------------------------------------------------------------------------------- Net operating income (loss) $ 36 $ (6) $ (48) ================================================================================
2000 Compared with 1999 Net earned premiums for Group Operations in 2000 increased $104 million, or 3%, to $3,675 million as compared with 1999. This increase was principally a result of a $41 million increase in Group Benefits, primarily related to the group life line of business; a $35 million increase in Life Reinsurance; an $18 million increase in Provider Markets, primarily related to the group reinsurance line of business and a $10 million increase in Federal Markets. The increases in Group Benefits and Life Reinsurance relate to new business production. Net operating income increased $42 million in 2000 as compared with 1999. This increase relates to a $24 million improvement in Federal Markets due to the 1999 exit of unprofitable medical lines, a $34 million improvement in Provider Markets and a $4 million improvement in Life Reinsurance. These improvements were partially offset by an $18 million decline in Group Benefits due to favorable 1999 loss experience in the group life line of business. The improvement associated with Provider Markets relates to adverse experience and loss development for the personal accident business recorded in 1999, which exceeded $7 million of exit costs incurred from the Management Services Organization (MSO) business and $13 million of adverse development on the medical stop loss business in 2000. The decision to shut down the MSO business was based on lack of demand as providers are backing away from risk contracting. The strategy to focus on Group Benefits, Federal Markets and the group reinsurance lines of business positions Group Operations for the expectation of modest improvement in net operating income in 2001. 1999 Compared with 1998 Net earned premiums declined in 1999 by $162 million, or 4%, to $3,571 million as compared with 1998. Federal Markets' net earned premiums declined $274 million, almost entirely due to the exit of selected medical markets in late 1998. This decline was partially offset by growth in Life Reinsurance and Group Benefits of $60 million and $53 million. 30 Net operating results in 1999 improved by $42 million as compared with 1998. Key components of the improvement include better underwriting results in Group Benefits' life and disability product lines, the exit of the employer health and affinity lines of business and lower restructuring and other related charges, partially offset by adverse losses and reserve development in the personal accident business. LIFE OPERATIONS Business Overview Life Operations provides financial protection to individuals through a full product line of term life insurance, universal life insurance, long term care insurance, annuities and other products. Life Operations also provides retirement services products to institutions in the form of various investment products and administration services. Life Operations has several distribution relationships and partnerships including managing general agencies, other independent agencies working with CNA life sales offices, a network of brokers and dealers and various other independent insurance consultants. Life Operations is composed of four principal groups: Individual Life, Retirement Services, Long Term Care and Other Operations. Individual Life primarily offers level premium term life insurance, universal life insurance and related products. New sales of term life have consistently placed CNA among the top five producers in the market in each of the past three years. Retirement Services markets annuities and investment products and services to both retail and institutional customers. In the institutional market, CNA has benefited from strong sales and earnings of its Index 500 product, which is a guaranteed investment contract that is indexed to the performance of the Standard and Poor's 500(R) (S&P 500(R)) Index. Long Term Care products provide reimbursement for covered nursing home and home health care expenses incurred due to physical or mental disability. New sales of Long Term Care have placed CNA among the top producers in the individual marketplace in each of the past three years. Other Operations businesses include developing operations in certain international markets and life settlements. Operating Results
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Sales volume*: Individual life $ 929 $ 873 $ 761 Retirement services 1,723 2,270 1,553 Long term care 398 343 299 Other operations 141 183 141 - -------------------------------------------------------------------------------- Total $ 3,191 $ 3,669 $ 2,754 ================================================================================ Net earned premiums $ 876 $ 936 $ 823 Net investment income 601 556 525 Other revenues 192 123 115 - -------------------------------------------------------------------------------- Total operating revenues 1,669 1,615 1,463 Benefits 1,104 1,122 998 Expenses 311 277 295 Restructuring and other related charges -- -- 7 - -------------------------------------------------------------------------------- Pre-tax operating income 254 216 163 Income tax expense (85) (71) (58) - -------------------------------------------------------------------------------- Net operating income $ 169 $ 145 $ 105 ================================================================================
* Sales volume is a cash-based measure that includes premium and annuity considerations, investment deposits and other sales activities that are not reported as premiums under accounting principles generally accepted in the United States of America (GAAP). 2000 Compared with 1999 Sales volume for Life Operations declined $478 million, or 13%, to $3,191 million in 2000 as compared with 1999. Sales volume decreased because of a reduction in Retirement Services' products sold to institutions. These products tend to be "large case" institutional markets' sales, which can be sporadic, opportunistic and sensitive to independent agency ratings. Despite the overall decline, Life Operations' competitively priced product portfolio enabled most of its businesses to experience growth in 2000. Individual Life and Long Term Care products had an increasing base of direct premiums, and variable investment contracts experienced growth of $270 million to reach an annual sales level of $380 million in 2000. Net earned premiums declined $60 million, or 6%, to $876 million in 2000 as compared with 1999. This decline was mainly attributable to sales declines in structured settlements and single premium group annuities due to a competitive pricing environment. These declines were partially offset by a growing in-force block of Long Term Care and annuity products. Net operating income increased $24 million in 2000 as compared with 1999. The increase was principally attributable to increased earnings in the Index 500 product, the continued growth of Individual Life insurance in-force and favorable investment results in Individual Life and the Retirement Services businesses. Life Operations expects that its continued product innovation and strong commitment to growth will generate increased sales, particularly of variable products and Long Term Care business. 1999 Compared with 1998 Sales volume increased $915 million, or 33%, to $3,669 million in 1999 as compared with 1998. The 1999 increase represents increased sales of $717 million in Retirement Services and a 31 growing base of premiums for Individual Life and Long Term Care. The significant growth in Retirement Services was largely attributable to strong sales in institutional investment products and variable annuities. Net earned premiums increased $113 million, or 14%, to $936 million in 1999 as compared with 1998. This increase was attributable mainly to increases in Long Term Care of $61 million and Retirement Services of $39 million. Net operating income increased to $145 million in 1999 as compared with $105 million in 1998. The 1999 improvement in net operating income was due primarily to favorable investment performance in the portfolio supporting Retirement Services' Index 500 product, improved mortality experience in the individual life market and expense reductions across virtually all of the other principal groups. CORPORATE AND OTHER The Corporate and Other segment results consist of interest expense on corporate borrowings, certain run-off insurance operations, asbestos claims related to Fibreboard Corporation (Fibreboard), financial guarantee insurance contracts and certain non-insurance operations, including eBusiness initiatives. Net operating loss increased to $220 million for 2000 as compared with 1999 primarily as a result of expenses in 2000 for CNA's eBusiness initiatives. The net operating loss for 1999 was $202 million, or $9 million less than 1998. The improvement was primarily attributable to decreased interest expense and decreased losses of $20 million from AMS Services, Inc. (AMS), an information technology and agency software development subsidiary which was sold in the fourth quarter of 1999, partially offset by increased losses from run-off insurance operations. See Note O to the Consolidated Financial Statements for discussion of the AMS transaction. RESTRUCTURING AND OTHER RELATED CHARGES On August 5, 1998, CNA announced estimates of the financial implications of its initiatives to achieve world-class performance. "World-class performance," as defined by the Company, refers to the Company's intention to position each of its strategic business units (SBU) as a market leader by sharpening its focus on customers and employing new technology to work smarter and faster. In the third quarter of 1998, the Company finalized and approved a plan to restructure its operations. The restructuring plan focused on a gross workforce reduction of approximately 4,500 employees resulting in a net reduction of approximately 2,400 employees, the consolidation of certain processing centers, the closing of various facilities and the exiting of certain businesses. The details of the restructuring and other related charges recognized in 1998 and 1999 are discussed in Note N to the Consolidated Financial Statements. As of December 31, 2000, the remaining accrued restructuring and other related charges consist of $7 million of lease termination costs, all of which are expected to be paid during 2001. INVESTMENTS The components of net investment income for the years ended December 31, 2000, 1999 and 1998 are presented in the following table. Net Investment Income
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Fixed maturity securities: Bonds: Taxable $ 1,549 $ 1,509 $ 1,490 Tax-exempt 216 267 340 Redeemable preferred stocks 1 -- 2 Equity securities 52 36 33 Mortgage loans and real estate 4 4 5 Policy loans 12 11 11 Short-term investments 201 188 241 Securities lending transactions, net 22 26 10 Other invested assets 71 101 67 - -------------------------------------------------------------------------------- Gross investment income 2,128 2,142 2,199 Investment expenses (48) (41) (53) - -------------------------------------------------------------------------------- Net investment income $ 2,080 $ 2,101 $ 2,146 ================================================================================
Lower net investment income results for 2000 as compared with 1999 was due to lower levels of invested assets caused by asset transfers in the fourth quarter of 1999 in connection with the Personal Insurance transaction with Allstate and the $1.1 billion payment from escrow to Fibreboard to settle certain asbestos-related claims. The impact of a lower invested asset base on net investment income was partially offset by the increase in yield on the bond portfolio. Lower net investment income in 1999 compared with 1998 was due to the lower invested asset base, as discussed above, and due to a decline in yield on the bond portfolio. The bond segment of the investment portfolio yielded 6.7% in 2000, 6.1% in 1999 and 6.4% in 1998. The components of net realized investment gains for the years ended December 31, 2000, 1999 and 1998 are presented in the following table. Net Realized Investment Gains
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Realized investment gains (losses): Fixed maturity securities: U.S. Government bonds $ 96 $ (177) $ 265 Corporate and other taxable securities (171) (78) 67 Tax-exempt bonds 13 (44) 90 Asset-backed bonds (65) (13) 39 Other (3) 1 6 - -------------------------------------------------------------------------------- Total fixed maturity securities (130) (311) 467 Equity securities 1,116 366 38 Other invested assets 339 253 190 - -------------------------------------------------------------------------------- Total realized investment gains 1,325 308 695 Allocated to participating policyholders (4) 7 (14) Income tax expense (461) (123) (247) - -------------------------------------------------------------------------------- Net realized investment gains $ 860 $ 192 $ 434 ================================================================================
32 Net realized investment gains increased $668 million in 2000 as compared with 1999. This increase is principally related to realized gains from the sale of Global Crossing Ltd. (Global Crossing) common stock and Canary Wharf Group plc (Canary Wharf) common stock. The increase in net realized gains for 2000 as compared with 1999 was $171 million for Global Crossing and $209 million for Canary Wharf. Additionally, a favorable change in market conditions contributed to the results for the bond sector. Net realized investment gains decreased $242 million in 1999 as compared with 1998. This decrease was principally related to interest rates and other market conditions impacting the results from bond sales. This decrease was partially offset by increased net realized gains for the sale of Global Crossing and Canary Wharf. The increase in net realized gains for 1999 as compared with 1998 was $103 million for Global Crossing and $79 million for Canary Wharf. A primary objective in the management of the fixed maturity portfolio is to maximize total return relative to underlying liabilities and respective liquidity needs. In achieving this goal, assets may be sold to take advantage of market conditions or other investment opportunities or credit and tax considerations. This activity will produce realized gains and losses depending on market conditions including interest rates. Substantially all invested assets are publicly traded securities classified as available-for-sale in the accompanying Consolidated Financial Statements. Accordingly, changes in fair value for these securities are reported in other comprehensive income. The following table details the carrying value of CNA's general and separate account investment portfolios as of the end of each of the last two years. General and Separate Account Investments
December 31 (In millions) 2000 % 1999 % - -------------------------------------------------------------------------------- General Account Investments Fixed maturity securities: Bonds: Taxable $23,249 66% $22,722 64% Tax-exempt 3,349 10 4,396 12 Redeemable preferred stocks 54 -- 130 -- Equity securities: Common stocks 2,216 6 3,344 9 Non-redeemable preferred stocks 196 1 266 1 Mortgage loans and real estate 26 -- 47 -- Policy loans 193 1 192 1 Other invested assets 1,116 3 1,108 3 Short-term investments 4,723 13 3,355 10 - -------------------------------------------------------------------------------- Total general account investments $35,122 100% $35,560 100% ================================================================================ Separate Account Investments Fixed maturity securities: Taxable bonds $ 2,703 65% $ 3,260 72% Equity securities: Common stocks 212 5 240 5 Non-redeemable preferred stocks 3 -- 21 1 Other invested assets 849 21 493 11 Short-term investments 380 9 489 11 - -------------------------------------------------------------------------------- Total separate account investments $ 4,147 100% $ 4,503 100% ================================================================================
The Company's general and separate account investment portfolios consist primarily of publicly traded government bonds, asset-backed securities, mortgage-backed securities, municipal bonds and corporate bonds. Approximately 57% and 63% of separate account investments at December 31, 2000 and 1999, are used to fund guaranteed investment contracts for which Continental Assurance Company (CAC) and Valley Forge Life Insurance Company (VFL) guarantee principal and a specified return to the contract holders (guaranteed investment contracts). The duration of fixed maturity securities included in the guaranteed investment contract portfolio is matched approximately with the corresponding payout pattern of the liabilities of the guaranteed investment contracts. The Company's investment policies for both the general and separate account portfolios emphasize high credit quality and diversification by industry, issuer and issue. Assets supporting interest rate sensitive liabilities are segmented within the general account to facilitate asset/liability duration management. The general account portfolio consists primarily of high-quality (rated BBB or higher) bonds, 93% and 94% of which were rated as investment-grade at December 31, 2000 and 1999. The following table summarizes the ratings of CNA's general account bond portfolio at carrying value. General Account Bond Ratings
December 31 (In millions) 2000 % 1999 % - -------------------------------------------------------------------------------- U.S. Government and affiliated agency securities $ 8,689 32% $ 8,781 32% Other AAA rated 7,120 27 9,692 36 AA and A rated 5,954 22 4,465 16 BBB rated 3,066 12 2,598 10 Below investment-grade 1,769 7 1,582 6 - -------------------------------------------------------------------------------- Total $26,598 100% $27,118 100% ================================================================================
The following table summarizes the bond ratings of the investments supporting those separate account products, which guarantee principal and a specified rate of interest. Guaranteed Separate Account Bond Ratings
December 31 (In millions) 2000 % 1999 % - -------------------------------------------------------------------------------- U.S. Government and affiliated agency securities $ 224 10% $ 59 2% Other AAA rated 1,248 55 1,795 62 AA and A rated 374 16 548 19 BBB rated 397 17 375 13 Below investment-grade 49 2 107 4 - -------------------------------------------------------------------------------- Total $2,292 100% $2,884 100% ================================================================================
33 At December 31, 2000 and 1999, approximately 98% and 95% of the general account portfolio and 99% and 97% of the guaranteed investment contract portfolio bonds are United States Government Agency securities or were rated by S&P's or Moody's Investors Service. The remaining bonds are rated by other rating agencies, outside brokers or Company management. Below investment-grade bonds, as presented in the tables above, are high-yield securities rated below BBB by bond rating agencies as well as other unrated securities that, in the opinion of management, are below investment-grade. High-yield securities generally involve a greater degree of risk than investment-grade securities. However, expected returns should compensate for the added risk. This risk is also considered in the interest rate assumptions for the underlying insurance products. CNA's concentration in high-yield bonds was approximately 7% and 6% of the general account portfolio and 2% and 4% of the guaranteed investment contract portion of CNA's separate account bond portfolio as of December 31, 2000 and 1999. Included in CNA's general account fixed maturity securities at December 31, 2000 are $7,623 million of asset-backed securities, at fair value, consisting of approximately 46% in United States government agency issued pass-through certificates, 34% in collateralized mortgage obligations (CMOs), 16% in corporate asset-backed obligations and 4% in corporate mortgage-backed pass-through certificates. The majority of CMOs held are actively traded in liquid markets and are priced by broker-dealers. Short-term investments at December 31, 2000 and 1999 consisted primarily of commercial paper and money market funds. The components of the general account short-term investments portfolio are presented in the following table. Short-term Investments
December 31 (In millions) 2000 1999 - -------------------------------------------------------------------------------- Commercial paper $3,291 $1,988 U.S. Treasury securities 383 41 Money market funds 620 904 Other 429 422 - -------------------------------------------------------------------------------- Total short-term investments $4,723 $3,355 ================================================================================
CNA invests in certain derivative financial instruments primarily to reduce its exposure to market risk (principally interest rate, equity price and foreign currency risk). CNA considers the derivatives in its general account to be held for purposes other than trading. Derivative securities are recorded at fair value at the reporting date. Certain derivatives in separate accounts are held for trading purposes. The Company uses derivatives to mitigate market risk by purchasing S&P 500(R) index futures contracts in a notional amount equal to the contract liability relating to Life Operations' Index 500 guaranteed investment contract product. The Company's largest equity holding in a single issuer is Global Crossing common stock. See Note B to the Consolidated Financial Statements for a discussion of the Company's ownership in Global Crossing. The Company's second largest equity holding is Canary Wharf. During 2000, the Company experienced a net decrease in unrealized gains of $334 million on its position in Canary Wharf, which was valued at $291 million on December 31, 2000. The majority of this decline was due to the sale of 60.1 million shares, resulting in a pretax realized gain of $444 million. MARKET RISK Market risk is a broad term related to changes in the fair value of a financial instrument. Discussions herein regarding market risk focus on only one element of market risk - price risk. Price risk relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors that relate to market volatility of the rate, index or price underlying the financial instrument. The Company's primary market risk exposures are due to changes in interest rates, although the Company has certain exposures to changes in equity prices and foreign currency exchange rates. The fair value of the financial instruments are adversely affected when interest rates rise, equity markets decline and the dollar strengthens against foreign currency. Active management of market risk is integral to the Company's operations. The Company may use the following tools to manage its exposure to market risk within defined tolerance ranges: 1) change the character of future investments purchased or sold, 2) use derivatives to offset the market behavior of existing assets and liabilities or assets expected to be purchased and liabilities to be incurred or 3) rebalance its existing asset and liability portfolios. For purposes of this disclosure, market risk sensitive instruments are divided into two categories: 1) instruments entered into for trading purposes and 2) instruments entered into for purposes other than trading. The Company's general account market risk sensitive instruments presented are classified as held for purposes other than trading. Sensitivity Analysis CNA monitors its sensitivity to interest rate risk by evaluating the change in the value of financial assets and liabilities due to fluctuations in interest rates. The evaluation is performed by applying an instantaneous change in interest rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on the Company's market value at risk and the resulting effect on stockholders' equity. The analysis presents the sensitivity of the market value of the Company's financial instruments to selected changes in market rates and prices. The range of change chosen reflects the Company's view of changes which are reasonably possible over a one-year period. The selection of the range of values chosen to represent changes in interest rates should not be construed as the Company's prediction of future market events, but rather an illustration of the impact of such events. The sensitivity analysis estimates the decline in the market value of the Company's interest sensitive assets and liabilities that were held on December 31, 2000 and December 31, 1999 due to instantaneous parallel increases in the period end yield curve of 100 and 150 basis points. 34 The sensitivity analysis also assumes an instantaneous 10% and 20% decline in the foreign currency exchange rates versus the United States dollar from their levels at December 31, 2000 and December 31, 1999, with all other variables held constant. Equity price risk was measured assuming an instantaneous 10% and 25% decline in the S&P 500(R) Index (Index) from its level at December 31, 2000 and December 31, 1999, with all other variables held constant. The Company's equity holdings were assumed to be highly and positively correlated with the Index. At December 31, 2000, a 10% and 25% decrease in the Index would result in a $457 million and $1,042 million decrease compared to $564 million and $1,420 million decrease at December 31, 1999, in the market value of the Company's equity investments. Of these amounts, under the 10% and 25% scenarios, $167 million and $418 million at December 31, 2000 and $148 million and $381 million at December 31, 1999 pertained to decreases in the market value of the separate account investments. These decreases would substantially be offset by decreases in related separate account liabilities to customers. Similarly, increases in the market value of the separate account equity investments would also be offset by increases in the same related separate account liabilities by the same approximate amounts. The following tables present the estimated effects on the market value of the Company's financial instruments at December 31, 2000 and 1999, due to an increase in interest rates of 100 basis points, a decline of 10% in foreign currency exchange rates and a 10% decline in the Index.
Market Risk Scenario 1 Increase (Decrease) December 31, 2000 Market Interest Currency Equity (In millions) Value Rate Risk Risk Risk - --------------------------------------------------------------------------------------------------------------------- Held for Other Than Trading Purposes General account: Fixed maturity securities $26,652 $(1,428) $ (213) $ (22) Equity securities 2,412 -- (44) (223) Short-term investments 4,723 (4) (18) -- Other invested assets 1,333 43 -- (45) Interest rate caps 1 1 -- -- Interest rate swaps -- -- -- -- Equity indexed futures -- -- -- -- Other derivative securities 1 1 (4) -- Total general account 35,122 (1,387) (279) (290) - -------------------------------------------------------------------------------------------------------------------- Separate accounts: Fixed maturity securities 2,293 (118) (7) -- Equity securities 212 -- (1) (21) Short-term investments 150 -- -- -- Other invested assets 444 -- -- (44) Other derivative securities -- -- -- -- Total separate accounts 3,099 (118) (8) (65) Total all securities held for other than trading purposes 38,221 (1,505) (287) (355) - -------------------------------------------------------------------------------------------------------------------- Held for Trading Purposes Separate accounts: Fixed maturity securities 410 (19) (4) (1) Equity securities 3 -- -- -- Short-term investments 230 -- -- -- Other invested assets 404 -- -- (3) Equity indexed futures -- 2 -- (98) Other derivative securities 1 (6) -- -- Total all securities held for trading purposes 1,048 (23) (4) (102) - -------------------------------------------------------------------------------------------------------------------- Total all securities $39,269 $(1,528) $ (291) $ (457) ==================================================================================================================== Debt (carrying value) $ 2,729 $ (114) $ -- $ -- ====================================================================================================================
35
MarketRisk Scenario 1 Increase (Decrease) ------------------- December 31, 1999 Market Interest Currency Equity (In millions) Value Rate Risk Risk Risk - ------------------------------------------------------------------------------------------------------------------------ Held for Other Than Trading Purposes General account: Fixed maturity securities $ 27,248 $ (1,268) $ (149) $ (14) Equity securities 3,610 -- (84) (361) Short-term investments 3,355 (2) (26) -- Other invested assets 1,331 42 -- (44) Interest rate caps 4 5 -- -- Interest rate swaps -- -- -- -- Equity indexed futures -- 19 -- -- Other derivative securities 12 (8) 59 3 Total general account 35,560 (1,212) (200) (416) - ----------------------------------------------------------------------------------------------------------------------- Separate accounts: Fixed maturity securities 2,927 (115) (16) (2) Equity securities 242 -- -- (24) Short-term investments 59 -- -- -- Other invested assets 175 -- -- (17) Other derivative securities (1) (7) -- -- Total separate accounts 3,402 (122) (16) (43) Total all securities held for other than trading purposes 38,962 (1,334) (216) (459) - ----------------------------------------------------------------------------------------------------------------------- Held for Trading Purposes Separate accounts: Fixed maturity securities 333 (12) (1) -- Equity securities 19 -- -- (2) Short-term investments 430 -- (2) -- Other invested assets 319 -- -- 2 Equity indexed futures -- 2 -- (105) Other derivative securities -- (1) -- -- Total all securities held for trading purposes 1,101 (11) (3) (105) - ----------------------------------------------------------------------------------------------------------------------- Total all securities $ 40,063 $ (1,345) $ (219) $ (564) ======================================================================================================================= Debt (carrying value) $ 2,881 $ (132) $ -- $ -- =======================================================================================================================
36 The following tables present the estimated effects on the market value of the Company's financial instruments at December 31, 2000 and 1999, due to an increase in interest rates of 150 basis points, a 20% decline in foreign currency exchange rates and a 25% decline in the S&P 500(R).
MarketRisk Scenario 2 Increase (Decrease) ------------------- December 31, 2000 Market Interest Currency Equity (In millions) Value Rate Risk Risk Risk - ---------------------------------------------------------------------------------------------------------------- Held for Other Than Trading Purposes General account: Fixed maturity securities $26,652 $(2,180) $ (427) $ (56) Equity securities 2,412 -- (88) (456) Short-term investments 4,723 (6) (36) -- Other invested assets 1,333 65 -- (112) Interest rate caps 1 2 -- -- Interest rate swaps -- (1) -- -- Equity indexed futures -- -- -- -- Other derivative securities 1 1 (7) -- Total general account 35,122 (2,119) (558) (624) - ---------------------------------------------------------------------------------------------------------------- Separate accounts: Fixed maturity securities 2,293 (171) (15) -- Equity securities 212 -- (1) (53) Short-term investments 150 -- -- -- Other invested assets 444 -- -- (111) Other derivative securities -- -- -- -- Total separate accounts 3,099 (171) (16) (164) Total all securities held for other than trading purposes 38,221 (2,290) (574) (788) - ---------------------------------------------------------------------------------------------------------------- Held for Trading Purposes Separate accounts: Fixed maturity securities 410 (28) (7) (1) Equity securities 3 -- -- (1) Short-term investments 230 -- -- -- Other invested assets 404 -- -- (7) Equity indexed futures -- 3 -- (245) Other derivative securities 1 (9) -- -- Total all securities held for trading purposes 1,048 (34) (7) (254) - ---------------------------------------------------------------------------------------------------------------- Total all securities $39,269 $(2,324) $ (581) $(1,042) ================================================================================================================= Debt (carrying value) $ 2,729 $ (166) $ -- $ -- =================================================================================================================
37
MarketRisk Scenario 2 Increase (Decrease) ------------------- December 31, 1999 Market Interest Currency Equity (In millions) Value Rate Risk Risk Risk - ----------------------------------------------------------------------------------------------------------------------- Held for Other Than Trading Purposes General account: Fixed maturity securities $ 27,248 $ (1,878) $ (298) $ (35) Equity securities 3,610 -- (168) (902) Short-term investments 3,355 (3) (51) -- Other invested assets 1,331 63 -- (111) Interest rate caps 4 11 -- -- Interest rate swaps -- -- -- -- Equity indexed futures -- 29 -- -- Other derivative securities 12 (13) 118 9 Total general account 35,560 (1,791) (399) (1,039) - ----------------------------------------------------------------------------------------------------------------------- Separate accounts: Fixed maturity securities 2,927 (170) (32) (4) Equity securities 242 -- -- (60) Short-term investments 59 -- (1) -- Other invested assets 175 -- -- (44) Other derivative securities (1) (11) -- _ Total separate accounts 3,402 (181) (33) (108) - ----------------------------------------------------------------------------------------------------------------------- Total all securities held for other than trading purposes 38,962 (1,972) (432) (1,147) Held for TradingPurposes Separate accounts: Fixed maturity securities 333 (18) (1) (1) Equity securities 19 -- -- (5) Short-term investments 430 -- (4) -- Other invested assets 319 -- -- (6) Equity indexed futures -- 3 -- (261) Other derivative securities -- (2) -- -- Total all securities held for trading purposes 1,101 (17) (5) (273) - ----------------------------------------------------------------------------------------------------------------------- Total all securities $ 40,063 $ (1,989) $ (437) $ (1,420) ======================================================================================================================= Debt (carrying value) $ 2,881 $ (193) $ -- $ -- =======================================================================================================================
LIQUIDITY AND CAPITAL RESOURCES The principal operating cash flow sources of CNA's property-casualty and life insurance subsidiaries are premiums and investment income. The primary operating cash flow uses are payments for claims, policy benefits and operating expenses. For the year ended December 31, 2000, net cash used for operating activities was $1,373 million as compared with net cash used of $2,934 million and $806 million in 1999 and 1998. The improvement in 2000 relates primarily to significant outflows in 1999 of 1) $1.1 billion in cash to Allstate in connection with the transaction involving the Company's Personal Insurance business and 2) $1.1 billion of claim payments from escrow pursuant to the Fibreboard settlement. See Note O to the Consolidated Financial Statements for discussion of the Personal Insurance transaction. Excluding these significant, non-recurring transactions from 1999, the Company's 2000 cash outflow from operations declined by approximately $600 million to an outflow of approximately $1.4 billion. The operating cash flows forgone in 2000 due to the transfer of Personal Insurance in 1999 was approximately $250 million. The remainder of the decline related primarily to increased payments of claims and decreased receipts of premiums. For the year ended December 31, 1999, net cash used for operating activities increased significantly, due to the non-recurring transactions described above. Excluding these transactions, cash from operations improved in 1999 over 1998, primarily due to lower levels of paid operating expenses. For the year ended December 31, 2000, net cash inflows from investment activities were $1,870 million as compared with $3,428 million and $300 million for the same period in 1999 and 1998. Cash flows from investing activities were particularly high in 1999 due to sales of investments to fund the outflows related to the Personal Insurance transaction and Fibreboard claim payments. For the year ended December 31, 2000, net cash used for financing activities was $487 million as compared with $558 million in 1999. In 1998, cash provided by financing activities amounted to $340 million. During 2000 and 1999, cash flows for financing activities included the repurchase of preferred and common equity instruments, the retirement or repurchase of senior debt securities and mortgages, the repayment of bank loans and the payment of dividends. During 1998, cash provided by financing activities included issuance of preferred stock and increased cash flows from borrowings. 38 On February 15, 2000, S&P lowered the Company's senior debt rating from A- to BBB and lowered the Company's preferred stock rating from BBB to BB+. As a result of these actions, the facility fee payable on the aggregate amount of CNA's $795 million revolving credit facility (Facility) was increased to 12.5 basis points per annum from 9.0 basis points per annum and the interest rate was increased to London Interbank Offered Rate (LIBOR) plus 27.5 basis points from LIBOR plus 16.0 basis points. Subsequently, the Company repurchased and retired all of its outstanding balance in its $150 million of money market preferred stock in the first four months of 2000. The Company has selected a financial institution to lead the syndication process for the new CNAF credit facility to replace the current CNAF revolving credit facility that terminates in May 2001. During 2000, CNA purchased a portion of its debt notes when opportunities arose. CNA may purchase additional securities in the future. These repurchases included approximately $24 million of The Continental Corporation (Continental) senior notes and approximately $14 million of CNAF senior notes. On August 2, 1999, the Company repaid its $157 million, 11% Secured Mortgage Notes, due June 30, 2013. On April 19, 1999, CNA filed a Registration Statement on Form S-3 with the Securities and Exchange Commission (SEC), which became effective, relating to $600 million in senior and subordinated debt, junior debt, common stock, preferred stock and warrants. No securities have been issued under this registration. On April 15, 1999, the Company retired $100 million of Continental's 8.25% senior notes. On December 23, 1998, CNA sold $200 million of preferred stock to Loews. On June 30, 1999, CNA redeemed this preferred stock at par plus accrued dividends. In 1998, CNA issued $1 billion of senior notes under a $1 billion Registration Statement on Form S-3 filed with the SEC on August 18, 1997. This shelf registration incorporated $250 million of securities remaining available for issuance from a prior shelf registration. Since filing this shelf registration, CNA has issued in four separate offerings senior notes with an aggregate principal amount of $1 billion. Proceeds from these debt issues were used to repay or refinance existing debt, provide funds for acquisitions, and increase the capital of CCC. The Company is separated into three intercompany reinsurance pools: the Continental Casualty Company Pool (CCC Pool), The Continental Insurance Company Pool (CIC Pool) and the Continental Assurance Company Pool (CAC Pool). The CCC Pool, CIC Pool and CAC Pool are composed of nine, fifteen and two legal insurance entities, respectively, domiciled in a total of 13 states and doing business in 50 states and Canada (the Pool Companies). To the extent a Pool Company's currently due claim liabilities may exceed its readily available liquid assets, the Company may be called upon to contribute capital to that company. Furthermore, such capital would likely be obtained in the form of a dividend from another Pool Company, possibly in a different pool, which may or may not require the approval of insurance regulators in the jurisdiction of the dividend-paying company. In addition, by agreement with the New Hampshire Insurance Department as well as certain other state insurance departments, dividend paying capacity for the CIC Pool is restricted to internal and external debt service requirements through September 2003 up to a maximum of $85 million annually, without the prior approval of the New Hampshire Insurance Department. As of December 31, 2000, approximately $881 million of dividend payments would not be subject to insurance department pre-approval. Accordingly, management must continuously monitor the capital allocation among the pools and the liquidity and capital resources of the individual Pool Companies. See Note K to the Consolidated Financial Statements for discussion of statutory accounting practices. In March of 1998, the National Association of Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting Principles (Codification). Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The states in which CNAF's insurance subsidiaries conduct business will require adoption of Codification (with certain modifications) for the preparation of statutory financial statements effective January 1, 2001. The Company estimates that the adoption of Codification, as modified, will increase statutory capital and surplus as of January 1, 2001 by approximately $77 million, which primarily relates to deferred tax assets, partially offset by insurance related assessments and pension liabilities. The table below presents ratings issued by A.M. Best, Fitch, Moody's and S&P for the CCC Pool, the CIC Pool and the CAC Pool. Also rated were CNAF's senior debt, commercial paper and Continental senior debt.
Insurance Ratings Debt Ratings --------------------------------- ---------------- CCC Pool CAC Pool CIC Pool CNAF Continental Financial Commercial Senior Strength Senior Debt Paper - ------------------------------------------------------------------------------------- Debt A.M. Best A A A- -- -- -- Fitch AA- AA -- A- -- -- Moody's A2 A2* A3 Baa1 P2 Baa2 S&P A AA- A- BBB A2 BBB-
* CAC and VFL are rated separately by Moody's and both have an A2 rating. 39 ACCOUNTING PRONOUNCEMENTS In the first quarter of 2000, the Company adopted the American Institute of Certified Public Accountants' Statement of Position No. 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk (SOP 98-7). Adoption of SOP 98-7 did not have a significant impact on the results of operations or the equity of the Company. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes the SEC Staff's view in applying GAAP to revenue recognition in financial statements. This bulletin, through its subsequent revised releases SAB No. 101A and No. 101B, is effective for registrants no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. Adoption of this bulletin, which occurred on October 1, 2000, did not have a significant impact on the results of operations or the equity of the Company. In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 was subsequently amended by Statement of Financial Accounting Standard No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, which delayed the effective date of SFAS 133 by one year, and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (SFAS 138). SFAS 138 addresses a limited number of issues causing implementation difficulties for entities applying SFAS 133. SFAS 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that an entity recognize all derivative instruments as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposures to changes in the fair value, cash flows or foreign currencies. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company is required to adopt SFAS 133 effective January 1, 2001. The transition adjustments resulting from adoption must be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle. The Company estimates that the initial adoption of SFAS 133 will not have a significant impact on the equity of the Company; however, adoption will result in an estimated after-tax decrease to 2001 earnings of $62 million. Of this estimated transition amount, approximately $58 million relates to investments and investment related derivatives (primarily related to the Company's hedged position in Global Crossing common stock, see Note C to the Consolidated Financial Statements). Because the Company already carries its investment related derivatives at fair value through other comprehensive income, there is an equal and offsetting favorable adjustment of $58 million to stockholders' equity (accumulated other comprehensive income). The remainder of the estimated transition adjustment is attributable to collateralized debt obligation products that are derivatives under SFAS 133. These estimates are based on the Company's interpretation of SFAS 133 and related implementation guidance. Changes in implementation guidance or the interpretation thereof could result in changes in the transition adjustment estimate. FORWARD-LOOKING STATEMENTS The statements contained in this management discussion and analysis that are not historical facts are forward-looking statements. When included in the management's discussion and analysis, the words "believes," "expects," "intends," "anticipates," "estimates" and analogous expressions are intended to identify forward-looking statements. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, the impact of competitive products, policies and pricing; product and policy demand and market responses; development of claims and claim trends and the effect on loss reserves; the performance of reinsurance companies under reinsurance contracts with the Company; general economic and business conditions; changes in financial markets (interest rate, credit, currency, commodities and stocks); changes in foreign, political, social and economic conditions; regulatory initiatives and compliance with governmental regulations; judicial decisions and rulings; the effect on the Company of changes in rating agency policies and practices; the results of financing efforts; changes in the Company's composition of operating segments; the actual closing of contemplated transactions; and agreements and various other matters and risks (many of which are beyond the Company's control) detailed in the Company's SEC filings. These forward-looking statements speak only as of the filing date of this document. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. 40 CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Years ended December 31 (In millions, except per share data) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Revenues Net earned premiums $ 11,474 $ 13,282 $ 13,536 Net investment income 2,080 2,101 2,146 Realized investment gains, net of participating policyholders' and minority interests 1,321 315 681 Other revenues 739 705 799 Total revenues 15,614 16,403 17,162 - --------------------------------------------------------------------------------------------------------------------------- Claims, Benefits and Expenses Insurance claims and policyholders' benefits 9,831 11,890 11,701 Amortization of deferred acquisition costs 1,880 2,143 2,180 Other operating expenses 1,887 2,096 2,467 Restructuring and other related charges -- 83 246 Interest 206 202 219 Total claims, benefits and expenses 13,804 16,414 16,813 - --------------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax and cumulative effect of a change in accounting principle 1,810 (11) 349 Income tax (expense) benefit (568) 88 (47) Minority interest (28) (30) (20) - --------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle 1,214 47 282 Cumulative effect of a change in accounting principle, net of tax of $95 -- (177) -- - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 1,214 $ (130) $ 282 =========================================================================================================================== Basic and Diluted Earnings (Loss) per Share Income before cumulative effect of a change in accounting principle $ 6.61 $ 0.19 $ 1.49 Cumulative effect of a change in accounting principle, net of tax -- (0.96) -- - --------------------------------------------------------------------------------------------------------------------------- Basic and diluted earnings (loss) per share available to common stockholders $ 6.61 $ (0.77) $ 1.49 =========================================================================================================================== Weighted average outstanding common stock and common stock equivalents 183.6 184.2 184.9 ===========================================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial Statements. 41 CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
December 31 (In millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Assets Investments: Fixed maturity securities available-for-sale (amortized cost of $26,579 and $27,948) $ 26,652 $ 27,248 Equity securities available-for-sale (cost of $1,175 and $1,150) 2,412 3,610 Mortgage loans and real estate (less accumulated depreciation of $1 and $1) 26 47 Policy loans 193 192 Other invested assets 1,116 1,108 Short-term investments 4,723 3,355 - ------------------------------------------------------------------------------------------------------------------------ Total investments 35,122 35,560 Cash and cash equivalents 163 153 Receivables: Reinsurance 9,397 7,403 Insurance 5,026 5,115 Less allowance for doubtful accounts (321) (310) Accrued investment income 404 387 Receivables for securities sold 424 284 Deferred acquisition costs 2,418 2,436 Prepaid reinsurance premiums 1,445 1,456 Federal income taxes recoverable (includes $25 and $241 due from Loews) 15 269 Deferred income taxes 503 852 Property and equipment at cost (less accumulated depreciation of $802 and $701) 716 746 Intangibles 317 328 Other assets 2,152 1,937 Separate account business 4,287 4,603 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 62,068 $ 61,219 ========================================================================================================================
42
2000 1999 - ----------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Liabilities: Insurance reserves: Claim and claim adjustment expense $ 26,962 $ 27,356 Unearned premiums 4,821 5,103 Future policy benefits 6,669 6,102 Policyholders' funds 602 710 Collateral on loaned securities and derivatives 1,308 1,300 Payables for securities purchased 593 135 Participating policyholders' equity 131 121 Debt 2,729 2,881 Other liabilities 4,102 3,775 Separate account business 4,287 4,603 Total liabilities 52,204 52,086 - ---------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes A, E and F) Minority interest 217 195 Stockholders' equity: Common stock 464 464 Preferred stock -- 150 Additional paid-in capital 126 126 Retained earnings 8,327 7,114 Accumulated other comprehensive income 873 1,188 Treasury stock, at cost (71) (41) - ---------------------------------------------------------------------------------------------------------- 9,719 9,001 Notes receivable for the issuance of common stock (Note I) (72) (63) - ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 9,647 8,938 - ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 62,068 $ 61,219 ==========================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial Statements. 43 CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Years ended December 31 (In millions) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income (loss) $ 1,214 $ (130) $ 282 Adjustments to reconcile net income (loss) to net cash flows used by operating activities: Cumulative effect of change in accounting principle, net of tax -- 177 -- Minority interest 28 30 20 Deferred income tax provision 493 138 47 Realized investment gains (1,321) (315) (681) Amortization of intangibles 21 23 93 Amortization of bond discount (309) (243) (208) Depreciation 155 185 166 Changes in: Receivables, net (1,664) (9) (404) Deferred acquisition costs (132) (221) (280) Accrued investment income (17) 6 (3) Federal income taxes recoverable 254 (17) (233) Prepaid reinsurance premiums 11 (152) (435) Insurance reserves (128) (1,193) 586 Transfer of business via reinsurance (41) (1,149) -- Other 63 (64) 244 - ----------------------------------------------------------------------------------------------------------------- Total adjustments (2,587) (2,804) (1,088) - ---------------------------------------------------------------------------------------------------------------- Net cash flows used by operating activities (1,373) (2,934) (806) - ----------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchases of fixed maturity securities (40,975) (45,515) (39,039) Proceeds from fixed maturity securities: Sales 38,502 43,587 35,480 Maturities, calls and redemptions 4,222 2,996 3,564 Purchases of equity securities (1,858) (1,575) (1,071) Proceeds from sales of equity securities 2,935 1,803 848 Change in short-term investments (1,124) 907 823 Change in collateral on loaned securities and derivatives 9 1,170 (23) Change in other investments 313 238 (81) Purchases of property and equipment, net (152) (250) (261) Acquisitions, net of cash acquired (2) (19) (120) Other, net -- 86 180 - ----------------------------------------------------------------------------------------------------------------- Net cash flows from investing activities $ 1,870 $ 3,428 $ 300 ==================================================================================================================
44
2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Dividends paid to preferred stockholders $ (1) $ (13) $ (7) Purchase of treasury stock (35) -- (102) Receipts from investment contracts credited to policyholder account balances 5 7 6 Return of policyholder account balances on investment contracts (138) (78) (20) Principal payments on debt (164) (450) (730) Proceeds from issuance of debt -- 177 993 (Redemption) issuance of preferred stock (150) (200) 200 Other, net (4) (1) -- - ----------------------------------------------------------------------------------------------------------- Net cash flows (used by) from financing activities (487) (558) 340 - ----------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 10 (64) (166) Cash and cash equivalents, beginning of year 153 217 383 - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 163 $ 153 $ 217 =========================================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid (received): Interest expense $ 205 $ 201 $ 210 Federal income taxes (154) (279) 143 Non-cash transactions: Notes receivable for the issuance of stock 4 19 44 Exchange of Canary Wharf Limited Partnership interest into common stock -- 539 --
The accompanying Notes are an integral part of these Consolidated Financial Statements. 45 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
Accumulated Notes Other Receivable Comprehen- for the Total Additional sive Issuance Stock- Common Preferred Paid-in Retained Income Treasury of Common holders' Stock Stock Capital Earnings (Loss) Stock Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- (In millions) Balance, January 1, 1998 $ 464 $ 150 $ 126 $ 6,983 $ 589 $ (3) $ -- $ 8,309 Comprehensive income: Net income -- -- -- 282 -- -- -- 282 Other comprehensive income -- -- -- -- 475 -- -- 475 ----- Total comprehensive income 757 Issuance of preferred stock -- 200 -- -- -- -- -- 200 Purchase of treasury stock -- -- -- -- -- (102) -- (102) Increase in notes from issuance of common stock -- -- -- -- -- 44 (44) -- Preferred dividends -- -- -- (7) -- -- -- (7) Balance, December 31, 1998 464 350 126 7,258 1,064 (61) (44) 9,157 Comprehensive loss: Net loss -- -- -- (130) -- -- -- (130) Other comprehensive income -- -- -- -- 124 -- -- 124 ----- Total comprehensive loss (6) Redemption of preferred stock -- (200) -- -- -- -- -- (200) Increase in notes from issuance of common stock -- -- -- (1) -- 20 (19) -- Preferred dividends -- -- -- (13) -- -- -- (13) Balance, December 31, 1999 464 150 126 7,114 1,188 (41) (63) 8,938 Comprehensive income: Net income -- -- -- 1,214 -- -- -- 1,214 Other comprehensive loss -- -- -- -- (315) -- -- (315) ----- Total comprehensive income 899 Redemption of preferred stock -- (150) -- -- -- -- -- (150) Purchase of treasury stock -- -- -- -- -- (35) -- (35) Increase in notes from issuance of common stock -- -- -- -- -- 5 (9) (4) Preferred dividends -- -- -- (1) -- -- -- (1) Balance, December 31, 2000 $ 464 $ -- $ 126 $ 8,327 $ 873 $ (71) $ (72) $ 9,647 ====================================================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial Statements. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Consolidated Financial Statements include CNA Financial Corporation (CNAF) and its controlled subsidiaries, which include property-casualty insurance companies (principally Continental Casualty Company (CCC) and The Continental Insurance Company (CIC)) and life insurance companies (principally Continental Assurance Company (CAC) and Valley Forge Life Insurance Company (VFL)), collectively CNA or the Company. Loews Corporation (Loews) owns approximately 87% of the outstanding common stock of the Company. The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany amounts have been eliminated. Certain amounts applicable to prior years have been reclassified to conform to the current year presentation. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Business CNA serves a wide variety of customers, including small, medium and large businesses; associations; professionals; and groups and individuals with a broad range of insurance and risk management products and services. Insurance products include property and casualty coverages; life, accident and health insurance; and retirement products and annuities. CNA services include risk management, information services, healthcare management, claims administration and employee leasing/payroll processing. CNA's products and services are marketed through agents, brokers, managing general agents and direct sales. Insurance Earned premiums: Insurance premiums on property-casualty and accident and health insurance contracts are earned ratably over the duration of the policies after provision for estimated adjustments on retrospectively rated policies and deductions for ceded insurance. The reserve for unearned premiums on these contracts represents the portion of premiums written relating to the unexpired terms of coverage. Revenues on interest sensitive contracts are comprised of contract charges and fees, which are recognized over the coverage period. Premiums for other life insurance products and annuities are recognized as revenue when due, after deductions for ceded insurance premiums. Claim and claim adjustment expense reserves: Claim and claim adjustment expense reserves, except reserves for structured settlements, workers' compensation lifetime claims and accident and health disability claims, are not discounted and are based on 1) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations, 2) estimates of unreported losses, 3) estimates of losses on assumed reinsurance, 4) estimates of future expenses to be incurred in settlement of claims and 5) estimates of claim recoveries, exclusive of reinsurance recoveries, which are reported as an asset. Management considers current conditions and trends as well as past Company and industry experience in establishing these estimates. The effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance. Claim and claim adjustment expense reserves represent management's estimates of ultimate liabilities based on currently available facts and case law. The ultimate liability may vary significantly from such estimates. CNA regularly reviews its reserves, and any adjustments to the previously established reserves are recognized in operating income in the period that the need for such adjustments becomes apparent. Structured settlements have been negotiated for certain property-casualty insurance claims. Structured settlements are agreements to provide fixed periodic payments to claimants. Certain structured settlements are funded by annuities purchased from CAC for which the related annuity obligations are reported in future policy benefits reserves. Obligations for structured settlements not funded by annuities are included in claim and claim adjustment expense reserves and carried at present values determined using interest rates ranging from 6.0% to 7.5%. At December 31, 2000 and 1999, the discounted reserves for unfunded structured settlements were $884 million and $883 million, net of discount of $1,473 million and $1,483 million. Workers' compensation lifetime claim reserves and accident and health disability claim reserves are calculated using mortality and morbidity assumptions based on Company and industry experience, and are discounted at interest rates allowed by insurance regulators that range from 3.5% to 6.5%. At December 31, 2000 and 1999, such discounted reserves totaled $2,205 million and $2,174 million, net of discount of $940 million and $893 million. 47 Future policy benefits reserves: Reserves for traditional life insurance products (whole and term life products) and long-term care products are computed using the net level premium method, which incorporates actuarial assumptions as to interest rates, mortality, morbidity, withdrawals and expenses. Actuarial assumptions generally vary by plan, age at issue and policy duration, and include a margin for adverse deviation. Interest rates range from 3% to 9%, and mortality, morbidity and withdrawal assumptions are based on Company and industry experience prevailing at the time of issue. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium paying period. Reserves for interest sensitive contracts are equal to the account balances that accrue to the benefit of the policyholders. Interest crediting rates ranged from 4.30% to 6.85% for the three years ended December 31, 2000. Insurance-related assessments: CNA's participation in involuntary risk pools is mandatory and is generally a function of its proportionate share of the voluntary market, by line of insurance, in each state in which it does business. In the first quarter of 1999, CNA adopted Statement of Position No. 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments (SOP 97-3). SOP 97-3 requires that insurance companies recognize liabilities for insurance-related assessments when an assessment is probable, when it can be reasonably estimated and when the event obligating the entity to pay an imposed or probable assessment has occurred on or before the date of the financial statements. Adoption of SOP 97-3 resulted in an after-tax charge of $177 million as a cumulative effect of a change in accounting principle in 1999. The pro forma effect of adoption on reported results for prior periods was not significant. Insurance-related assessment liabilities are not discounted or recorded net of premium taxes. These liabilities are included as part of other liabilities in the consolidated balance sheets. Reinsurance: Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and reported as a recoverable in the consolidated balance sheets. Reinsurance contracts that do not meet the criteria for risk transfer are recorded in accordance with Statement of Position No. 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk. The related deposit assets are recorded as reinsurance receivables in the consolidated balance sheets. Deferred acquisition costs: Costs that vary with and are related primarily to the acquisition of property-casualty insurance business are deferred and amortized ratably over the period the related premiums are earned. 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 insurance business acquisition costs are deferred and amortized based on assumptions consistent with those used for computing future policy benefits reserves. Deferred acquisition costs on traditional life business are amortized over the assumed premium paying periods. The amortization of deferred acquisition costs for universal life and annuity contracts are matched to the recognition of gross profits on these contracts. To the extent that unrealized gains or losses on available-for-sale securities would result in an adjustment of deferred policy acquisition costs had they actually been realized, an adjustment is recorded to deferred acquisition costs and to unrealized investment gains or losses. Investments Valuation of investments: CNA classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity securities as available-for-sale, and as such, they are carried at fair value. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, and amortization and accretion are included in investment income. Changes in fair value are reported as a component of other comprehensive income. Investments are written down to estimated fair values and losses are recognized in income when a decline in value is determined to be other than temporary. 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. Other invested assets include investments in joint ventures, limited partnerships and certain derivative securities. Investments in joint ventures and limited partnerships are carried at CNA's equity in the investees' net assets. Investments in derivative securities are carried at fair value at the reporting date, and changes in fair value are recognized in realized investment gains and losses. Derivatives used to hedge the fair value of assets or liabilities are classified with the related hedged item in the consolidated balance sheets. For interest rate swaps associated with certain corporate borrowings, amounts due or payable under these swaps are recorded as an adjustment to interest expense and changes in the fair value of the swaps are not recognized in the Company's consolidated financial statements. 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 or amortized cost of the specific securities sold. Equity in affiliates: CNA uses the equity method of accounting for investments in companies in which its ownership interest of the voting shares of an investee company enables CNA to influence the operating or financial decisions of the investee company but without a controlling financial interest. Equity in net income of these affiliates is reported in other revenues. 48 Securities lending activities: CNA lends securities to unrelated parties, primarily major brokerage firms. Borrowers of these securities must deposit collateral with CNA equal to 100% of the fair value of the securities if the collateral is cash or 102% of the fair value of the securities if the collateral is securities. Cash deposits from these transactions are invested in short-term investments, primarily commercial paper, and a liability is recognized for the obligation to return the collateral. The fair value of collateral held and included in short-term investments was $885 million and $1,300 million at December 31, 2000 and 1999. CNA continues to receive the interest on loaned debt securities as beneficial owner and, accordingly, loaned debt securities are included in fixed maturity securities. Cash Equivalents Cash equivalents are short-term, highly liquid investments that are both readily convertible into known amounts of cash and so near to maturity that they present insignificant risk of changes in value due to changing interest rates. Separate Account Business CAC and VFL write investment and annuity contracts. The supporting assets and liabilities of certain of these contracts are legally segregated and reported as assets and liabilities of separate account business. CAC and VFL guarantee principal and a specified return to the contractholders on approximately 57% and 63% of the separate account business at December 31, 2000 and 1999. Substantially all assets of the separate account business are carried at fair value. Separate account liabilities are carried at contract values. Income Taxes The Company accounts for income taxes under the liability method. Under the liability method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities. 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 is determined principally on the straight-line method. Intangibles Intangibles include goodwill, representing the excess of purchase price over fair value of the net assets of acquired entities, and other intangible assets. Goodwill is generally amortized on a straight-line basis over the period of expected benefit, generally ranging from 15 to 30 years. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. Amortization expense on goodwill and other intangibles amounted to $21 million, $23 million and $32 million for the years ended December 31, 2000, 1999 and 1998. Intangible assets are periodically reviewed to determine whether impairment in value has occurred. Earnings Per Share Earnings per share applicable to common stock are based on weighted average outstanding shares, retroactively adjusted for all stock splits. The computation of earnings per share was as follows. Earnings Per Share
Years ended December 31 (In millions, except per share amounts) 2000 1999 1998 - -------------------------------------------------------------------------------- Net income (loss) $ 1,214 $ (130) $ 282 Less preferred dividends (1) (13) (7) - -------------------------------------------------------------------------------- Net income (loss) applicable to common stock $ 1,213 $ (143) $ 275 ================================================================================ Weighted average outstanding common stock and common stock equivalents 183.6 184.2 184.9 Basic and diluted earnings (loss) per share available to common stockholders $ 6.61 $ (0.77) $ 1.49 ================================================================================
Accounting Pronouncements In the first quarter of 2000, the Company adopted the American Institute of Certified Public Accountants' Statement of Position No. 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk (SOP 98-7). Adoption of SOP 98-7 did not have a significant impact on the results of operations or the equity of the Company. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes the SEC Staff's view in applying GAAP to revenue recognition in financial statements. This bulletin, through its subsequent revised releases SAB No. 101A and No. 101B, was effective for registrants no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. Adoption of this bulletin, which occurred on October 1, 2000, did not have a significant impact on the results of operations or the equity of the Company. In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 was subsequently amended by Statement of Financial Accounting Standard No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which delayed the effective date of SFAS 133 by one year, and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging 49 Activities (SFAS 138). SFAS 138 addresses a limited number of issues causing implementation difficulties for entities applying SFAS 133. SFAS 133, as amended and interpreted, establishes accounting and reportings standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that an entity recognize all derivative instruments as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposures to changes in the fair value, cash flows or foreign currencies. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company is required to adopt SFAS 133 effective January 1, 2001. The transition adjustments resulting from adoption must be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle. The Company estimates that the initial adoption of SFAS 133 will not have a significant impact on the equity of the Company; however, adoption will result in an estimated after-tax decrease to 2001 earnings of $62 million. Of this estimated transition amount, approximately $58 million relates to investments and investment-related derivatives (related primarily to the Company's hedged position in GlobalCrossing Ltd. (Global Crossing) common stock, see Note C). Because the Company already carries its investment-related derivatives at fair value through other comprehensive income, there is an equal and offsetting favorable adjustment of $58 million to stockholders' equity (accumulated other comprehensive income). The remainder of the estimated transition adjustment is attributable to collateralized debt obligation products that are derivatives under SFAS 133. These estimates are based on the Company's interpretation of SFAS 133 and related implementation guidance. Changes in implementation guidance or the interpretation thereof could result in changes in the transition adjustment estimate. NOTE B. INVESTMENTS The significant components of net investment income are presented in the following table. Net Investment Income
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Fixed maturity securities $ 1,766 $ 1,776 $ 1,832 Short-term investments 201 188 241 Other 161 178 126 - -------------------------------------------------------------------------------- Gross investment income 2,128 2,142 2,199 Investment expenses (48) (41) (53) - -------------------------------------------------------------------------------- Net investment income $ 2,080 $ 2,101 $ 2,146 ================================================================================
Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) in investments were as follows. Net Investment Appreciation
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Net realized investment gains (losses): Fixed maturity securities: Gross realized gains $ 434 $ 269 $ 621 Gross realized losses (564) (580) (154) Net realized (losses) gains on fixed maturity securities (130) (311) 467 - -------------------------------------------------------------------------------- Equity securities: Gross realized gains 1,337 481 119 Gross realized losses (221) (115) (81) Net realized gains on equity securities 1,116 366 38 - -------------------------------------------------------------------------------- Other realized investment gains 339 253 190 - -------------------------------------------------------------------------------- Net realized investment gains before allocation to participating policyholders and minority interest 1,325 308 695 Allocation to participating policyholders and minority interest (4) 7 (14) Income tax expense (461) (123) (247) Net realized investment gains 860 192 434 - -------------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) in investments: Fixed maturity securities 773 (1,262) 34 Equity securities (1,223) 1,545 796 Other (52) 18 (112) - -------------------------------------------------------------------------------- Total net change in unrealized (depreciation) appreciation in general account investments (502) 301 718 Net change in unrealized appreciation (depreciation) on separate accounts and other 66 (59) 5 Allocation to participating policyholders and minority interest (12) 24 (6) Deferred income tax benefit (expense) 161 (100) (249) Net change in unrealized (depreciation) appreciation in investments (287) 166 468 - -------------------------------------------------------------------------------- Net realized gains and change in unrealized appreciation in investments $ 573 $ 358 $ 902 ================================================================================
50 Other realized investment gains for the years ended December 31, 2000, 1999 and 1998 include gains and losses related to the sale of certain operations or affiliates. See Note O. The unrealized gain on the Company's position in Global Crossing common stock, including the fair market value of the related hedge discussed in Note C, was $902 million and $1,764 million as of December 31, 2000 and 1999. Changes in the Company's investment in Global Crossing, on a pre-tax basis, were as follows. Change in Net Realized Gains and Unrealized Appreciation (Depreciation) for Global Crossing
Years ended December 31 (In millions) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in unrealized gain on common stock $(1,525) $ 924 $ 828 Increase in unrealized gain on options collar 663 -- -- ============================================================================================================================= Net (decrease) increase in unrealized gain on position in Global Crossing common stock $ (862) $ 924 $ 828 Realized gains on sales of Global Crossing common stock $ 485 $ 222 $ 63 =============================================================================================================================
The following tables provide a summary of investments in fixed maturity securities and equity securities available-for-sale. Summary of Fixed Maturity and Equity Securities
Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------- December 31, 2000 U.S. Treasury securities and obligations of government agencies $ 5,103 $ 198 $ 3 $ 5,298 Asset-backed securities 7,549 100 26 7,623 States, municipalities and political subdivisions - tax-exempt 3,279 79 9 3,349 Corporate securities 7,237 149 342 7,044 Other debt securities 3,357 63 136 3,284 Redeemable preferred stocks 54 -- -- 54 - ------------------------------------------------------------------------------------------------------------------------------------ Total fixed maturity securities 26,579 589 516 26,652 Equity securities 1,175 1,400 163 2,412 ==================================================================================================================================== Total $27,754 $ 1,989 $ 679 $29,064 ==================================================================================================================================== December 31, 1999 U.S. Treasury securities and obligations of government agencies $ 8,431 $ 14 $ 127 $ 8,318 Asset-backed securities 7,253 14 228 7,039 States, municipalities and political subdivisions - tax-exempt 4,514 16 134 4,396 Corporate securities 5,502 34 303 5,233 Other debt securities 2,185 36 89 2,132 Redeemable preferred stocks 63 72 5 130 - ------------------------------------------------------------------------------------------------------------------------------------ Total fixed maturity securities 27,948 186 886 27,248 Equity securities 1,150 2,635 175 3,610 - ------------------------------------------------------------------------------------------------------------------------------------ Total $29,098 $ 2,821 $ 1,061 $30,858 ====================================================================================================================================
51 The following table summarizes fixed maturity securities by contractual maturity at December 31, 2000. Contractual Maturity
Amortized Fair (In millions) Cost Value - -------------------------------------------------------------------------------- Due in one year or less $ 1,217 $ 1,210 Due after one year through five years 5,047 5,014 Due after five years through ten years 6,965 6,861 Due after ten years 5,801 5,944 Asset-backed securities 7,549 7,623 - -------------------------------------------------------------------------------- Total $26,579 $26,652 ================================================================================
Actual maturities may differ from contractual maturities because some securities may be called or prepaid with or without call or prepayment penalties. The carrying value of investments (other than equity securities) that did not produce income during 2000 was $35 million. At December 31, 2000, no investments, other than investments in U.S. government agency securities, exceeded 10% of stockholders' equity. Restricted Investments The Company may from time to time invest in securities that have a limited market or the sale of which may be restricted in whole or in part. As of December 31, 2000, the Company owned 19.3 million shares of Global Crossing common stock valued at $277 million, representing approximately 2.2% of Global Crossing's outstanding common stock. Because the Company's holdings of Global Crossing were not acquired in a public offering, the shares may not be sold to the public unless the sale is registered or exempt from the registration requirements of the Securities Act of 1933 (the Act) including sales pursuant to Rule 144. The Company has the right to require Global Crossing to register, under the Act, all of the Company's current holdings. See Note C for discussion of the Company's hedge of this investment. Cash and securities with carrying values of $1.9 billion and $1.8 billion were deposited by the Company's insurance subsidiaries under requirements of regulatory authorities as of December 31, 2000 and 1999. Note C. FINANCIAL INSTRUMENTS In the normal course of business, CNA invests in various financial assets, incurs various financial liabilities and enters into agreements involving derivative securities, including off-balance sheet financial instruments. Fair values are disclosed for all financial instruments, for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance sheets. Management attempts to obtain quoted market prices for the purposes of these disclosures. Where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. These techniques are significantly affected by management's assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair values. The estimates presented herein are not necessarily indicative of the amounts that CNA would realize in a current market exchange. Non-financial instruments such as real estate, deferred acquisition costs, property and equipment, deferred income taxes and intangibles and certain financial instruments such as insurance reserves and leases are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value of the Company. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, short-term investments, accrued investment income, receivables for securities sold, federal income taxes recoverable, collateral on loaned securities and derivatives, payables for securities purchased and certain other assets and other liabilities approximate fair value because of the short-term nature of these items. These assets and liabilities are not listed in the following tables. The following methods and assumptions were used by CNA in estimating the fair value for financial assets and liabilities. The fair values of fixed maturity and equity securities were based on quoted market prices, where available. For securities not actively traded, fair values were estimated using values obtained from independent pricing services or quoted market prices of comparable instruments. The fair values for mortgage loans and policy loans were estimated using discounted cash flows utilizing interest rates currently offered for similar loans to borrowers of comparable credit quality. Loans with similar characteristics were aggregated for purposes of these calculations. Premium deposits and annuity contracts were valued based on cash surrender values and the outstanding fund balances. Valuation techniques to determine fair value of other invested assets and other separate account business assets consisted of discounting cash flows, obtaining quoted market prices of the investments and comparing the investments to similar instruments or to the underlying assets of the investments. CNA's senior notes and debentures were valued based on quoted market prices. The fair value for other long-term debt was estimated using discounted cash flows based on current incremental borrowing rates for similar borrowing arrangements. The fair values of financial guarantee contracts were estimated using discounted cash flows utilizing interest rates currently offered for similar contracts. The fair values of guaranteed investment contracts and deferred annuities of the separate account business were estimated using discounted cash flow calculations based on interest rates currently offered for similar contracts with similar maturities. The fair values of the liabilities for variable separate account business were based on the quoted market values of the underlying assets of each variable separate account. The fair values of other separate account liabilities approximate their carrying value because of their short-term nature. 52 The carrying amount and estimated fair value of CNA's financial instrument assets and liabilities are listed in the following table. Derivative financial instruments are shown in a separate table. Financial Assets and Liabilities
2000 1999 ------------------------ ------------------------ December 31 Carrying Estimated Carrying Estimated (In millions) Amount Fair Value Amount Fair Value - ---------------------------------------------------------------------------------------------------------------- Financial assets Investments: Fixed maturity securities $26,652 $26,652 $27,248 $27,248 Equity securities 2,412 2,412 3,610 3,610 Mortgage loans 22 23 44 42 Policy loans 193 180 192 179 Other invested assets 1,116 1,116 1,108 1,108 Separate account business: Fixed maturity securities 2,703 2,703 3,260 3,260 Equity securities 215 215 261 261 Other 849 849 493 493 Notes receivable for the issuance of common stock 72 58 63 56 Financial liabilities Premium deposits and annuity contracts $ 1,486 $ 1,419 $ 1,293 $ 1,240 Debt 2,729 2,595 2,881 2,775 Financial guarantee contracts 150 128 124 112 Separate account business: Guaranteed investment contracts 882 880 1,516 1,518 Variable separate accounts 1,387 1,387 1,505 1,505 Deferred annuities 114 115 117 125 Other 623 623 571 571
Derivative Financial Instruments CNA invests in derivative financial instruments in the normal course of business primarily to reduce its exposure to market risk (principally interest rate risk, equity stock price risk and foreign currency risk). Financial instruments used for such purposes include interest rate swaps, interest rate caps, put and call options, commitments to purchase securities, futures and forwards. Other than derivatives held in certain separate accounts, the Company generally does not hold or issue these instruments for trading purposes. CNA also uses derivatives to mitigate the risk associated with its indexed group annuity contracts (a separate account product) by purchasing Standard & Poor's 500(R) (S&P 500(R)) index futures contracts in a notional amount equal to the contract holder liability, which is calculated using the S&P 500(R) rate of return. Futures are contracts to buy or sell a standard quantity and quality of a commodity, financial instrument or index at a specified future date and price. Forwards are contracts between two parties to purchase and sell a specific quantity of a commodity, government security, foreign currency or other financial instrument at a price specified at contract inception, with delivery and settlement at a specified future date. Commitments to purchase government and municipal securities are agreements to purchase securities in the future at a predetermined price. 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. The option purchaser pays a premium to the option seller (writer) for the right to exercise the option. The option seller is obligated to buy (put) or sell (call) the item underlying the contract at a set price, if the option purchaser chooses to exercise. An interest rate cap consists of a guarantee given by the issuer to the purchaser in exchange for the payment of a premium. This guarantee states that if interest rates rise above a specified rate the issuer will pay to the purchaser the difference between the then current market rate and the specified rate on the notional principal amount. The gross notional principal or contractual amounts of derivative financial instruments in the general account at December 31, 2000 and 1999 were $2,872 million and $2,062 million. The gross notional principal or contractual amounts of derivative financial instruments in the separate accounts were $1,411 million and $1,627 million at December 31, 2000 and 1999. The contractual or notional amounts are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential for gain or loss on these instruments. 53 Interest rates, equity prices and foreign currency exchange rates generally affect the fair values associated with derivative financial instruments. The credit exposure associated with non-performance by the counterparties to these instruments is generally limited to the gross fair value of the asset related to the instruments recognized in the consolidated balance sheets. The Company continuously monitors the creditworthiness of its counterparties. The Company generally does not require collateral from its derivative investment counterparties. The fair values of derivatives generally represent the estimated amounts that CNA would expect to receive or pay upon termination of the contracts at the reporting date. Dealer quotes are available for substantially all of CNA's derivatives. For derivative instruments not actively traded, fair values are estimated using values obtained from independent pricing services, costs to settle or quoted market prices of comparable instruments. A summary of the aggregate contractual or notional amounts, estimated fair values and gains (losses) related to derivative financial instruments is as follows. Derivative Financial Instruments
Fair Value Contractual ------------------------------------ Notional Recognized (In millions) Amount Asset (Liability) Gains (Losses) - ----------------------------------------------------------------------------------------------------------------------------------- As of and for the year ended December 31, 2000 General account Total return swaps $ 5 $ -- $ -- $ 12 Interest rate caps 500 1 -- (3) Commitments to purchase government and municipal securities -- -- -- 5 Futures sold, not yet purchased 80 -- -- (7) Forwards 13 -- -- 54 Options purchased 18 1 -- (9) Options written -- -- -- 8 Options purchased - GlobalCrossing 1,000 664 -- -- Options written - GlobalCrossing 1,256 -- 1 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total $2,872 $ 666 $ 1 $ 60 =================================================================================================================================== Separate accounts Futures purchased $ 996 $ -- $ (13) $ (172) Futures sold, not yet purchased 76 -- -- (4) Commitments to purchase government and municipal securities 111 1 -- 4 Options purchased 110 -- -- (2) Options written 118 -- (1) 4 - ----------------------------------------------------------------------------------------------------------------------------------- Total $1,411 $ 1 $ (14) $ (170) - ----------------------------------------------------------------------------------------------------------------------------------- As of and for the year ended December 31, 1999 General account Interest rate swaps on corporate borrowings $ 650 $ -- $ -- $ -- Total return swaps 7 -- -- 11 Interest rate caps 500 4 -- 4 Commitments to purchase government and municipal securities 127 -- (1) (1) Futures sold, not yet purchased 153 -- -- 9 Forwards 591 9 -- 21 Options purchased 25 4 -- (5) Options written 9 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total $2,062 $ 17 $ (1) $ 39 =================================================================================================================================== Separate accounts Futures purchased $1,113 $ -- $ -- $ 131 Futures sold, not yet purchased 79 -- -- 2 Commitments to purchase government and municipal securities 228 -- (2) (4) Options purchased 108 1 -- (1) Options written 99 -- -- 4 - ----------------------------------------------------------------------------------------------------------------------------------- Total $1,627 $ 1 $ (2) $ 132 ===================================================================================================================================
54 During the first quarter of 2000, at which time the Company owned 36.1 million shares of Global Crossing common stock, the Company entered into option agreements intended to hedge the market risk associated with approximately 19.3 million shares of Global Crossing common stock. These option agreements were structured as a collar in which the Company purchased put options and sold call options on Global Crossing common stock. As of December 31, 2000, the average exercise prices were $51.70 and $64.93 on the put and call options, subject to adjustments on the call options under certain limited circumstances. The options expire in the first half of 2002 and are only exercisable on their expiration dates. The Company has designated the collar as a hedge of its investment in Global Crossing common stock. Accordingly, the fair value of the collar is presented in equity securities available-for-sale in the accompanying consolidated balance sheets, consistent with the hedged item. Additionally, at December 31, 2000, CNA holds collateral, included in short-term investments, with a fair value of $462 million. See Note B for discussion of changes in the fair value of the collar. The Company had entered into interest rate swap agreements to convert the variable rate of its borrowings under a revolving credit facility and its commercial paper program to a fixed rate. The Company was party to interest rate swap agreements with several banks with an aggregate notional principal amount of $650 million at December 31, 1999. Those agreements, which terminated December 14, 2000, effectively fixed the Company's interest cost on $650 million of variable rate debt for 1998, 1999 and most of 2000. See Note H for discussion of these agreements. NOTE D. INCOME TAXES CNA and its eligible subsidiaries (CNA Tax Group) are included in the consolidated federal income tax return of Loews and its eligible subsidiaries. Loews and CNA have agreed that for each taxable year, CNA will 1) 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 2) pay to Loews an amount, if any, equal to the federal income tax that would have been payable by the CNA Tax Group filing a separate consolidated tax 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. Either party may cancel this agreement upon 30 days' written notice. For 2000, the inclusion of the CNA Tax Group in the consolidated federal income tax return of Loews increased the Loews federal income tax liability. Accordingly, CNA has paid or will pay Loews approximately $64 million for 2000. In 1999 and 1998, the inclusion of the CNA Tax Group in the consolidated federal income tax return of Loews resulted in a decreased federal income tax liability for Loews. Accordingly, Loews has paid CNA approximately $288 million for 1999 and $83 million for 1998. A reconciliation between CNA's federal income tax expense (benefit) at statutory rates and the recorded income tax expense (benefit), after giving effect to minority interest, but before giving effect to the cumulative effect of a 1999 change in accounting principle for SOP 97-3, is as follows. Tax Rate Reconciliation
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Income tax expense (benefit) at statutory rates $ 624 $ (14) $ 115 Tax benefit from tax exempt income (71) (84) (103) Other expense, including state income taxes 15 10 35 - -------------------------------------------------------------------------------- Effective income tax expense (benefit) $ 568 $ (88) $ 47 ================================================================================
The composition of CNA's total income tax expense (benefit) allocated between operating income and realized investment gains and losses, excluding the cumulative effect of the 1999 change in accounting principle, is as follows. Components of Tax Provision
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Income tax expense (benefit) on operating income $ 107 $(211) $(200) Income tax expense on realized investment gains 461 123 247 - -------------------------------------------------------------------------------- Total income tax expense (benefit) $ 568 $ (88) $ 47 ================================================================================
The current and deferred components of CNA's income tax expense (benefit), excluding taxes on the cumulative effect of the 1999 change in accounting principle, are as follows. Current and Deferred Taxes
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Current tax expense (benefit) $ 75 $(226) $ -- Deferred tax expense 493 138 47 - -------------------------------------------------------------------------------- Total income tax expense (benefit) $ 568 $ (88) $ 47 ================================================================================
55 The deferred tax effects of the significant components of CNA's deferred tax assets and liabilities are set forth in the table below. Components of Net Deferred Tax Assets
December 31 (In millions) 2000 1999 - -------------------------------------------------------------------------------- Deferred tax assets (liabilities) Insurance reserves: Property-casualty claim reserves $ 864 $ 1,081 Unearned premium reserves 294 335 Life reserves 187 213 Other insurance reserves 21 26 Deferred acquisition costs (763) (778) Net unrealized gains (470) (627) Postretirement benefits other than pensions 134 149 Net operating losses -- 137 Foreign affiliate(s) related 110 44 Receivables 82 80 Accrued assessments and guarantees 43 72 Investment valuation differences 10 65 Other, net (9) 55 - -------------------------------------------------------------------------------- Net deferred tax asset $ 503 $ 852 ================================================================================
At December 31, 2000, gross deferred tax assets and liabilities amounted to approximately $1.9 billion and $1.4 billion. In comparison, gross deferred tax assets and liabilities amounted to approximately $2.4 billion and $1.5 billion at December 31, 1999. CNA's management believes it is more likely than not that the deferred tax assets will be realized through future earnings and available tax planning strategies. NOTE E. CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES CNA's property-casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to settle all outstanding claims, including claims that 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 factors can affect the estimation of reserves. Establishing loss reserves is an estimation process. Many factors 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 affect 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 estimable than long-tail claims, such as general liability and professional liability claims. The table below provides a reconciliation between beginning and ending claim and claim adjustment expense reserves. Reconciliation of Claim and Claim Adjustment Expense Reserves
As of and for the years ended December 31 (In millions) 2000 1999 1998 Reserves, beginning of year: Gross $ 26,631 $ 28,317 $ 28,533 Ceded 6,273 5,424 5,326 Net reserves, beginning of year 20,358 22,893 23,207 - -------------------------------------------------------------------------------- Net reserves transferred under retroactive reinsurance agreements -- (1,024) -- Net reserves of acquired insurance companies at date of acquisition -- -- 122 Total net adjustments -- (1,024) 122 - -------------------------------------------------------------------------------- Net incurred claim and claim adjustment expenses: Provision for insured events of current year 6,331 7,287 7,903 Increase in provision for insured events of prior years 427 1,027 263 Amortization of discount 158 139 143 Total net incurred 6,916 8,453 8,309 - -------------------------------------------------------------------------------- Net payments attributable to: Current year events 1,888 2,744 2,791 Prior year events 6,916 7,460 5,954 Reinsurance recoverable against net reserves transferred under retroactive reinsurance agreements (See Note O) (370) (240) -- - -------------------------------------------------------------------------------- Total net payments 8,434 9,964 8,745 - -------------------------------------------------------------------------------- Net reserves, end of year 18,840 20,358 22,893 Ceded reserves, end of year 7,568 6,273 5,424 - -------------------------------------------------------------------------------- Gross reserves, end of year* $ 26,408 $ 26,631 $ 28,317 ================================================================================
* Excludes life claim and claim adjustment expense reserves of $554 million and $725 million at December 31, 2000 and 1999, included in the consolidated balance sheets. The increase (decrease) in provision for insured events of prior years (reserve development) is composed of the following components. Reserve Development
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Environmental pollution and other mass tort $ 17 $ (84) $ 227 Asbestos 65 560 243 Other 345 551 (207) - -------------------------------------------------------------------------------- Total $ 427 $ 1,027 $ 263 - -===============================================================================
56 Environmental Pollution and Other Mass Tort and Asbestos Reserves CNA's property-casualty insurance companies have potential exposures related to environmental pollution and other mass tort and asbestos claims. Environmental pollution cleanup is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to cleanup. 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-Superfunds) govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and restoration by "Potentially Responsible Parties" (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs fail to do so, and to assign liability to PRPs. 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 cleanup is unknown. To date, approximately 1,500 cleanup sites have been identified by the Environmental Protection Agency (EPA) on its National Priorities List (NPL). The addition of new cleanup sites to the NPL has slowed in recent years. State authorities have designated many cleanup sites as well. Many policyholders have made claims against various CNA insurance subsidiaries for defense costs and indemnification in connection with environmental pollution matters. These claims relate to accident years 1989 and prior, which coincides with CNA's adoption of the Simplified Commercial General Liability coverage form, which includes an absolute pollution exclusion. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether cleanup costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and the definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues. A number of proposals to reform Superfund have been made by various parties. However, no reforms were enacted by Congress during 2000, and it is unclear what positions the Congress or the administration will take and what legislation, if any, will result in the future. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental cleanup may be significantly 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 cleanup 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 cleanup, and the standards for cleanup and liability, the ultimate liability of CNA for environmental pollution claims may vary substantially from the amount currently recorded. The following table provides data related to CNA's environmental pollution and other mass tort and asbestos claim and claim adjustment expense reserves. Environmental Pollution and Other Mass Tort and Asbestos Reserves
2000 1999 - -------------------------------------------------------------------------------- Environmental Environmental December 31 Pollution and Pollution and (In millions) Other Mass Tort Asbestos Other Mass Tort Asbestos - -------------------------------------------------------------------------------- Gross reserves $ 493 $ 848 $ 618 $ 946 Ceded reserves (146) (245) (155) (262) - -------------------------------------------------------------------------------- Net reserves $ 347 $ 603 $ 463 $ 684 ================================================================================
As of December 31, 2000, 1999 and 1998 CNA carried $347 million, $463 million and $787 million of claim and claim expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and other mass tort claims. In 2000, CNA recorded $17 million of adverse development compared with $84 million of favorable development in 1999 and $227 million of adverse development in 1998. These changes were based upon the Company's continuous review of these types of exposures, as well as its internal studies and annual analysis of environmental pollution and other mass tort claims. The analysis of activity in calendar year 2000 indicated a slight deterioration in pollution claims. The analysis completed in 1999 indicated favorable results in the number of new claims being reported in the other mass tort area. The 1998 analysis indicated deterioration in claim experience related mainly to pollution claims. CNA's property-casualty insurance subsidiaries also have exposure to asbestos claims. Estimation of asbestos claim and claim adjustment expense reserves involves many of the same limitations discussed above for environmental pollution claims, such as inconsistency of court decisions, specific policy provisions, allocation of liability among insurers, missing policies and proof of coverage. As of December 31, 2000, 1999 and 1998, CNA carried approximately $603 million, $684 million and $1,456 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported 57 and unreported asbestos-related claims. In 2000, CNA recorded $65 million of adverse development compared with $560 million of adverse development in 1999 and $243 million of adverse development in 1998. The reserve strengthening in 2000 for asbestos-related claims was a result of management's continuous review of development with respect to these exposures, as well as a review of the results of the Company's annual analysis of these claims, which was completed in conjunction with the study of environmental pollution and other mass tort claims. This analysis indicated continued deterioration in claim counts and asbestos-related claims similar to the results noted in both 1999 and 1998. The factors that have led to the deterioration in claim counts include intensive advertising campaigns by lawyers for asbestos claimants and the addition of new defendants, such as distributors of asbestos-containing products. The results of operations in future years may continue to be adversely affected by environmental pollution and other mass tort and asbestos claim and claim adjustment expenses. Management will continue to monitor these liabilities and make further adjustments as warranted. Other Reserves Unfavorable claim and claim adjustment expense reserve development for other lines in 2000 was due to unfavorable loss experience in standard commercial lines, assumed reinsurance and accident and health lines. These unfavorable changes were partially offset by favorable development in non-medical professional liability and other casualty lines. The unfavorable development in standard commercial lines can be attributed to adverse claim experience for recent accident years in the commercial auto liability, commercial multi-peril and workers' compensation lines of business. The unfavorable development in the assumed reinsurance and accident and health lines also resulted from adverse claims experience. Unfavorable claim and claim adjustment expense reserve development for other lines in 1999 of $551 million was due to unfavorable loss development of approximately $540 million for standard commercial lines, approximately $60 million for medical malpractice and approximately $70 million for accident and health. These unfavorable changes were partially offset by favorable development of approximately $120 million in non-medical professional liability and assumed reinsurance on older accident years. The unfavorable development in standard commercial lines was due to commercial automobile liability and workers' compensation losses being higher than expected in recent accident years. In addition, the number of claims reported for commercial multiple-peril liability claims from older accident years did not decrease as much as expected. The unfavorable development for medical malpractice was also due to losses being higher than expected for recent accident years. The accident and health unfavorable development was due to higher than expected claim reporting on assumed personal accident coverage in recent accident years. Other lines' favorable claim and claim adjustment expense reserve development for 1998 of $207 million was due to favorable loss development of approximately $100 million in the commercial lines business and approximately $105 million of favorable loss development in the personal lines business. The favorable development in the commercial lines of business was primarily attributable to improved frequency and severity in the commercial auto lines for older accident years, as well as some continued improvement in workers' compensation for older years. The favorable development in the personal auto lines of business was attributable to improved trends, particularly in personal auto liability. CNA's insurance subsidiaries also have exposure to construction defect losses, principally in its general liability and commercial multiple-peril lines. This exposure relates to claims involving property damage alleging loss of use, damage, destruction or deterioration of land, buildings and other structures involving new construction or major rehabilitation of real property. Many of these claims involve multiple defects and multiple defendants. The majority of losses have been concentrated in a limited number of states, including California. The Company has taken several underwriting actions to mitigate this exposure in the future. Estimation of construction defect losses is subject to a high level of uncertainty due to the long period of time between the accident date and the reporting of the claim, emerging case law, changing regulatory rules and the allocation of damages to the multiple defendants. Due to the inherent uncertainties noted above, the ultimate liability for construction defect claims may vary substantially from the amount currently recorded. Financial Guarantee Reserves CNA's property-casualty operations write financial guarantee insurance contracts, which guarantee corporate credit and asset-backed securities. Premiums are received throughout the exposure period and are recognized as revenue in proportion to the underlying risk insured. In addition, through August 1, 1989, CNA's property-casualty operations wrote financial guarantee insurance in the form of surety bonds and also insured equity policies. These bonds represented primarily industrial development bond guarantees and, in the case of insured equity policies, typically extended in initial terms from 10 to 13 years. For these guarantees and policies CNA received an advance premium, which is recognized over the exposure period and in proportion to the underlying risk insured. At December 31, 2000 and 1999, gross exposure on financial guarantee surety bonds and insured equity policies was $249 million and $352 million. The degree of risk to CNA related to this exposure is substantially reduced through reinsurance, diversification of exposures and collateral requirements. In addition, security interests in improved real estate are also commonly obtained on financial guarantee risks. Approximately 39% and 37% of the risks were ceded to reinsurers at December 31, 2000 and 1999. Total exposure, net of reinsurance, amounted to $151 million and $222 million at December 31, 2000 and 1999. At December 31, 2000 and 1999, collateral consisting of letters of credit, cash reserves and debt service reserves amounted to $7 million and $43 million. Gross unearned premium reserves for financial guarantee contracts were $23 million and $11 million at December 31, 2000 and 1999. Gross claim and claim adjustment expense reserves totaled $127 million and $113 million at December 31, 2000 and 1999. 58 NOTE F. LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES Tobacco Litigation Four insurance subsidiaries of CNAF are defendants in a lawsuit arising out of policies allegedly issued to Liggett Group, Inc. (Liggett). The lawsuit was filed by Liggett and its current parent, Brooke Group Holding Inc., in the Delaware Superior Court, New Castle County, on January 26, 2000. The lawsuit, which involves numerous insurers, concerns coverage issues relating to a number of tobacco-related claims (currently over 1,100 pending) asserted against Liggett over the past 20 years. However, Liggett only began submitting claims for coverage under the policies in January 2000. CNA believes its coverage defenses are strong. Based on facts and circumstances currently known, management believes that the ultimate outcome of the pending litigation should not materially affect the financial condition or results of operations of CNA. IGI Contingency In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an arrangement with IOA Global, Ltd. (IOA), an independent managing general agent based in Philadelphia, Pennsylvania, to develop and manage a book of accident and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies, Ltd. (IGI), a personal accident reinsurance managing general underwriter, was appointed to underwrite and market the book under the supervision of IOA. Between April 1, 1997 and December 1, 1999, IGI underwrote a number of reinsurance arrangements with respect to personal accident insurance worldwide (the IGI Program). Under various arrangements, CNA Re Ltd. both assumed risks as a reinsurer and also ceded a substantial portion of those risks to other companies, including other CNA insurance subsidiaries and ultimately to a group of reinsurers participating in a reinsurance pool known as the Associated Accident and Health Reinsurance Underwriters (AAHRU) Facility. CNA's Group Operations business unit participated as a pool member in the AAHRU Facility in varying percentages between 1997 and 1999. CNA has undertaken a review of the IGI Program and, among other things, has determined that a small portion of the premiums assumed under the IGI Program related to United States workers' compensation "carve-out" business. CNA is aware that a number of reinsurers with workers' compensation carve-out insurance exposure have disavowed their obligations under various legal theories. If one or more such companies are successful in avoiding or reducing their liabilities, then it is likely that CNA's liability will also be reduced. Moreover, based on information known at this time, CNA reasonably believes it has strong grounds for avoiding a substantial portion of its United States workers' compensation carve-out exposure through legal action. As noted, CNA arranged substantial reinsurance protection to manage its exposures under the IGI Program. CNA believes it has valid and enforceable reinsurance contracts with the AAHRU Facility and other reinsurers with respect to the IGI Program, including the United States workers' compensation carve-out business. It is likely that certain reinsurers will dispute their liabilities to CNA; however, the Company is unable to predict the extent of such potential disputes at this time. Legal actions could result, and the resolution of any such actions could take years. Based on the Company's review of the entire IGI Program, CNA has established reserves for its estimated exposure under the program and an estimate for recoverables from retrocessionaires. The Company is pursuing a number of loss mitigation strategies. Although the results of these various actions to date support the recorded reserves, the estimate of ultimate losses is subject to considerable uncertainty. As a result of these uncertainties, the results of operations in future years may be adversely affected by potentially significant reserve additions. Management does not believe that any such future reserve additions will be material to the equity of the Company. Other Litigation CNAF and its subsidiaries are also parties to other litigation arising in the ordinary course of business. The outcome of such other litigation will not, in the opinion of management, materially affect the financial position or results of operations of CNA. NOTE G. REINSURANCE CNA assumes and cedes reinsurance 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, minimize exposures on larger risks and to exit certain lines of business. Reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA's retained amount varies by type of coverage. Generally, property risks are reinsured 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. CNA's life reinsurance includes coinsurance, yearly renewable term and facultative programs. The ceding of insurance does not discharge the primary liability of the Company. Therefore, a credit exposure exists with respect to property, liability and life reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under reinsurance agreements. CNA holds substantial collateral in the form of funds and bank letters of credit. Such collateral was approximately $1,566 million and $1,306 million at December 31, 2000 and 1999. CNA places reinsurance with carriers only after review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claims settlement practices. CNA's largest recoverables from a single reinsurer, including prepaid reinsurance premiums, were approximately $1,176 million, $776 million and $402 million at December 31, 2000, from The Allstate Corporation (Allstate), American Reinsurance Company and National Indemnity Insurance Company. Insurance claims and policyholders' benefits are net of reinsurance recoveries of $4,863 million, $3,224 million and $994 million for 2000, 1999 and 1998. 59 Life premiums are primarily from long duration contracts and property-casualty premiums and accident and health premiums are primarily from short duration contracts. The effects of reinsurance on earned premiums and written premiums for the years ended December 31, 2000, 1999 and 1998 are shown in the following table. Components of Earned Premiums
(In millions) Direct Assumed Ceded Net Assumed/Net % - --------------------------------------------------------------------------------------------------------------- 2000 Earned Premiums Property-casualty $ 8,389 $ 1,955 $ 3,421 $ 6,923 28.2% Accident and health 3,644 484 487 3,641 13.3 Life 1,227 220 537 910 24.2 - --------------------------------------------------------------------------------------------------------------- Total earned premiums $13,260 $ 2,659 $ 4,445 $11,474 23.2% =============================================================================================================== 1999 Earned Premiums Property-casualty $ 9,158 $ 1,816 $ 2,199 $ 8,775 20.7% Accident and health 3,730 198 397 3,531 5.6 Life 1,174 222 420 976 22.7 - --------------------------------------------------------------------------------------------------------------- Total earned premiums $14,062 $ 2,236 $ 3,016 $13,282 16.8% =============================================================================================================== 1998 Earned Premiums Property-casualty $ 8,327 $ 1,549 $ 897 $ 8,979 17.3% Accident and health 3,745 176 256 3,665 4.8 Life 1,014 159 281 892 17.8 - --------------------------------------------------------------------------------------------------------------- Total earned premiums $13,086 $ 1,884 $ 1,434 $13,536 13.9% ===============================================================================================================
Components of Written Premiums
(In millions) Direct Assumed Ceded Net Assumed/Net % - --------------------------------------------------------------------------------------------------------------- 2000 Written Premiums Property-casualty $ 8,412 $ 1,787 $ 3,444 $ 6,755 26.5% Accident and health 3,598 468 489 3,577 13.1 Life 1,229 220 537 912 24.1 - --------------------------------------------------------------------------------------------------------------- Total written premiums $13,239 $ 2,475 $ 4,470 $11,244 22.0% =============================================================================================================== 1999 Written Premiums Property-casualty $ 9,114 $ 1,948 $ 3,262 $ 7,800 25.0% Accident and health 3,731 194 403 3,522 5.5 Life 1,158 196 461 893 21.9 - --------------------------------------------------------------------------------------------------------------- Total written premiums $14,003 $ 2,338 $ 4,126 $12,215 19.1% =============================================================================================================== 1998 Written Premiums Property-casualty $ 8,765 $ 1,429 $ 969 $ 9,225 15.5% Accident and health 3,717 178 254 3,641 4.9 Life 986 159 283 862 18.4 - --------------------------------------------------------------------------------------------------------------- Total written premiums $13,468 $ 1,766 $ 1,506 $13,728 12.9% ===============================================================================================================
60 The impact of reinsurance on life insurance in-force at December 31, 2000, 1999 and 1998 is shown in the following table. Components of Life Insurance In-Force
(In millions) Direct Assumed Ceded Net - -------------------------------------------------------------------------- 2000 $391,847 $142,934 $363,893 $170,888 1999 339,255 130,735 184,376 285,614 1998 297,488 96,906 128,896 265,498
NOTE H. DEBT Debt consists of the following. Debt
December 31 (In millions) 2000 1999 - -------------------------------------------------------------------------------- Variable rate debt: Commercial paper $ 627 $ 675 Credit facility - CNA -- 77 Credit facility - CNA Surety 100 100 Senior notes: 7.250%, due March 1, 2003 133 143 6.250%, due November 15, 2003 249 249 6.500%, due April 15, 2005 491 497 6.750%, due November 15, 2006 249 248 6.450%, due January 15, 2008 149 149 6.600%, due December 15, 2008 199 199 8.375%, due August 15, 2012 68 81 6.950%, due January 15, 2018 148 148 Debenture, 7.250%, due November 15, 2023 240 247 Capital leases, 8.000%-19.980%, due through December 31, 2011 40 42 Other debt, 1.000%-8.500%, due through 2019 36 26 - -------------------------------------------------------------------------------- Total debt $2,729 $2,881 ================================================================================
CNA has a $750 million revolving credit facility (the Facility) that expires in May 2001. The amount available under the Facility is reduced by CNA's outstanding commercial paper borrowings. As of December 31, 2000, there was $123 million of unused borrowing capacity under the Facility. The interest rate on the Facility was equal to the London Interbank Offered Rate (LIBOR), plus 27.5 basis points. Additionally, there is an annual facility fee of 12.5 basis points on the entire Facility. There were no borrowings under the Facility at December 31, 2000. The average interest rate on the borrowings under the Facility, excluding facility fees, for the year ended December 31, 1999 was 6.66%. The weighted average interest rate on commercial paper was 7.24%, 6.50% and 5.89% at December 31, 2000, 1999 and 1998. At December 31, 2000, the commercial paper program had a weighted average maturity of 22 days. As discussed in Note C, to offset the variable rate characteristics of the Facility and the interest rate risk associated with periodically reissuing commercial paper, CNA was party to interest rate swap agreements with several banks. The last of these agreements expired on December 14, 2000. These agreements required CNA to pay interest at a fixed rate in exchange for the receipt of the three-month LIBOR. The effect of the interest rate swap agreements was to decrease interest expense by approximately $2 million for the year ended December 31, 2000 and increase interest expense by approximately $4 million and $2 million for the years ended December 31, 1999 and 1998. The combined weighted average cost of Facility borrowings and commercial paper borrowings, including Facility fees and interest rate swaps, was 7.36%, 6.47% and 6.36% at December 31, 2000, 1999 and 1998. On February 15, 2000, Standard & Poor's lowered the Company's senior debt rating from A- to BBB and lowered the Company's preferred stock rating from BBB to BB+. As a result of these actions the facility fee payable on the aggregate amount of the Facility was increased to 12.5 basis points per annum and the interest rate on the Facility was increased to LIBOR plus 27.5 basis points from their previous levels of 9 basis points and LIBOR plus 16 basis points. During 2000, the Company repaid bank loans drawn under the CNA credit facility and repurchased approximately $38 million of its senior notes. On August 2, 1999, the Company repaid its $157 million, 11% Secured Mortgage Notes, due June 30, 2013. The gain realized on the transaction was not significant. On April 15, 1999, the Company retired $100 million of its 8.25% senior notes. CNA Surety Corporation (CNA Surety), a 64% owned subsidiary of the Company, has entered into a $130 million revolving credit facility that expires in September 2002. The interest rate on facility borrowings is based on LIBOR plus 20 basis points. Additionally, there is an annual facility fee of 10 basis points on the entire facility. The average interest rate on the borrowings under this facility, including facility fees, for the years ended December 31, 2000 and 1999 was 6.73% and 5.57%. Commercial paper is reflected as due in 2001 in the following table because the commercial paper program is fully supported by the Facility, which expires in 2001. The combined aggregate maturities for debt at December 31, 2000 are presented in the following table. Maturity of Debt
(In millions) 2001 $ 639 2002 105 2003 387 2004 4 2005 496 Thereafter 1,112 Less original issue discount (14) - ------------------------------------------- Total $2,729 ===========================================
61 NOTE I. BENEFIT PLANS Pension and Postretirement Healthcare and Life Insurance Benefit Plans CNAF and certain subsidiaries sponsor noncontributory pension plans typically covering full-time employees age 21 or over who have completed at least one year of service. While the terms of the plans vary, benefits are generally based on years of credited service and the employee's highest 60 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 mortgage-backed securities, equity investments and short-term investments. CNA provides certain healthcare and life insurance benefits to eligible retired employees, their covered dependents and their beneficiaries. The funding for these plans is generally to pay covered expenses as they are incurred. In 2000, employees of CCC who were employed at December 31, 1999, and were still employed at April 24, 2000, were required to make a choice regarding their continued participation in the defined benefit pension plan. These employees were given two choices: 1) to continue earning additional benefits in the defined benefit pension plan or 2) to convert the present value of their accrued benefit in the pension plan to an "accrued pension account" (APA) that would be credited with interest at the 30-year Treasury rate and to receive enhanced employer contributions to the Savings and Capital Accumulation Plan (S-CAP) (see Savings Plan discussion below). Approximately 60% of eligible employees elected the latter choice, resulting in a curtailment charge of approximately $13 million, before income taxes. Additionally, this change in benefit plan participation resulted in a reduction of the pension benefit obligation of $37 million at December 31, 2000. In 1999, the Company recorded pre-tax curtailment and other related charges of approximately $8 million related to the transfer of personal lines insurance business to Allstate as discussed in Note O. This transaction resulted in a reduction of the pension and postretirement benefit obligations of $44 million and $2 million at December 31, 1999. A 1999 amendment to the postretirement plan that affected early retirement eligibility and the level of employer subsidy resulted in a net reduction in the postretirement benefit obligation of approximately $40 million at December 31, 1999. Additionally, in 1999, the Company amended its benefit plans for its total risk management services subsidiary, RSKCoSM. The amendment resulted in a reduction in the pension and postretirement benefit obligations of approximately $10 million and $8 million at December 31, 1999. The Company recorded pre-tax curtailment charges of approximately $19 million in 1998 related to its restructuring activities as discussed in Note N. These curtailments resulted in a reduction of the pension and postretirement benefit obligations of $88 million and $34 million at December 31, 1998. The following table provides a reconciliation of benefit obligations. Benefit Obligations and Accrued Benefit Costs
Postretirement Pension Benefits Benefits ---------------- --------------- (In millions) 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Benefit obligation at January 1 $ 1,815 $ 1,900 $ 268 $ 321 Change in benefit obligation: Service cost 31 64 7 11 Interest cost 131 129 22 22 Participants' contributions -- -- 4 4 Plan amendments (1) (10) (1) (48) Actuarial gain (loss) 62 (130) 41 (5) Curtailment (37) (44) -- (2) Special termination benefits -- 3 -- -- Acquisition -- 2 -- -- Benefits paid (119) (99) (28) (35) - -------------------------------------------------------------------------------- Benefit obligation at December 31 1,882 1,815 313 268 - -------------------------------------------------------------------------------- Fair value of plan assets at January 1 1,452 1,424 -- -- Change in plan assets: Actual return on plan assets 213 (17) -- -- Acquisition -- 2 -- -- Company contributions 138 142 24 31 Participants' contributions -- -- 4 4 Benefits paid (119) (99) (28) (35) - -------------------------------------------------------------------------------- Fair value of plan assets at December 31 1,684 1,452 -- -- - -------------------------------------------------------------------------------- Funded status (198) (363) (313) (268) Unrecognized net actuarial loss 105 173 80 41 Unrecognized prior service cost (benefit) 20 39 (116) (132) - -------------------------------------------------------------------------------- Accrued benefit cost $ (73) $ (151) $ (349) $ (359) ================================================================================
62 The components of net periodic benefit costs are presented in the following table. Net Periodic Benefit Costs
Years ended December 31 (In millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Pension benefits Service cost $ 31 $ 64 $ 58 Interest cost on projected benefit obligation 131 129 126 Expected return on plan assets (120) (100) (97) Prior service cost amortization 3 6 10 Actuarial loss 1 8 4 Transition amount amortization -- -- (2) Curtailment loss 13 8 17 - -------------------------------------------------------------------------------- Net periodic benefit cost $ 59 $ 115 $ 116 ================================================================================ Postretirement benefits Service cost $ 7 $ 11 $ 11 Interest cost on projected benefit obligation 22 22 28 Prior service cost amortization (16) (13) (4) Actuarial loss 2 3 1 Curtailment loss -- -- 2 - -------------------------------------------------------------------------------- Net periodic benefit cost $ 15 $ 23 $ 38 ================================================================================
Actuarial assumptions are set forth in the following table. Actuarial Assumptions
December 31 2000 1999 1998 - ------------------------------------------------------------------------- Pension benefits Discount rate 7.50% 7.75% 6.75% Expected return on plan assets 7.75% 8.00% 7.00% Rate of compensation increases 5.83% 5.70% 5.70% Postretirement benefits Discount rate 7.50% 7.75% 6.75%
The assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation was 4% per year in 2000. The healthcare cost trend rate assumption has a significant effect on the amount of the benefit obligation and periodic cost reported. An increase in the assumed healthcare cost trend rate of 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 2000, by $12 million and the aggregate net periodic postretirement benefit cost for 2000 by $1 million. A decrease in the assumed healthcare cost trend rate of 1% in each year would decrease the accumulated postretirement benefit obligation as of December 31, 2000, by $11 million and the aggregate net periodic postretirement benefit cost for 2000, by $1 million. Savings Plans CNAF sponsors savings plans, which are generally contributory plans that allow most employees to contribute a maximum of 13% of their eligible compensation, subject to certain limitations prescribed by the Internal Revenue Service. The Company contributes matching amounts to participants, amounting to 70% of the first 6% of eligible compensation contributed by the employee. Employees vest in these contributions ratably over five years. Employees of RSKCoSM participating in the CNAF sponsored plan are able to contribute a maximum of 16% of their eligible compensation, subject to certain limitations prescribed by the Internal Revenue Service. RSKCoSM contributes matching amounts to participants, amounting to 50% of the first 6% of eligible compensation contributed by the employee. As noted above, during 2000, CCC employees were required to make a choice regarding their continued participation in CCC's defined benefit pension plan. Employees who elected to forego earning additional benefits in the defined benefit pension plan and all employees hired by CCC on or after January 1, 2000, receive a Company contribution of 3% or 5% of their eligible compensation, depending on their age. In addition, these employees are eligible to receive additional discretionary contributions of up to 2% of eligible compensation and an additional Company match of up to 80% of the first 6% of eligible compensation contributed by the employee. These contributions are made at the discretion of management and are contributed to participant accounts in the first quarter of the year following management's determination of the discretionary amounts. Employees fully vest in these contributions after five years of service. Contributions by the Company to the savings plans were $39 million, $29 million and $25 million in 2000, 1999 and 1998. Additionally, in 2000, CNA has accrued $12 million in discretionary contributions. This accrued discretionary contribution will be paid during 2001. Stock Options The Board of Directors approved the CNA Long-Term Incentive Plan (the LTI Plan) during 1999 and subsequently merged it with the CNA Financial Corporation Incentive Compensation Plan in February 2000. The LTI Plan authorizes the grant of options to certain management personnel for up to 2.0 million shares of the Company's common stock. All options granted have 10-year terms and vest ratably over the four-year period following the date of grant. The number of shares available for the granting of options under the LTI Plan as of December 31, 2000, was approximately 1.4 million. 63 The following table presents activity under the LTI Plan during 2000 and 1999. Option Plan Activity
2000 1999 - --------------------------------------------------------------------------- Weighted Weighted Average Average Option Option Number Price Number Price of Shares Per Share of Shares Per Share - -------------------------------------------------------------------------- Balance at January 1 291,300 $ 35.21 -- $ -- Options granted 318,300 32.15 294,900 35.21 Options exercised (3,300) 35.09 -- -- Options forfeited (53,025) 34.02 (3,600) 35.09 - -------------------------------------------------------------------------- Balance at December 31 553,275 $ 33.56 291,300 $ 35.21 ========================================================================== Options exercisable at December 31 63,575 $ 35.23 -- $ -- ========================================================================== Weighted average fair value per share of options granted $ 12.10 $ 11.82 ==========================================================================
The weighted average remaining contractual life of options outstanding was nine years, and the range of exercise prices on those options was $32.03 to $36.53. The fair value of granted options was estimated at the grant date using the Black-Scholes option-pricing model. The weighted average fair value of options granted during 2000 and 1999 was $3.9 million and $3.5 million. The following weighted average assumptions were used for the year ended December 31, 2000 and 1999: risk free interest rate of 6.2%; expected dividend yield of 0.0%; and expected option life of five years. The weighted average assumption for the expected stock price volatility was 29.2% and 22.9% for the years ended December 31, 2000 and 1999. CNA Surety has reserved shares of its common stock for issuance to directors, officers and employees of CNA Surety through incentive stock options, non-qualified stock options and stock appreciation rights under a separate plan (CNA Surety Plan). The CNA Surety Plan and the Replacement Plan have an aggregate number of 1.3 million shares available for which options may be granted. At December 31, 2000, approximately 1.5 million options were outstanding under these two plans. The Company follows the financial disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), with respect to its stock-based incentive plans. The Company applies Accounting Principal Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, in accounting for its plan, as permitted by SFAS 123. Accordingly, no compensation cost has been recognized for any of the aforementioned plans, as the exercise price of the granted options equaled the market price of the under lying stock at the grant date. However, had the Company applied the fair value provision of SFAS 123, the Company's net income, including the pro forma effect of the options issued under the CNA Surety Plan and the LTI Plan, for the year ended December 31, 2000, would have been $1,213 million, or net income per share of $6.60. For the year ended December 31, 1999, the net loss would have been a loss of $131 million, or a net loss per share of $0.78. NOTE J. LEASES CNA occupies office facilities under lease agreements that expire at various dates through 2014. 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 2005. Most leases contain renewal options that provide for rent increases based on prevailing market conditions. CNA has vacated certain owned and leased facilities in connection with its restructuring and other related activities (see Note N). These facilities have been leased or subleased under lease agreements that expire at various dates through 2014. Lease expense for the years ended December 31, 2000, 1999 and 1998 was $83 million, $81 million and $134 million. The table below presents the future minimum lease payments to be made under non-cancelable operating leases along with lease and sublease future minimum receipts to be received on owned and leased properties at December 31, 2000. Future Minimum Lease Payments and Receipts
Future Future Minimum Minimum Lease Lease (In millions) Payments Receipts - ----------------------------------------------------- 2001 $118 $ 49 2002 105 49 2003 89 50 2004 69 46 2005 58 44 Thereafter 192 253 - ------------------------------------------------------ Total $631 $491 - ------------------------------------------------------
NOTE K. STOCKHOLDERS' EQUITY AND STATUTORY FINANCIAL INFORMATION Capital stock (in whole numbers) is composed of the following. Summary of Capital Stock
December 31 2000 1999 - ------------------------------------------------------------------------- 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 Series F (stated value $100,000 per share) -- 750 Common stock, par value $2.50 Authorized 500,000,000 500,000,000 Issued 185,525,907 185,525,907 Outstanding 183,263,873 184,406,931 Treasury stock 2,262,034 1,118,976
During 2000, the Company redeemed all outstanding shares of its money market preferred stock, which amounted to $150 million, at its stated value of $100,000 per share plus accrued dividends. In 1999, the Company increased the number of authorized shares of common stock from 200,000,000 to 500,000,000. In 1998, CNA's Board of Directors approved the Share Repurchase Program to purchase, in the open market or through privately negotiated transactions, its outstanding common stock, as Company management deems appropriate. During 2000, CNA purchased 1,272,700 shares of its common stock for approximately $35 million. No shares were purchased during 1999. During 2000, 1999 and 1998, CNA sold 126,342 shares, 507,362 shares and 1,229,583 shares of common stock that were held in treasury to certain senior officers of CNA, at the average of the highest and lowest sale prices on the New York Stock Exchange composite transactions, for the dates of the sales. Each of these purchases by senior officers was financed by collateralized loans from CNA which, at origination, amounted to $4 million, $19 million and $44 million for the years ended December 31, 2000, 1999 and 1998. The loans are 10-year notes, which bear interest at the applicable federal rate for the month in which they originated, compounding semi-annually and due at maturity. The interest rates range from 5.23% to 6.14% as of December 31, 2000. On December 23, 1998, CNA issued 2,000 shares of Series G cumulative, exchangeable preferred stock to Loews for $200 million. On June 30, 1999, CNA repurchased the Series G preferred stock from Loews. Statutory Accounting Practices (Unaudited) CNA's insurance subsidiaries are domiciled in various jurisdictions. These subsidiaries prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the respective jurisdictions' insurance regulators. Prescribed statutory accounting practices are set forth in a variety of publications of the National Association of Insurance Commissioners (NAIC) as well as state laws, regulations and general administrative rules. The Company's insurance subsidiaries follow one significant permitted accounting practice related to discounting of certain non-tabular workers' compensation claims. The impact of this permitted practice was to increase statutory surplus by approximately $71 million, $95 million and $118 million at December 31, 2000, 1999 and 1998. This practice was followed by an acquired company, and CNA received permission to eliminate the effect of the permitted practice over a 10-year period. CNAF's ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from its subsidiaries. The payment of dividends to CNAF by its insurance subsidiaries without prior approval of the insurance department of each subsidiary's domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to pre-approval by the respective state insurance departments. In addition, by agreement with the New Hampshire Insurance Department, as well as certain other state insurance departments, dividend paying capacity for the Continental Insurance Company Pool is restricted to internal and external debt service requirements through September 2003 up to a maximum of $85 million annually, without the prior approval of the New Hampshire Insurance Department. As of December 31, 2000, approximately $881 million of dividend payments would not be subject to insurance department pre-approval. Combined statutory capital and surplus and net income (loss), determined in accordance with accounting practices prescribed or permitted by the regulations and statutes of various insurance regulators for the property-casualty and the life insurance subsidiaries, were as follows. Statutory Information
Statutory Capital and Surplus Statutory Net Income (Loss) ------------------------------- ---------------------------- December 31 Years Ended December 31 ------------------------------ ---------------------------- (In millions) 2000 1999 2000 1999 1998 - ------------------------------------------------------------------------------------ Property-casualty companies* $ 8,387 $ 8,679 $ 1,118 $ 361 $ 161 Life insurance companies 1,274 1,222 (47) 77 (57)
* Surplus includes equity of property-casualty companies' ownership in life insurance subsidiaries. 65 In March 1998, the NAIC adopted the Codification of Statutory Accounting Principles (Codification). Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, is effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. The states in which CNAF's insurance subsidiaries conduct business will require adoption of Codification (with certain modifications) for the preparation of statutory financial statements effective January 1, 2001. The Company estimates that the adoption of Codification, as modified, will increase statutory capital and surplus as of January 1, 2001 by approximately $77 million, which primarily relates to deferred tax assets offset by insurance related-assessments and pension liabilities. NOTE L. COMPREHENSIVE INCOME Comprehensive income is composed of all changes to stockholders' equity, except those changes resulting from transactions with stockholders in their capacity as stockholders. The components of comprehensive income are shown below. Comprehensive Income
Years ended December 31 (In millions) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 1,214 $ (130) $ 282 Other comprehensive income: Change in unrealized gains/losses on general account investments: Holding gains arising during the period 422 714 925 Less: unrealized gains at beginning of period included in realized gains during the period (924) (413) (207) - ----------------------------------------------------------------------------------------------------------------------- Net change in unrealized gains/losses on general account investments (502) 301 718 Net change in unrealized gains/losses on separate accounts and other 66 (59) 5 Foreign currency translation adjustment (28) (42) 7 Allocation to participating policyholders and minority interest (12) 24 (6) - ----------------------------------------------------------------------------------------------------------------------- Other comprehensive (loss) income, before tax (476) 224 724 Deferred income tax benefit (expense) related to other comprehensive income 161 (100) (249) Other comprehensive (loss) income, net of tax (315) 124 475 - ----------------------------------------------------------------------------------------------------------------------- Total comprehensive income (loss) $ 899 $ (6) $ 757 =======================================================================================================================
In the preceding table, deferred income tax expense related to other comprehensive income is attributable to each of the components of other comprehensive income in equal proportion except for the foreign currency translation adjustment, for which there are no deferred taxes. See Note B for a discussion of changes in the fair value of the Company's holdings of Global Crossing common stock. The following table displays the components of accumulated other comprehensive income included in the consolidated balance sheets. Accumulated Other Comprehensive Income
December 31 (In millions) 2000 1999 - ---------------------------------------------------------------------- Cumulative foreign currency translation adjustment $ 3 $ 31 Net unrealized gains on investments 870 1,157 - --------------------------------------------------------------------- Accumulated other comprehensive income $ 873 $1,188 =====================================================================
NOTE M. BUSINESS SEGMENTS CNA conducts its operations through seven operating segments: Agency Market Operations, Specialty Operations, CNA Re, Global Operations, Risk Management, Group Operations and Life Operations. In addition to these seven operating segments, certain other activities are reported in a Corporate and Other segment. These segments reflect the way CNA distributes its products to the marketplace, manages operations and makes business decisions. Agency Market Operations provides a broad range of property-casualty insurance products and services to small and middle market businesses. Specialty Operations provides a broad array of professional, financial and specialty property-casualty products and services. CNA Re offers primarily traditional property-casualty treaty reinsurance and also offers facultative and financial reinsurance. Global Operations provides commercial and contract marine, surety, warranty and specialty products and services to United States-based customers expanding overseas and foreign customers. Risk Management serves the casualty and property needs of large domestic commercial businesses, offering customized strategies to address the management of business risks. Group Operations offers a broad array of group life and health insurance products and services to employers, affinity groups, federal employees and other entities that purchase insurance as a group. Life Operations provides financial protection to individuals through a full product line of term life insurance, universal life insurance, long-term care insurance and annuities and provides retirement service products to institutions in the form of various investment products and administrative services. 66 Corporate and Other segment results consist of interest expense on corporate borrowings, eBusiness expenses, certain run-off insurance operations, asbestos claims related to Fibreboard Corporation, financial guarantee insurance contracts and certain non-insurance operations. The accounting policies of the segments are the same as those described in the summary of significant accounting polices. The Company manages its assets on a legal entity basis, while segment operations are conducted across legal entities, as such assets are not readily identifiable by individual segment. In addition, distinct investment portfolios are not maintained for each segment, and accordingly, allocation of assets to each segment is not performed. Therefore, investment income and realized investment gains/losses are allocated based on each segment's net carried insurance reserves, as adjusted. All significant intersegment income and expense have been eliminated. Risk Management's other revenues and expenses for 2000 and 1999 include revenues for services provided by RSKCoSM to other units within the Risk Management segment that are eliminated at the consolidated level. Such intrasegment revenues and expenses eliminated at the consolidated level were $159 million and $176 million for the years ended December 31, 2000 and 1999. Income taxes have been allocated on the basis of the taxable income of the segments. Approximately 8.2%, 7.6% and 5.0% of CNA's gross written premiums were derived from outside the United States for the years ended December 31, 2000, 1999 and 1998. The increases in foreign premiums were indicative of CNA's continued expansion overseas, which management attributes to its development of a greater awareness and working knowledge of international business to seize the opportunities of international economic growth. Gross written premiums from the United Kingdom were approximately 5.3%, 5.8% and 3.5% of CNA's premiums for the years ended December 31, 2000, 1999 and 1998. Gross written premiums from any individual foreign country, other than the United Kingdom, were not significant. Group Operations' revenues include $2.1 billion, $2.1 billion and $2.0 billion in 2000, 1999 and 1998 under contracts covering U.S. government employees and their dependents. Segment Results
Agency Risk Years ended December 31 Market Specialty Global Manage- Group Life (In millions) Operations Operations CNA Re Operations ment Operations Operations - ------------------------------------------------------------------------------------------------------------------------------ 2000 Net earned premiums $ 3,331 $ 799 $ 1,089 $ 1,089 $ 637 $ 3,675 $ 876 Claims, benefits and expenses 3,772 819 1,186 1,128 760 3,770 1,316 - ------------------------------------------------------------------------------------------------------------------------------ Underwriting loss (441) (20) (97) (39) (123) (95) (440) Net investment income 604 216 195 136 163 142 601 Other revenues 151 26 5 116 318 49 192 Other expenses 185 35 14 123 324 46 99 - ------------------------------------------------------------------------------------------------------------------------------ Pre-tax operating income (loss) 129 187 89 90 34 50 254 Income tax (expense) benefit (19) (56) (32) (24) (5) (14) (85) Minority interest -- -- -- (24) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Net operating income (loss) excluding realized investment gains 110 131 57 42 29 36 169 Realized investment gains, net of tax, participating policyholders' and minority interests 388 141 80 78 96 55 22 - ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 498 $ 272 $ 137 $ 120 $ 125 $ 91 $ 191 ============================================================================================================================== Years ended December 31 Corporate Elimi- (In millions) and Other nations Total - ---------------------------------------------------------------------------- 2000 Net earned premiums $ 24 $ (46) $ 11,474 Claims, benefits and expenses 164 (46) 12,869 - ---------------------------------------------------------------------------- Underwriting loss (140) -- (1,395) Net investment income 23 -- 2,080 Other revenues 55 (173) 739 Other expenses 282 (173) 935 - ---------------------------------------------------------------------------- Pre-tax operating income (loss) (344) -- 489 Income tax (expense) benefit 128 -- (107) Minority interest (4) -- (28) - ---------------------------------------------------------------------------- Net operating income (loss) excluding realized investment gains (220) -- 354 Realized investment gains, net of tax, participating policyholders' and minority interests -- -- 860 - ---------------------------------------------------------------------------- Net income (loss) $ (220) $ -- $ 1,214 ============================================================================ 67 Segment Results (continued) Agency Risk Years ended December 31 Market Specialty Global Manage- Group Life (In millions) Operations Operations CNA Re Operations ment Operations Operations - ------------------------------------------------------------------------------------------------------------------------------ 1999 Net earned premiums $ 4,799 $ 1,001 $ 1,176 $ 1,010 $ 801 $ 3,571 $ 936 Claims, benefits and expenses 5,791 1,166 1,369 1,037 936 3,706 1,323 Restructuring and other related charges 60 -- -- -- -- 5 -- - ------------------------------------------------------------------------------------------------------------------------------ Underwriting loss (1,052) (165) (193) (27) (135) (140) (387) Net investment income 686 235 161 132 154 130 556 Other revenues 80 19 (1) 120 316 40 123 Other expenses 77 30 (5) 100 307 46 76 Non-insurance restructuring and related charges -- -- -- -- 10 -- -- - ------------------------------------------------------------------------------------------------------------------------------ Pre-tax operating (loss) income (363) 59 (28) 125 18 (16) 216 Income tax benefit (expense) 162 (10) 15 (33) 1 10 (71) Minority interest -- -- -- (28) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Net operating (loss) income excluding realized investment gains (losses) (201) 49 (13) 64 19 (6) 145 Realized investment gains (losses), net of tax, participating policyholders' and minority interests 75 38 21 15 19 4 (31) Cumulative effect of a change in accounting principle, net of tax (93) (3) -- (3) (74) (2) (2) - ------------------------------------------------------------------------------------------------------------------------------ Net (loss) income $ (219) $ 84 $ 8 $ 76 $ (36) $ (4) $ 112 ============================================================================================================================== Years ended December 31 Corporate Elimi- (In millions) and Other nations Total - ---------------------------------------------------------------------------- 1999 Net earned premiums $ 35 $ (47) $ 13,282 Claims, benefits and expenses 214 (47) 15,495 Restructuring and other related charges -- -- 65 - ---------------------------------------------------------------------------- Underwriting loss (179) -- (2,278) Net investment income 47 -- 2,101 Other revenues 204 (196) 705 Other expenses 401 (196) 836 Non-insurance restructuring and related charges 8 -- 18 - ---------------------------------------------------------------------------- Pre-tax operating (loss) income (337) -- (326) Income tax benefit (expense) 137 -- 211 Minority interest (2) -- (30) - ---------------------------------------------------------------------------- Net operating (loss) income excluding realized investment gains (losses) (202) -- (145) Realized investment gains (losses), net of tax, participating policyholders' and minority interests 51 -- 192 Cumulative effect of a change in accounting principle, net of tax -- -- (177) - ---------------------------------------------------------------------------- Net (loss) income $ (151) $ -- $ (130) ============================================================================ Agency Risk Years ended December 31 Market Specialty Global Manage- Group Life (In millions) Operations Operations NA Re Operations ment Operations Operations - ----------------------------------------------------------------------------------------------------------------------------- 1998 Net earned premiums $ 5,247 $ 1,092 $ 944 $ 941 $ 823 $ 3,733 $ 823 Claims, benefits and expenses 6,050 1,251 1,005 991 1,018 3,903 1,210 Restructuring and other related charges 96 5 1 1 -- 39 3 - ----------------------------------------------------------------------------------------------------------------------------- Underwriting loss (899) (164) (62) (51) (195) (209) (390) Net investment income 744 245 163 110 144 133 525 Other revenues 48 27 5 82 230 24 115 Other expenses 52 44 11 80 227 31 83 Non-insurance restructuring and related charges -- -- -- -- 88 -- 4 - ----------------------------------------------------------------------------------------------------------------------------- Pre-tax operating (loss) income (159) 64 95 61 (136) (83) 163 Income tax benefit (expense) 105 (6) (27) (18) 48 35 (58) Minority interest -- -- -- (25) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net operating (loss) income excluding realized investment gains (54) 58 68 18 (88) (48) 105 Realized investment gains, net of tax, participating policyholders' and minority interests 171 57 27 17 31 29 82 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 117 $ 115 $ 95 $ 35 $ (57) $ (19) $ 187 ============================================================================================================================= Years ended December 31 Corporate Elimi- (In millions) and Other nations Total - ---------------------------------------------------------------------------- 1998 Net earned premiums $ (26) $ (41) $ 13,536 Claims, benefits and expenses 162 (41) 15,549 Restructuring and other related charges -- -- 145 - ---------------------------------------------------------------------------- Underwriting loss (188) -- (2,158) Net investment income 82 -- 2,146 Other revenues 284 (16) 799 Other expenses 506 (16) 1,018 Non-insurance restructuring and related charges 9 -- 101 - ---------------------------------------------------------------------------- Pre-tax operating (loss) income (337) -- (332) Income tax benefit (expense) 121 -- 200 Minority interest 5 -- (20) - ---------------------------------------------------------------------------- Net operating (loss) income excluding realized investment gains (211) -- (152) Realized investment gains, net of tax, participating policyholders' and minority interests 20 -- 434 - ---------------------------------------------------------------------------- Net income (loss) $ (191) $ -- $ 282 ============================================================================
68 NOTE N. RESTRUCTURING AND OTHER RELATED CHARGES The Company finalized and approved a restructuring plan (the Plan) in August 1998. In connection with the Plan, the Company incurred various expenses that were recorded in the third and fourth quarters of 1998 and throughout 1999. These restructuring and other related charges related primarily to the following activities: planned reductions in the workforce; the consolidation of certain processing centers; the exiting of certain businesses and office facilities; the termination of lease obligations; and the write-off of certain assets related to these activities. The Plan contemplated a gross reduction in workforce of 4,500 employees, resulting in a planned net reduction of approximately 2,400 employees. As of December 31, 1999, the Company had completed essentially all aspects of the Plan. The Company accrued $220 million of these restructuring and other related charges in the third quarter of 1998 (the Initial Accrual). Other charges, such as parallel processing costs, relocation costs and retention bonuses, did not qualify for accrual under GAAP and have been charged to expense as incurred (Period Costs). The Company incurred Period Costs of $83 million and $26 million during 1999 and the fourth quarter of 1998. The Company incurred restructuring and other related charges of $246 million in 1998 that were composed of the Initial Accrual and fourth quarter Period Costs, and which included the following: 1) costs and benefits related to planned employee terminations of $98 million, of which $53 million related to severance and outplacement costs, $24 million related to other employee transition related costs and $21 million related to benefit plan curtailment costs; 2) writedown of certain assets to their fair value of $74 million, of which $59 million related to a writedown of an intangible asset, and $15 million of abandoned leasehold improvements and other related fixed assets associated with leases that were terminated as part of the restructuring plan; 3) lease termination costs of $42 million; and 4) losses incurred on the exiting of certain businesses of $32 million. The 1998 restructuring and other related charges incurred by Agency Market Operations were approximately $96 million. These charges included employee severance and outplacement costs of $43 million related to the planned net reduction in the workforce of approximately 1,200 employees. Lease termination costs of approximately $29 million were incurred in connection with the consolidation of four regional offices into two zone offices and a reduction of the number of claim processing offices from 24 to eight. The Agency Market Operations charges also included benefit plan curtailment costs of $12 million, parallel-processing charges of $7 million and $5 million of fixed asset writedowns. Through December 31, 1998, approximately 364 Agency Market Operations employees, the majority of whom were loss adjusters and office support staff, had been released. The 1999 Period Costs incurred by Agency Market Operations were approximately $60 million. These charges included employee-related expenses (outplacement, retention bonuses and relocation costs) of $23 million, parallel processing costs of $16 million and consulting expenses of $10 million. Other charges, including technology and facility charges, were approximately $15 million. Additionally, Agency Market Operations reduced its estimate for lease termination cost by $4 million during 1999. During 1999, approximately 1,000 Agency Market Operations employees, the majority of whom were office support staff, were released. The 1998 restructuring and other related charges incurred by Risk Management were approximately $88 million. These charges included lease termination costs of approximately $8 million associated with the consolidation of claim offices in 36 market territories. In addition, employee severance and outplacement costs relating to the planned net reduction in workforce of approximately 200 employees were approximately $10 million, and the writedown of fixed and intangible assets was approximately $64 million. Parallel processing and other charges were approximately $6 million. Through December 31, 1998, approximately 152 Risk Management employees had been released, the majority of whom were claim adjusters and office support staff. The charges related to fixed and intangible assets were due primarily to a writedown of an intangible asset (goodwill) related to Alexsis, Inc., a wholly owned subsidiary acquired by the Company in 1995 that provided claims administration services for unrelated parties. As part of the Company's periodic reviews of asset recoverability and as a result of several adverse events, the Company concluded, based on an undiscounted cash flow analysis completed in the third quarter of 1998, that an impairment existed. Based on a discounted cash flow analysis, a $59 million write-off was necessary. The adverse events contributing to this conclusion included operating losses from the business, the loss of several significant customers whose business volume with this operation constituted a large portion of the revenue base and substantial changes in the overall market demand for the services offered by this operation, which, in turn, had negative effects on the prospects for achieving the profitability levels necessary to recover the intangible asset. 69 The 1999 Period Costs incurred by Risk Management were approximately $10 million. These charges included employee-related expenses of $3 million and parallel processing charges of $3 million. Other charges, including consulting and facility charges, were approximately $7 million. Additionally, Risk Management reduced its estimate for lease termination costs by $2 million and its estimate of employee severance costs by $1 million during 1999. During 1999, approximately 136 Risk Management employees were released, the majority of whom were claims adjusters and office support staff. The 1998 restructuring and other related charges incurred by Group Operations were approximately $39 million. These charges included approximately $29 million of costs related to the Company's decision to exit the Employer Health and Affinity lines of business. These costs represent the Company's estimate of losses in connection with fulfilling the remaining obligations under contracts. Earned premiums for these lines of business were approximately $400 million in 1998. The 1998 charges also included employee severance and outplacement costs of approximately $7 million related to the planned net reduction in workforce of approximately 400 employees. Charges for lease termination costs and fixed asset writedowns were $3 million. Through December 31, 1998, approximately 56 Group Operations employees had been released. The majority of the released employees were claims and sales support staff. The 1999 Period Costs incurred by Group Operations were approximately $5 million. These charges include $7 million of employee severance and related charges. Additionally, Group Operations reduced its estimate for business exit costs by $2 million during 1999. During 1999, approximately 300 Group Operations employees were released, the majority of whom were claims adjusters and sales support staff. For the other segments of the Company, restructuring and other related charges were approximately $23 million in 1998. Charges related primarily to the closing of leased facilities were $3 million, and employee severance and outplacement costs related to planned net reductions of 600 employees in the current workforce and benefit costs associated with those reductions were $13 million. In addition, there were charges of $4 million related to the writedown of certain assets and $3 million related to the exiting of certain businesses. Through December 31, 1998, approximately 270 employees of these other segments, most of whom were underwriters and office support staff, had been released. For the other segments of the Company, Period Costs were approximately $8 million for 1999. These charges were primarily for employee termination-related costs. Through December 31, 1999, approximately 600 employees of these other segments, most of whom were underwriters and office support staff, had been released. No restructuring-related charges related to the Plan were incurred during 2000; however, payments were made during 2000 related to amounts accrued under the Plan as of December 31, 1999. The following table sets forth the major categories of the restructuring accrual and changes therein during 1998, 1999 and 2000. Accrued Restructuring and Other Related Costs
Employee Termination Lease and Related Writedown Termination Business (In millions) Benefit Costs of Assets Costs Exit Costs Total - ------------------------------------------------------------------------------------------------------------------- Initial accrual $ 72 $ 74 $ 42 $ 32 $ 220 Payments charged against liability (14) -- -- -- (14) Costs that did not require cash (21) (74) -- -- (95) - ------------------------------------------------------------------------------------------------------------------- Accrued costs at December 31, 1998 37 -- 42 32 111 Payments charged against liability (32) -- (9) (15) (56) Change in estimated costs (1) -- (6) (2) (9) - ------------------------------------------------------------------------------------------------------------------- Accrued costs at December 31, 1999 4 -- 27 15 46 Payments charged against liability (4) -- (20) (15) (39) - ------------------------------------------------------------------------------------------------------------------- Accrued costs at December 31, 2000 $ -- $ -- $ 7 $ -- $ 7 ===================================================================================================================
70 NOTE O. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS Individual Life Reinsurance Transaction Effective December 31, 2000, CNA completed a transaction with Munich American Reassurance Company (MARC), whereby MARC acquired CNA's individual life reinsurance business (CNA Life Re) via an indemnity reinsurance agreement. CNA will continue to accept and retrocede business on existing CNA Life Re contracts until such time that CNA and MARC are able to execute novations of each of CNA Life Re's assumed and retroceded reinsurance contracts. MARC assumed approximately $294 million of liabilities (primarily future policy benefits and claim reserves) and approximately $209 million in assets (primarily uncollected premiums and deferred policy acquisition costs). The net gain from the reinsurance transaction, which is subject to certain post-closing adjustments, has been recorded as deferred revenue and will be recognized in income over the next 12 to 18 months as CNA Life Re's assumed contracts are novated to MARC. The CNA Life Re business contributed net earned premiums of $229 million, $194 million and $134 million, and pre-tax operating income of $33 million, $28 million and $12 million for the years ended December 31, 2000, 1999 and 1998. Personal Insurance Transaction On October 1, 1999, certain subsidiaries of CNA completed a transaction with Allstate, whereby CNA's personal lines insurance business and related employees were transferred to Allstate. Approximately $1.1 billion of cash and $1.1 billion of additional assets (primarily premium receivables and deferred policy acquisition costs) were transferred to Allstate, and Allstate assumed $2.2 billion of claim and claim adjustment expense reserves and unearned premium reserves. Additionally, CNA received $140 million in cash which consisted of 1) $120 million in ceding commission for the reinsurance of the CNA personal insurance business by Allstate and 2) $20 million for an option exercisable during 2002 to purchase 100% of the common stock of five CNA insurance subsidiaries at a price equal to GAAP carrying value as of the exercise date. Also, CNA invested $75 million in a 10-year equity-linked note issued by Allstate. CNA will continue to write new and renewal personal insurance policies and to reinsure this business with Allstate companies until such time as Allstate exercises its option to buy the five CNA subsidiaries. Prior to 2002, the Company will concentrate the direct writing of personal lines insurance business into the five optioned companies, such that most, if not all, business related to this transaction will be written by those companies by the date Allstate has the opportunity to exercise its option. CNA continues to have primary liability on policies reinsured by Allstate. CNA will continue to have an ongoing interest in the profitability of CNA's personal lines insurance business and the related successor business through an agreement licensing the "CNA Personal Insurance" trademark and a portion of CNA's Agency Market Operations distribution system to Allstate for use in Allstate's personal insurance agency business for a period of five years from the transaction date. Under this agreement, CNA will receive a royalty fee based on the business volume of personal insurance policies sold through the CNA agents for a period of six years. In addition, the $75 million equity-linked note will be redeemed on September 30, 2009 (subject to earlier redemption on stated contingencies) for an amount equal to the face amount plus or minus an amount not exceeding $10 million, depending on the underwriting profitability of the CNA Personal Insurance business. CNA also shares in any reserve development related to claim and claim adjustment expense reserves transferred to Allstate at the transaction date. Under the reserve development sharing agreement, 80% of any favorable or adverse reserve development up to $40 million and 90% of any favorable or adverse reserve development in excess of $40 million inures to CNA. CNA's obligation with respect to unallocated loss adjustment expense reserves was settled at the transaction date and is therefore not subject to the reserve sharing arrangement. The retroactive portion of the reinsurance transaction, consisting primarily of the cession of claim and claim adjustment expense reserves approximating $1.0 billion, was not recognized as reinsurance because the criteria for risk transfer were not met for this portion of the transaction. The related consideration paid was recorded as a deposit and is included in reinsurance receivables in the consolidated balance sheets. The prospective portion of the transaction, which as of the transaction date consisted primarily of the cession of $1.1 billion of unearned premium reserves, has been recorded as reinsurance. The related consideration paid was recorded as prepaid reinsurance premiums. Premiums ceded after the transaction date will follow this same treatment. The $20 million received from Allstate for the option to purchase the five CNA subsidiaries was deferred and will not be recognized until Allstate exercises its option or the option expires. CNA recognized an after-tax realized loss of approximately $39 million in 1999 related to the transaction, consisting primarily of the accrual of lease obligations and the write-down of assets that related specifically to the Personal Insurance lines of business. The $120 million ceding commission related to the prospective portion of the transaction has been recognized in proportion to the recognition of the unearned premium reserves to which it relates. Ceding commission earned was $69 million and $51 million in 2000 and 1999. Royalty fees earned in 2000 and 1999 were approximately $27 million and $7 million. 71 The Personal Insurance lines transferred to Allstate contributed net earned premiums of $1,354 million and $1,622 million and pre-tax operating income of $89 million and $97 million for the years ended December 31, 1999 and 1998. Sale of AMS Services, Inc. On November 30, 1999, CNA sold the majority of its interest in AMS Services, Inc. (AMS), a software development company serving the insurance agency market. Prior to the sale, CNA owned 89% of AMS and consolidated AMS in its financial statements. As a result of the sale, CNA owns 9% of AMS and therefore AMS is no longer consolidated. CNA recognized an after-tax gain of $21 million on the sale. Total assets of AMS as of the sale date were approximately $135 million. CNA's share of the AMS operating results were $206 million and $264 million of operating revenue and $8 million and $28 million of operating losses for the 11 months ended November 30, 1999 and the year ended December 31, 1998. NOTE P. QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables set forth unaudited quarterly financial data for the years ended December 31, 2000 and 1999. Quarterly Financial Data (Unaudited)
(In millions, except per share data) First Second Third Fourth Year - ----------------------------------------------------------------------------------------------------------------------------------- 2000 Quarters Revenues $ 3,509 $ 3,855 $ 4,337 $ 3,913 $ 15,614 =================================================================================================================================== Net operating income excluding realized investment gains $ 84 $ 88 $ 90 $ 92 $ 354 Net realized investment gains 57 242 460 101 860 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 141 $ 330 $ 550 $ 193 $ 1,214 Basic and diluted earnings per share $ 0.76 $ 1.80 $ 3.00 $ 1.06 $ 6.61 =================================================================================================================================== 1999 Quarters Revenues $ 4,347 $ 4,347 $ 4,001 $ 3,708 $ 16,403 =================================================================================================================================== Net operating income (loss) excluding realized investment gains (losses) $ 28 $ 45 $ 82 $ (300) $ (145) Net realized investment gains (losses) 144 109 (53) (8) 192 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) before cumulative effect of a change in accounting principle 172 154 29 (308) 47 Cumulative effect of a change in accounting principle, net of tax (177) -- -- -- (177) - ----------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (5) $ 154 $ 29 $ (308) $ (130) =================================================================================================================================== Basic and diluted (loss) earnings per share $ (0.05) $ 0.82 $ 0.15 $ (1.68) $ (0.77)
NOTE Q. RELATED PARTY TRANSACTIONS CNA reimburses Loews, or pays directly, for management fees, travel and related expenses and expenses of investment facilities and services provided to CNA. These amounts were approximately $14 million, $13 million and $13 million in 2000, 1999 and 1998. CNA and its eligible subsidiaries are included in the consolidated federal income tax return of Loews and its eligible subsidiaries. See Note D for a detailed description of the income tax agreement and tax payments made between the Company and Loews. CNA writes, at standard rates, a limited amount of insurance for Loews and its affiliates. The total premiums from Loews and its affiliates were $5 million for both 2000 and 1999 and $6 million in 1998. CNA assumes the risk for a limited amount of insurance from R.V.I. Guaranty Company, Inc. (RVI), an affiliate. CNA assumed approximately $12 million and $5 million in written premiums from RVI during 2000 and 1999. CNA sponsors a stock ownership plan whereby the Company finances the purchase of Company stock by certain executive officers. See Note K for a detailed discussion of this plan. 72 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Stockholders of 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, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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 the 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for liabilities for insurance-related assessments in 1999. DELOITTE & TOUCHE LLP Chicago, Illinois February 14, 2001 73 DIRECTORS AND OFFICERS - -------------------------------------------------------------------------------- DIRECTORS Antoinette Cook Bush o + @ # Executive Vice President Northpoint Technology Ltd. Dennis H. Chookaszian + @ Board of Directors mPower Advisors, LLC Ronald L. Gallatin o + @ # Independent Consultant Robert P. Gwinn(1) o + @ # Retired Chairman and Chief Executive Officer Encyclopaedia Britannica Walter L. Harris o + @ President and Chief Executive Officer Tanenbaum-Harber Co., Inc. Bernard L. Hengesbaugh + @ Chairman and Chief Executive Officer CNA insurance companies Walter F. Mondale(1) o + @ Partner Dorsey & Whitney LLP Edward J. Noha + @ Chairman of the Board CNA Financial Corporation Joseph Rosenberg + @ Senior Investment Strategist Loews Corporation James S. Tisch + @ President and Chief Executive Officer Loews Corporation Laurence A. Tisch + @ Chief Executive Officer CNA Financial Corporation Co-Chairman of the Board Loews Corporation Preston R. Tisch + @ Co-Chairman of the Board Loews Corporation Marvin Zonis o + @ # Professor of International Political Economy University of Chicago Graduate School of Business Committees of the Board: o Audit + Executive @ Finance # Incentive Compensation Red symbol indicates committee chairperson OFFICERS Laurence A. Tisch Chief Executive Officer CNA Financial Corporation Bernard L. Hengesbaugh Chairman and Chief Executive Officer CNA insurance companies Robert V. Deutsch Senior Vice President and Chief Financial Officer CNA Financial Corporation (1) Retirement to be effective May 2001. (2) Retired effective February 28, 2001. Jonathan D. Kantor Senior Vice President, General Counsel and Secretary CNA Financial Corporation Thomas F. Taylor(2) Executive Vice President CNA insurance companies 74 COMPANY INFORMATION - -------------------------------------------------------------------------------- COMPANY HEADQUARTERS CNA Financial Corporation CNA Plaza 333 South Wabash Avenue Chicago, IL 60685 312-822-5000 www.cna.com STOCKHOLDER INFORMATION CNA's common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange, and is traded on the Philadelphia Stock Exchange. Its trading symbol is CNA. SHARES OUTSTANDING As of March 8, 2001, CNA had 183,264,248 shares of common stock outstanding. Approximately 87 percent of CNA's outstanding common stock is owned by Loews Corporation. CNA had 2,540 stockholders of record at March 8, 2001. COMMON STOCK INFORMATION The table below shows 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 necessary to support business growth in an increasingly competitive environment for CNA's insurance subsidiaries. CNA's ability to pay dividends is influenced, in part, by dividend restrictions of its principal operating insurance subsidiaries as described in Note K to the Consolidated Financial Statements. ANNUAL MEETING The Annual Meeting of Stockholders will be held at 10:00 a.m. Central time on Wednesday, May 2, 2001 in Room 207N, CNA Plaza, 333 South Wabash Avenue, Chicago, Illinois. Shareholders unable to attend are requested to exercise their right to vote by proxy. Proxy materials 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: Jonathan D. Kantor Senior Vice President, General Counsel and Secretary CNA Financial Corporation CNA Plaza, 43 South Chicago, IL 60685 INDEPENDENT AUDITORS Deloitte & Touche LLP 180 North Stetson Avenue Chicago, IL 60601 INVESTOR RELATIONS Donald P. Lofe, Jr. Group Vice President, Corporate Finance CNA Financial Corporation CNA Plaza, 22 South Chicago, IL 60685 312-822-3993 TRANSFER AGENT AND REGISTRAR First Chicago Trust Company of New York c/o EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 Telephone Inside the United States 1-800-446-2617 Outside the United States 1-201-324-0498 TDD/TTY for hearing impaired 1-201-222-4955 (Operators are available Monday - Friday, 8:30 a.m. to 7:00 p.m. Eastern time. An interactive automated system is available around the clock every day.) Internet www.equiserve.com Certificate transfers by mail EquiServe P.O. Box 2589 Jersey City, NJ 07303-2506 Certificate transfers by private courier EquiServe Transfer Department 525 Washington Boulevard Jersey City, NJ 07310 Certificate transfers by messenger EquiServe c/o Securities Transfer and Reporting Service, Inc. 100 William Street, Galleria New York, NY 10038 COMMON STOCK INFORMATION 2000 Quarter High Low Fourth 40 1/16 32 1/16 Third 41 15/16 34 3/8 Second 36 15/16 27 1/8 First 39 1/8 24 9/16 1999 Quarter High Low Fourth 42 1/8 33 15/16 Third 41 1/4 34 5/16 Second 45 5/16 35 1/16 First 41 33 EX-21.1 5 d25096_ex21-1.txt PRIMARY SUBSIDIARIES OF CNAF EXHIBIT 21.1 PRIMARY SUBSIDIARIES OF CNAF PLACE OF COMPANY INCORPORATION - ------- ------------- American Casualty Company of Reading, Pennsylvania Pennsylvania Boston Old Colony Insurance Company Massachusetts CNA Casualty of California California CNA Lloyd's of Texas Texas CNA Reinsurance Company, Ltd. United Kingdom CNA Surety Corporation Delaware Columbia Casualty Company Illinois Commercial Insurance Company of Newark, New Jersey New Jersey Continental Assurance Company Illinois Continental Casualty Company Illinois Continental Reinsurance Corporation California Firemen's Insurance Company of Newark, New Jersey New Jersey First Insurance Company of Hawaii, Ltd. Hawaii Kansas City Fire & Marine Insurance Company Missouri National Fire Insurance Company of Hartford Connecticut National-Ben Franklin Insurance Company of Illinois Illinois Niagara Fire Insurance Company Delaware EXHIBIT 21.1 (continued) PLACE OF COMPANY INCORPORATION - ------- ------------- Pacific Insurance Company California RSKCo, Claim Services, Inc. Illinois The Buckeye Union Insurance Company Ohio The Continental Insurance Company New Hampshire The Continental Insurance Company of New Jersey New Jersey The Continental Corporation New York The Fidelity & Casualty Company of New York New Hampshire The Glens Falls Insurance Company Delaware The Mayflower Insurance Company Ltd. Indiana Transcontinental Insurance Company New York Transportation Insurance Company Illinois Valley Forge Insurance Company Pennsylvania Valley Forge Life Insurance Company Pennsylvania All other subsidiaries, when aggregated, are not considered significant. EX-23.1 6 d25096_ex23-1.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-69741 and 333-84447 of CNA Financial Corporation and subsidiaries on Forms S-3 and S-8, respectively, of our reports dated February 14, 2001 (which expresses an unqualified opinion and includes an explanatory paragraph as to an accounting change), 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, 2000. DELOITTE & TOUCHE LLP Chicago, Illinois March 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----