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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1996 Commission File Number 1-5823
------------------------------
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-6169860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA PLAZA
CHICAGO, ILLINOIS 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------- -------------------------
Common Stock New York Stock Exchange
with a par value Chicago Stock Exchange
of $2.50 per share Pacific Stock Exchange
-----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No....
As of March 3, 1997, 61,798,262 shares of common stock were outstanding and
the aggregate market value of the common stock of CNA Financial Corporation held
by non-affiliates was approximately $1,077 million.
DOCUMENTS INCORPORATED
BY REFERENCE:
Portions of the CNA Financial Corporation 1996 Annual Report to
Shareholders are incorporated by reference into Parts I and II of this Report.
Portions of the CNA Financial Corporation Proxy Statement prepared for the
1997 annual meeting of shareholders, pursuant to Regulation 14A, are
incorporated by reference into Part III of this Report.
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<PAGE>
CNA FINANCIAL CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1996
Item Page
Number PART I Number
- ------ ------
1 Business............................................. 3
2 Properties........................................... 13
3 Legal Proceedings.................................... 14
4 Submission of Matters to a Vote of Security Holders.. 14
PART II
5 Market for the Registrant's Common Stock and
Related Stockholder Matters........................... 17
6 Selected Financial Data.............................. 17
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 17
8 Financial Statements and Supplementary Data........... 17
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 17
PART III
10 Directors and Executive Officers of the Registrant..... 18
11 Executive Compensation................................. 18
12 Security Ownership of Certain Beneficial Owners and
Management............................................. 18
13 Certain Relationships and Related Transactions......... 18
PART IV
14 Financial Statements, Schedules, Exhibits and Reports
on Form 8-K............................................ 18
2
<PAGE>
PART I
ITEM 1. BUSINESS
CNA Financial Corportion ("CNA") was incorporated in 1967 as the parent
company of Continental Casualty Company ("CCC"), incorporated in 1897, and
Continental Assurance Company ("CAC") incorporated in 1911. In 1975, CAC became
a wholly-owned subsidiary of CCC. On May 10, 1995, CNA acquired all the
outstanding common stock of The Continental Corporation ("Continental") and it
became a wholly owned subsidiary of CNA. The Continental Corporation, a New York
corporation incorporated in 1968, is an insurance holding company. Its principal
subsidiary, The Continental Insurance Company ("CIC") was organized in 1853. The
principal business of Continental is the ownership of a group of property and
casualty insurance companies.
CNA's property and casualty insurance operations are conducted by CCC and
its property and casualty insurance affiliates and CIC and its property and
casualty insurance affiliates. Life insurance operations are conducted by CAC
and its life insurance affiliates. CNA's principal business is insurance
conducted through its insurance subsidiaries. As multiple-line insurers, the
insurance companies underwrite property, casualty, life and accident and health
coverages, as well as pension products and annuities. Their principal market for
insurance products is the United States.
COMPETITION
All aspects of the insurance business are highly competitive. CNA's
insurance operations compete with a large number of stock and mutual insurance
companies and other entities for both producers and customers and must
continuously allocate resources to refine and improve insurance products and
services.
There are approximately 3,300 companies that sell property/casualty
insurance in the United States, approximately 900 of which operate in all or
most states. CNA's consolidated property/casualty subsidiaries (including CIC
for the full year of 1995) would have been ranked as the third largest
property/casualty insurance organization in 1995 based upon statutory net
written premium.
There are approximately 1,770 companies selling life insurance (including
accident and health insurance and pension products and annuities) in the United
States. CAC is ranked as the twenty-second largest life insurance organization
based on 1995 consolidated statutory premium volume.
DIVIDENDS BY INSURANCE SUBSIDIARIES
The payment of dividends to CNA by its insurance affiliates without prior
approval of the affiliate's domiciliary state insurance commissioners is limited
to amounts determined by formula in accordance with the accounting practices
prescribed or permitted by the state's insurance department. This formula varies
by state. The formula for the majority of the states is the greater of 10% of
prior year statutory surplus or prior year statutory net income, less the
aggregate of all dividends paid during the twelve months prior to date of
payment. Some states, however, have an additional stipulation that dividends
can't exceed prior year surplus. Based upon the various state formulas,
approximately $941 million in dividends can be paid to CNA by its insurance
affiliates in 1997 without prior approval. All dividends must be reported to the
domiciliary insurance department prior to declaration and payment.
3
<PAGE>
REGULATION
The insurance industry is subject to comprehensive and detailed regulation
and supervision throughout the United States. Each state has established
supervisory agencies with broad administrative power relative to licensing
insurers and agents, approving policy forms, establishing reserve requirements,
fixing minimum interest rates for accumulation of surrender values and maximum
interest rates of policy loans, prescribing the form and content of statutory
financial reports, regulating solvency and the type and amount of investments
permitted. Regulatory powers also extend to premium rate regulations which
require that rates not be excessive, inadequate or unfairly discriminatory. In
addition to regulation of dividends by insurance subsidiaries discussed above,
intercompany transfers of assets may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial position of the insurance affiliates making the transfer.
Insurers are also required by the states to provide coverage to insureds
who would not otherwise be considered eligible by the insurers. Each state
dictates the types of insurance and the level of coverage which must be provided
to such involuntary risks. CNA's insurance subsidiaries' share of these
involuntary risks is mandatory and generally a function of its respective share
of the voluntary market by line of insurance in each state.
After failing to enact the massive health reform introduced in 1994,
Congress passed a health insurance reform bill in August of 1996 and the
President signed it into law (P.L. 104-191) on August 21, 1996. The new law does
little for Americans without health insurance but it will protect those who have
health insurance from losing it. The 105th Congress is expected to consider
additional incremental health care reform as it attempts to provide greater
access and affordability to Americans. Among the bills that have been introduced
this year are measures that would allow small businesses to band together to
form association health plans to buy insurance; bar the use of clauses
restricting what doctors can tell patients about treatment options; restructure
the Medicare program; subsidize health insurance for uninsured children; and
limit or prohibit underwriting on the basis of genetic information. We cannot
predict if any of these proposals will be enacted or the extent to which they
may affect the insurance industry.
Last year, a moderate product liability bill was vetoed and Congress was
not able to override the veto. This year, a similar product liability reform
bill was introduced in the Senate. The bill contains many of the provisions of
the vetoed bill and thus, one cannot predict if any reform will be adopted.
Although federal standards would create more uniform laws, tort reform
supporters still look primarily to the states for passage of reform measures.
Over the last decade, many states have passed some type of reform, but more
recently, state courts have modified or overturned approximately 38% of these
reforms. Additionally, new causes of action and theories of damages are more
frequently proposed in state courts or legislatures. Continued unpredicability
in the law means that insurance underwriting and rating is difficult in
commercial lines, professional liability and some specialty coverages.
Environmental clean-up remains the subject of both federal and state
regulation. Last year Congress and the Clinton Administration failed to reach an
agreement on efforts to overhaul the federal Superfund hazardous waste program.
The legislative stalemate was the result of a failure by Superfund stakeholders
and Congress to reach a compromise on clean-up standards, the repeal of
retroactive liability and how to finance future clean-up costs. In the new
Congress, Superfund reform has been listed as one of the legislative priorities.
At this time we cannot predict if any reform will be enacted. By some estimates,
there are thousands of potential waste sites subject to clean-up. The insurance
industry is involved in extensive litigation regarding coverage issues
concerning clean up of hazardous waste. Judicial interpretations in many cases
have expanded the scope of coverage and liability beyond the original intent of
the policies. See Note E of the Consolidated Financial Statements of the 1996
Annual Report to Shareholders for further discussion.
4
<PAGE>
REGULATION --(CONTINUED)
In recent years, increased scrutiny of state regulated insurer solvency
requirements by certain members of the U.S. Congress, resulted in the National
Association of Insurance Commissioners developing industry minimum Risk-Based
Capital (RBC) requirements, establishing a formal state accreditation process
designed to more closely regulate for solvency, minimize the diversity of
approved statutory accounting and actuarial practices and increasing the annual
statutory statement disclosure requirements.
The RBC formulas are designed to identify an insurer's minimum capital
requirements based upon the inherent risks (e.g., asset default, credit and
underwriting) of its operations. In addition to the minimum capital
requirements, the RBC formula and related regulations identify various levels of
capital adequacy and corresponding actions that the state insurance departments
should initiate. The level of capital adequacy below which insurance departments
would take action is defined as the Company Action Level. As of December 31,
1996, all of CNA's property/casualty and life insurance affiliates have adjusted
capital amounts in excess of Company Action Levels.
REINSURANCE
Information as to CNA's reinsurance business is set forth in Note G of the
Consolidated Financial Statements of the 1996 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
EMPLOYEE RELATIONS
CNA has approximately 24,300 full-time equivalent employees and has
experienced satisfactory labor relations. CNA has never had work stoppages due
to labor disputes.
CNA has comprehensive benefit plans for substantially all of its employees,
including retirement plans, savings plans, disability programs, group life
programs and group health care programs.
BUSINESS SEGMENTS
Information as to CNA's business segments is set forth in Note M of the
Consolidated Financial Statements of the 1996 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
5
<PAGE>
PROPERTY/CASUALTY BUSINESS
CNA's property/casualty operations market commercial and personal lines of
property/casualty insurance through independent agents and brokers.
Commercial lines customers include large national corporations, small and
medium-sized businesses, groups and associations and professionals. Coverages
are written primarily through traditional insurance contracts under which risk
is transferred to the insurer. Many large commercial account policies are
written under retrospectively-rated contracts which are experience-rated.
Premiums for such contracts may be adjusted, subject to limitations set by
contract, based on loss experience of the insureds. Other experience-rated
policies include provisions for dividends based on loss experience.
Experience-rated contracts reduce but do not eliminate risk to the insurer.
Commercial business includes such lines as workers' compensation, general
liability and commercial automobile, professional and specialty, multiple peril
and accident and health coverages as well as reinsurance. Professional and
specialty coverages include liability coverage for architects and engineers,
lawyers, accountants, medical and dental professionals; directors and officers
liability; and other specialized coverages. The major components of CNA's
commercial business are professional and specialty coverages, general liability
and commercial automobile and workers' compensation which accounted for 18%, 17%
and 17%, respectively, of 1996 premiums earned.
The property/casualty group markets personal lines of insurance, primarily
automobile and homeowners' coverages sold to individuals under monoline and
package policies.
CNA is required by the various states in which it does business to provide
coverage for risks that would not otherwise be considered under CNA's
underwriting standards. CNA's share of involuntary risks is mandatory and
generally a function of its share of the voluntary market by line of insurance
in each state. Premiums for involuntary risks result from mandatory
participation in residual markets. Property/casualty involuntary risks include
mandatory participation in residual markets, statutory assessments for
insolvencies of other insurers and other charges.
CNA also provides loss control, policy administration and claim
administration services under service contracts for fees. Such services are
provided primarily in the workers' compensation market, where retention of more
risk by the employer through self-insurance or high-deductible programs has
become increasingly prevalent.
6
<PAGE>
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
<TABLE>
<CAPTION>
The following table sets forth supplemental data on a GAAP basis, except
where indicated, for the property/casualty business:
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995(a) 1994 1993 1992
(In millions of dollars)
- ---------------------------------------------------------------------------------------------------------------
Commercial Premiums Earned
<S> <C> <C> <C> <C> <C>
Professional and specialty............... $ 1,844.9 $ 1,557.7 $ 1,010.1 $ 798.9 $ 741.5
General liability and commercial automobile 1,754.1 1,648.9 1,261.1 1,154.5 1,176.0
Workers' compensation.................... 1,542.5 1,475.8 1,426.3 1,501.5 1,669.2
Multiple peril.......................... 1,046.9 869.9 389.0 368.5 374.9
Accident and health..................... 919.0 699.1 557.1 428.3 352.6
Reinsurance and other.................... 1,188.9 973.9 773.5 712.2 556.0
--------- --------- --------- ---------- ---------
$ 8,296.3 $ 7,225.3 $ 5,417.1 $ 4,963.9 $ 4,870.2
========= ========= ========= ========== =========
Personal Premiums Earned
Personal lines packages.................. $ 1,063.3 $ 781.6 $ 562.6 $ 510.7 $ 447.3
Monoline automobile and property coverages 366.5 325.4 314.2 343.5 395.0
Accident and health...................... 168.9 107.8 88.9 85.6 88.6
--------- ---------- --------- ---------- ---------
$ 1,598.7 $ 1,214.8 $ 965.7 $ 939.8 $ 930.9
========= ========== ========= ========== =========
Involuntary Risks Premiums Earned (b)
Workers' compensation.................... $ 135.6 $ 178.2 $ 350.0 $ 292.3 $ 451.4
Private passenger automobile............. 57.9 79.7 46.4 23.2 52.5
Commercial automobile.................... 36.4 19.9 54.3 50.3 44.9
Property and multiple peril.............. 2.2 5.9 5.0 5.5 3.7
--------- ---------- --------- --------- ---------
$ 232.1 $ 283.7 $ 455.7 $ 371.3 $ 552.5
========= ========== ========= ========= =========
Net Investment Income and Other Income
Commercial............................... $ 1,943.3 $ 1,713.1 $ 1,145.1 $ 979.8 $ 1,087.3
Personal................................. 353.0 230.4 177.6 156.1 165.3
Involuntary risks........................ 93.4 104.3 88.1 75.7 83.6
--------- ---------- --------- --------- ---------
$ 2,389.7 $ 2,047.8 $ 1,410.8 $ 1,211.6 $ 1,336.2
========= ========== ========= ========= =========
Underwriting (Loss)
Commercial............................... $ (853.1) $ (920.8) $ (945.7) $(1,535.6) $(2,505.9)
Personal................................ (183.8) (101.9) (185.2) (99.7) (152.8)
Involuntary risks........................ (106.3) (98.8) (70.3) (156.5) (340.9)
---------- ---------- ---------- ---------- ----------
$(1,143.2) $(1,121.5) $(1,201.2) $(1,791.8) $(2,999.6)
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995(a) 1994 1993 1992
(In millions of dollars)
- ---------------------------------------------------------------------------------------------------------------
Trade Ratios (c)
<S> <C> <C> <C> <C> <C>
Loss ratio............................... 76.4% 77.9% 81.9% 96.2% 116.7%
Expense ratio........................... 30.9 29.4 28.3 27.2 26.2
Combined ratio (before policyholder
dividends)............................... 107.3 107.3 110.2 123.4 142.9
Policyholder dividend ratio.............. 1.6 3.0 4.8 3.9 1.9
Trade Ratios - Statutory basis (c)
Loss ratio............................... 76.8% 78.6% 82.2% 96.4% 116.3%
Expense ratio............................ 31.6 29.2 27.8 27.1 25.6
Combined ratio (before policyholder
dividends)............................... 108.4 107.8 110.0 123.5 141.9
Policyholder dividend ratio.............. 1.4 2.1 3.8 3.1 2.4
Other Data - Statutory basis (d)
Capital and surplus...................... $6,348.8 $5,695.9 $3,367.3 $3,598.4 $3,135.8
Written to surplus ratio................. 1.6 1.7 2.0 1.7 2.0
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Premium earned, net investment income and underwriting loss includes
the results of The Continental Corporation since May 10, 1995.
(b) Property/casualty involuntary risks include mandatory participation in
residual markets, statutory assessments for insolvencies of other
insurers and other involuntary charges.
7
<PAGE>
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
(c) GAAP trade ratios reflect the results of Continental Casualty Company
and its property/casualty insurance subsidiaries for the entire year,
along with the results of The Continental Insurance Company and its
property/casualty insurance subsidiaries since May 10, 1995. Statutory
trade ratios reflect the results of Continental Casualty Company and
its property/casualty insurance subsidiaries and The Continental
Insurance Company and its property/casualty insurance subsidiaries
since January 1, 1995. Prior year ratios have not been restated to
include Continental. Trade ratios are industry measures of
property/casualty underwriting results. The loss ratio is the
percentage of incurred claim and claim adjustment expenses to premiums
earned. Under generally accepted accounting principles, the expense
ratio is the percentage of underwriting expenses, including the change
in deferred acquisition costs, to premiums earned. Under statutory
accounting principles, the expense ratio is the percentage of
underwriting expenses (with no deferral of acquisition costs) to
premiums written. The combined ratio is the sum of the loss and expense
ratios. The policyholder dividend ratio is the ratio of dividends
incurred to premiums earned.
(d) Other Data is determined on the statutory basis of accounting and
reflects a capital contribution from CNA of $475 million in 1993. In
addition, dividends of $545 million, $325 million, $175 million, $150
million and $100 million were paid to CNA by Continental Casualty
Company in 1996, 1995, 1994, 1993 and 1992, respectively.
Property/casualty insurance subsidiaries have received, or will
receive, reimbursement from CNA for general management and
administrative expenses, unallocated loss adjustment expenses and
investment expenses of $194.6, $197.0, $169.6, $167.5, and $141.1
million in 1996, 1995, 1994, 1993 and 1992, respectively.
The following table displays the distribution of gross written premium:
------------------------------------------------------------------------
Gross Written Premium % of Total
---------------------
Year Ended December 31 1996 1995 1994
------------------------------------------------------------------------
New York..................................... 9.3 10.3 8.6
California................................... 8.5 9.7 11.4
Texas........................................ 6.0 6.5 6.5
Illinois..................................... 5.3 5.2 4.9
Pennsylvania................................. 4.9 5.4 5.7
Florida...................................... 4.2 4.1 4.6
New Jersey................................... 4.1 4.6 3.2
All other states, countries or political
subdivisions (a)............................. 46.8 44.4 43.2
Reinsurance assumed:
Voluntary.................................. 9.1 7.8 5.9
Involuntary................................ 1.8 2.0 6.0
------ ------- ------
100.0 100.0 100.0
========================================================================
(a) No other state, country or political subdivision accounts for more
than 3.0% of gross written premium.
8
<PAGE>
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES
The loss reserve development table below illustrates the change over time of
reserves established for property/casualty claims and claims expense at the end
of various calendar years. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down, shows
the cumulative amounts paid as of the end of successive years with respect to
that reserve liability. The third section, reading down, shows re-estimates of
the original recorded reserve as of the end of each successive year which is the
result of CNA's expanded awareness of additional facts and circumstances that
pertain to the unsettled claims. The last section compares the latest
re-estimated reserve to the reserve originally established, and indicates
whether or not the original reserve was adequate or inadequate to cover the
estimated costs of unsettled claims.
<PAGE>
The loss reserve development table is cumulative and, therefore, ending
balances should not be added since the amount at the end of each calendar year
includes activity for both the current and prior years.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Schedule of
Property/Casualty
Loss Reserve
Development
Calendar Year Ended 1986(a) 1987(a) 1988(a)1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996
(In millions of
dollars)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves
for unpaid
claim and claim
expenses................$ -- $ -- $ -- $ -- $16,530 $17,712 $20,034 $20,812 $21,639 $31,044 $29,830
Ceded recoverable....... -- -- -- -- 3,440 3,297 2,867 2,491 2,705 6,089 6,095
----- ----- ----- ----- ------- ------- ------- ------- ------- ------- -------
Net reserves
for unpaid
claim and claim
expenses................ 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735
------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------
NET PAID
(CUMULATIVE) AS OF:
One year later.......... 1,335 1,763 2,040 2,670 3,285 3,411 3,706 3,629 3,656 6,510 --
Two years later......... 2,383 2,961 3,622 4,724 5,623 6,024 6,354 6,143 7,087 -- --
Three years later....... 3,197 4,031 4,977 6,294 7,490 7,946 8,121 8,764 -- -- --
Four years later........ 3,963 5,007 6,078 7,534 8,845 9,218 10,241 -- -- -- --
Five years later........ 4,736 5,801 6,960 8,485 9,726 10,950 -- -- -- -- --
Six years later......... 5,339 6,476 7,682 9,108 11,207 -- -- -- -- -- --
Seven years later....... 5,880 7,061 8,142 10,393 -- -- -- -- -- -- --
Eight years later....... 6,382 7,426 9,303 -- -- -- -- -- -- -- --
Nine years later........ 6,690 8,522 -- -- -- -- -- -- -- -- --
Ten years later......... 7,738 -- -- -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Schedule of
Property/Casualty
Loss Reserve
Development - continued
Calendar Year Ended 1986(a) 1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996
(In millions of
dollars)
- --------------------------------------------------------------------------------------------------------------------
NET RESERVES
RE-ESTIMATED AS OF:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
End of initial year..... 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735
One year later.......... 6,642 8,086 9,737 11,336 12,984 16,032 17,757 18,250 18,922 24,864 --
Two years later......... 6,763 8,345 9,781 11,371 14,693 16,810 17,728 18,125 18,500 -- --
Three years later....... 6,989 8,424 9,796 13,098 15,737 16,944 17,823 17,868 -- -- --
Four years later........ 7,166 8,516 11,471 14,118 15,977 17,376 17,765 -- -- -- --
Five years later........ 7,314 10,196 12,496 14,396 16,440 17,329 -- -- -- -- --
Six years later......... 9,022 11,239 12,742 14,811 16,430 -- -- -- -- -- --
Seven years later.......10,070 11,480 13,167 14,810 -- -- -- -- -- -- --
Eight years later.......10,317 11,898 13,174 -- -- -- -- -- -- -- --
Nine years later........10,755 11,925 -- -- -- -- -- -- -- -- --
Ten years later.........10,823 -- -- -- -- -- -- -- -- -- --
------- ------ ------ ------ ------- ------ ------ ------ ------ ------ -----
Total net (deficiency)
redundancy (4,580) (3,880) (3,622) (3,543) (3,340) (2,914) (598) 453 434 91 --
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Reconciliation to Gross
Re-estimated Reserves:
Net reserves
re-estimated............ 10,823 11,925 13,174 14,810 16,430 17,329 17,765 17,868 18,500 24,864 --
Re-estimated ceded
recoverable -- -- -- -- 2,855 2,610 2,046 1,918 2,472 6,262 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total gross
re-estimated reserves -- -- -- -- 19,285 19,939 19,811 19,786 20,972 31,126 --
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Net (Deficiency)
Redundancy
Related to:
Asbestos claims.........(3,021) (2,973) (2,917) (2,818) (2,681) (2,634) (945) (345) (309) (51) --
Environmental claims....(1,021) (1,007) (1,002) (975) (964) (918) (871) (425) (246) (65) --
------- ------- ------- ------- ------- ------- ----- ----- ----- ----- -----
Total asbestos and (4,042) (3,980) (3,919) (3,793) (3,645) (3,552)(1,816) (770) (555) (116) --
environmental
Other................... (538) 100 297 250 305 638 1,218 1,223 989 207 --
------- ------- ------- ------- ------- ------- ------ ------ ----- ----- ------
Total net
(deficiency)
redundancy..............(4,580) (3,880) (3,622) (3,543) (3,340) (2,914) (598) 453 434 91 --
- -------------------------------------------------------------------------------------------------------------------------
<PAGE>
<FN>
(a) Reflects reserves of CNA, excluding Continental reserves which were acquired
on May 10, 1995. Accordingly, the reserve development (net reserves recorded at
the end of the year, as initially estimated, less net reserves re-estimated as
of subsequent years) relates only to the operations of CNA and does not include
Continental.
(b) Reserve development related to the 1994 reserves of CNA, excluding
Continental, as determined by the balances in this column, plus adverse reserve
development of $134 million related to the reserves of Continental, acquired on
May 10, 1995, which are not reflected in this column, were recorded by CNA in
1995 and subsequent periods.
(c) Includes Continental gross reserves of $9,713 million and net reserves of
$6,063 million acquired on May 10, 1995 and subsequent development thereon.
</FN>
</TABLE>
9
<PAGE>
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES - (CONTINUED)
Additional information as to CNA's property/casualty claim and claim
expense reserves is set forth in Notes A and E of the Consolidated Financial
Statements of the 1996 Annual Report to Shareholders, incorporated by reference
in Item 8, herein.
RESERVE DEVELOPMENT
Information as to CNA's reserve development is set forth in Note E of the
Consolidated Financial Statements of the 1996 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
LIFE BUSINESS
CNA's life insurance operations market individual and group insurance
products through licensed agents, most of whom are independent contractors, who
sell life and/or group insurance for CNA and for other companies on a commission
basis.
The individual insurance products consist primarily of term, universal
life, participating policies and annuity products. Products developed in 1996
included a portfolio of variable products and new universal life products which
are expected to be marketed in 1997. Group insurance products include life,
accident and health consisting primarily of major medical and hospitalization
and pension products, such as guaranteed investment contracts and annuities. In
the medical and hospitalization market, CNA underwrites the Federal Employees
Health Benefits Program (FEHBP) which had revenues of $2.1 billion, $1.9 billion
and $1.8 billion in 1996, 1995 and 1994. CNA has undertaken a number of
initiatives to enhance service, manage health care utilization demand and
quality and strengthen CNA's networks of physicians, hospitals and other
providers.
CNA's products are designed and priced using assumptions management
believes to be reasonably conservative for mortality, morbidity, persistency,
expense levels and investment results. Underwriting practices that management
believes are prudent are followed in selecting the risks that will be insured.
Further, actual experience related to pricing assumptions is monitored closely
so that prospective adjustments to these assumptions may be implemented as
necessary. CNA mitigates the risk related to persistency by including
contractual surrender charge provisions in its ordinary life and annuity
policies in the first five to ten years, thus providing for the recovery of
acquisition expenses. The investment portfolios supporting interest sensitive
products, including universal life and individual annuities, are managed
separately to minimize surrender and interest rate risk.
Profitability in the health insurance business continues to be impacted by
intense competition and rising medical costs. CNA has aggressively pursued
expense reduction through increases in automation and other productivity
improvements. Further, increasing costs of health care have resulted in a
continued market shift away from traditional forms of health coverage toward
managed care products and experience-rated plans. CNA's ability to compete in
this market will be increasingly dependent on its ability to control costs
through managed care techniques, innovation and quality customer-focused service
in order to properly position CNA in the evolving health care environment.
10
<PAGE>
LIFE BUSINESS--(CONTINUED)
<TABLE>
<CAPTION>
The following table sets forth supplemental data for the life insurance
business:
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
(In millions of dollars)
- --------------------------------------------------------------------------------------------------------------------
INDIVIDUAL PREMIUM
<S> <C> <C> <C> <C> <C>
Life and annuities................................ $ 629.1 $ 497.1 $ 369.4 $ 312.1 $ 294.7
Accident and health............................... 1.8 32.7 32.6 30.9 27.1
--------- --------- --------- --------- ---------
$ 630.9 $ 529.8 $ 402.0 $ 343.0 $ 321.8
========= ========= ========= ========= =========
GROUP PREMIUM
Accident and health (a)........................... $ 2,548.0 $ 2,189.7 $ 2,111.2 $ 1,983.0 $ 1,957.5
Life and annuities................................ 194.9 312.9 165.0 116.2 158.4
--------- --------- --------- --------- ---------
$ 2,742.9 $ 2,502.6 $ 2,276.2 $ 2,099.2 $ 2,115.9
========= ========= ========= ========= =========
NET INVESTMENT INCOME AND OTHER INCOME
Individual........................................ $ 292.2 $ 247.3 $ 193.8 $ 154.2 $ 163.0
Group............................................. 214.2 198.1 166.4 142.8 156.6
--------- --------- --------- --------- ---------
$ 506.4 $ 445.4 $ 360.2 $ 297.0 $ 319.6
========= ========= ========= ========= =========
INCOME EXCLUDING REALIZED CAPITAL GAINS, BEFORE INCOME TAX
Individual........................................ $ 100.9 $ 65.4 $ 47.3 $ 14.5 $ 22.5
Group............................................. 69.8 94.9 87.1 51.9 56.1
--------- --------- --------- --------- ---------
$ 170.7 $ 160.3 $ 134.4 $ 66.4 $ 78.6
========= ========= ========= ========= =========
GROSS LIFE INSURANCE IN FORCE
Individual (b).................................... $ 172,213 $ 113,901 $ 80,560 $ 76,835 $ 75,569
Group............................................. 64,796 52,146 46,873 35,413 29,643
--------- --------- --------- --------- ---------
$ 237,009 $ 166,047 $ 127,433 $ 112,248 $ 105,212
========= ========= ========= ========= =========
OTHER DATA - STATUTORY BASIS(C)
Capital and surplus............................... $ 1,163.4 $ 1,127.6 $ 1,054.6 $ 1,022.0 $ 1,003.0
Capital and surplus-percent of total liabilities.. 25.5% 28.2% 29.4% 30.1% 33.4%
Participating policyholders-percent of gross life
insurance in force 0.5 0.6 0.9 1.1 1.2
- --------------------------------------------------------------------------------------------------------------------
(a) Group accident and health premiums include contracts involving U.S.
government employees and their dependents amounting to approximately
$2.1, $1.9, $1.8, $1.7 and $1.6 billion in 1996, 1995, 1994, 1993 and
1992, respectively.
(b) Lapse ratios for individual life insurance, as measured by surrenders
and withdrawals as a percentage of average ordinary life insurance in
force were 7.2%, 9.4%, 9.7%, 9.7% and 8.6%, in 1996, 1995, 1994, 1993
and 1992, respectively.
(c) Other Data is determined on the basis of statutory accounting
practices. Life insurance subsidiaries have received reimbursement from
CNA for general management and administrative expenses and investment
expenses of $28.5, $21.3, $24.7, $25.6 and $24.5 million in 1996, 1995,
1994, 1993 and 1992, respectively. Statutory capital and surplus as a
percent of total liabilities is determined after excluding Separate
Account liabilities and reclassifying the statutorily required Asset
Valuation and Interest Maintenance Reserves as surplus.
</TABLE>
11
<PAGE>
LIFE BUSINESS - (CONTINUED)
Guaranteed Investment Contracts
- -------------------------------
CAC writes the majority of its group pension products as guaranteed
investment contracts in a fixed Separate Account, which is permitted by Illinois
insurance statutes. CAC guarantees principal and a specified return to
guaranteed investment contractholders. This guarantee affords the
contractholders additional security, in the form of CAC's general account
surplus, which supports the principal and interest payments.
CNA manages the liquidity and interest rate risks on the guaranteed
investment contract portfolio by matching the approximate duration of fixed
maturity securities included in the investment portfolio supporting the
guaranteed investment contracts with the corresponding payout pattern of the
contracts, and assessing market value surrender charges on the majority of the
contracts.
The table below shows a comparison of the duration of assets and contracts,
weighted average investment yield, weighted average interest crediting rates,
and withdrawal characteristics of the guaranteed investment contract portfolio.
- --------------------------------------------------------------------------------
December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Duration in years:
Assets...................................... 3.12 3.12 3.23
Contracts................................... 3.16 2.98 2.99
---- ---- ----
Difference.................................. (0.04) 0.14 0.24
====== ==== ====
Weighted average investment yield.............. 7.44% 7.58% 7.67%
Weighted average interest crediting rates...... 7.32% 7.45% 7.53%
Withdrawal characteristics:
With market value adjustment................ 95% 92% 79%
Non-withdrawable............................ 5 8 15
Without market value adjustment............. 0 0 6
- --------------------------------------------------------------------------------
Total 100% 100% 100%
================================================================================
As shown above, the weighted average investment yield at December 31, 1996,
1995 and 1994 was more than the weighted average interest crediting rate.
INVESTMENTS
Information as to CNA's investments is set forth in Note B of the
Consolidated Financial Statements of the 1996 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
12
<PAGE>
ITEM 2. PROPERTIES
CNA Plaza, owned by Continental Assurance Company, serves as the home
office for CNA and its insurance subsidiaries. An adjacent building (located at
55 E. Jackson Blvd.), jointly owned by Continental Casualty Company and
Continental Assurance Company, is partially situated on grounds under leases
expiring in 2058. Approximately 30% of the adjacent building is rented to
non-affiliates. CNA's subsidiaries lease office space in various cities
throughout the United States and in other countries. The following table sets
forth certain information with respect to the principal office buildings owned
or leased by CNA's subsidiaries:
- --------------------------------------------------------------------------------
AMOUNT OF BUILDING
OWNED AND OCCUPIED OR
LEASED BY CNA OR ITS
LOCATION SUBSIDIARIES PRINCIPAL USAGE
- --------------------------------------------------------------------------------
CNA Plaza 1,144,378 * Principal Executive Offices
333 S. Wabash of CNA
Chicago, Illinois
180 Maiden Lane 507,547* Property/Casualty
New York, New York Insurance Offices
1 Continental Drive 490,993** Property/Casualty
Cranbury, New Jersey Insurance Offices
55 E. Jackson Blvd. 308,750 * Principal Executive
Chicago, Illinois Offices of CNA
401 Penn Street 251,691* Property/Casualty
Reading, Pennsylvania Insurance Offices
100 CNA Drive 251,363* Life Insurance Offices
Nashville, Tennessee
7361 Calhoun Place 224,725** Life Insurance Offices
Rockville, Maryland
1111 E. Broad St. 215,470** Property/Casualty
Columbus, Ohio Insurance Offices
200 S. Wacker Drive 214,997** Property/Casualty
Chicago, Illinois Insurance Offices
333 Glen Street 157,825** Property/Casualty
Glen Falls, New York Insurance Offices;
Residual Market Center
111 Congressional Blvd. 118,215** Personal Lines
Indianapolis, Indiana
1431 Opus Place 106,151** Property/Casualty,
Downers Grove, Illinois Surety Insurance Offices
2401 Pleasant Valley 102,376** Commercial Operations
York, Pennsylvania
1100 Ward Avenue 93,771* First Insurance Company
Honolulu, Hawaii of Hawaii, Ltd.Headquarters
* Represents property owned by CNA or its subsidiaries.
** Represents property leased by CNA or its subsidiaries.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Incorporated herein by reference from Note F of the Consolidated Financial
Statements in the 1996 Annual Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
FIRST BECAME
POSITION AND OFFICER OF
OFFICES HELD THE CNA
WITH INSURANCE
NAME REGISTRANT AGE COMPANIES PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
Laurence A. Tisch Chief Executive 74 **** Co-Chairman of the
Officer Board and Co-Chief
Executive Officer of
Loews Corporation.
President, Chief
Executive Officer and
Director of CBS, Inc.
until November 1995.
Executive officer of
the Registrant since
1974.
Dennis H. Chookaszian Chairman of the 53 1975 Chairman of the Board
Board and Chief and Chief Executive
Executive Officer, Officer of the CNA
CNA Insurance Insurance Companies
Companies since September 1992.
Prior thereto, Mr.
Chookaszian was
President and Chief
Operating Officer of
the CNA Insurance
Companies. Executive
officer of the
Registrant since 1975.
Philip L. Engel President, CNA 56 1977 President of the CNA
Insurance Insurance Companies
Companies since September 1992.
Prior thereto, Mr.
Engel was Executive
Vice President of the
CNA Insurance
Companies. Executive
officer of the
Registrant since 1992.
William J. Senior Vice 44 1987 Senior Vice President
Adamson, Jr. President, CNA of the CNA Insurance
Insurance Companies since November
Companies 1995; Group Vice President
of the CNA Insurance
Companies from April 1993
through October 1995. Prior
thereto, Mr. Adamson was
Vice President of the CNA
Insurance Companies.
Exectuive officer of the
Registrant since 1996.
<PAGE>
FIRST BECAME
POSITION AND OFFICER OF
OFFICES HELD THE CNA
WITH INSURANCE
NAME REGISTRANT AGE COMPANIES PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
James P. Flood Senior Vice 46 1995 Senior Vice President of
President, CNA the CNA Insurance Companies
Insurance since May 1995; Senior
Companies Vice President of The
Continental Insurance
Company from October 1992
through May 1995.
Prior thereto, Mr. Flood
was Vice President of The
Continental Insurance
Company. Executive officer
of the Registrant since
1996.
Michael C. Garner Senior Vice 44 1993 Senior Vice President of
President, CNA the CNA Insurance Companies
Insurance since September 1993.
Companies Prior thereto, Mr. Garner
was a partner of Coopers
and Lybrand LLP. Executive
officer of the Registrant
since 1996.
Bernard L. Hengesbaugh Senior Vice 50 1980 Senior Vice President of
President, CNA the CNA Insurance Companies
Insurance since November 1990.
Companies Executive officer of the
Registrant since 1996.
Peter E. Jokiel Senior Vice 49 1985 Senior Vice President and
President and Chief Financial Officer
Chief Financial since November 1990.
Officer Executive officer of the
Registrant since 1990.
Jonathan D. Kantor Senior Vice 41 1994* Group Vice President of the
President* CNA Insurance Companies
since April 1994.
Prior thereto, partner at
the law firm of Shea &
Gould. Executive officer
of the Registrant effective
April 1, 1997.**
Donald M. Lowry Senior Vice 67 1982 Senior Vice President,
President, Secretary and General
Secretary and Counsel since August 1992.
General Prior thereto, Mr. Lowry
Counsel*** was Senior Vice President
and General Counsel of the
CNA Insurance Companies.
Executive officer of the
Registrant since 1992.
Carolyn L. Murphy Senior Vice 52 1978 Senior Vice President of
President, CNA the CNA Insurance Companies
Insurance since November 1990.
Companies Executive officer of the
Registrant since 1992.
<PAGE>
FIRST BECAME
POSITION AND OFFICER OF
OFFICES HELD THE CNA
WITH INSURANCE
NAME REGISTRANT AGE COMPANIES PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
William H. Sharkey,Jr. Senior Vice 48 1994 Senior Vice President of
President, CNA the CNA Insurance Companies
Insurance since January 1994. Prior
Companies therto, Mr. Sharkey was
Senior Vice President of
Cigna Healthcare. Executive
officer of the Registrant
since 1996.
15
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
FIRST BECAME
POSITION AND OFFICER OF
OFFICES HELD THE CNA
WITH INSURANCE
NAME REGISTRANT AGE COMPANIES PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
Adrian M. Tocklin Senior Vice 45 1995 Senior Vice President of
President, CNA the CNA Insurance Companies
Insurance since May 1995; President
Companies of The Continental
Insurance Company from June
1994 through May 1995;
Executive Vice President of
The Continental Insurance
Company from August 1991
through June 1994.
Prior thereto, Ms. Tocklin
was Senior Vice President
of The Continental
Insurance Company.
Executive officer of the
Registrant since 1996.
Jae L. Wittlich Senior Vice 54 1977 Senior Vice President of
President, the CNA Insurance Companies
CNA since November 1990.
Insurance Executive officer of the
Companies Registrant since 1992.
David W. Wroe Senior Vice 50 1996 Senior Vice President of
President, the CNA Insurance Companies
CNA since June 1996. Prior
Insurance thereto, Mr. Wroe was
Companies President of Agency
Management Systems.
Executive officer of the
Registrant since 1996.
- -------------------------------
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
*Mr. Kantor will succeed Donald Lowry as Senior Vice President , Secretary and
General Counsel of the CNA Insurance Companies effective April 1, 1997 and as
Senior Vice President and General Counsel of the Registrant effective 1998.
**Shea & Gould declared bankruptcy in 1995.
***Mr. Lowry will remain Senior Vice President, Secretary and General Counsel of
the Registrant until 1998.
****Mr. Tisch is not an officer of the CNA Insurance Companies.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from page 82 of the 1996 Annual Report to
Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from page 2 of the 1996 Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated herein by reference from pages 12 through 29 of the 1996
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheet - December 31, 1996 and 1995
Statement of Consolidated Operations - Years Ended December 3l, 1996, 1995
and 1994
Statement of Consolidated Stockholders' Equity - December 31, 1996, 1995
and 1994
Statement of Consolidated Cash Flows - Years Ended December 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
The above Consolidated Financial Statements, the related Notes to the
Consolidated Financial Statements and the Independent Auditors' Report are
incorporated herein by reference from pages 30 through 81 of the 1996 Annual
Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required in Part III has been omitted as the Registrant intends
to file a definitive proxy statement pursuant to Regulation 14A with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information required in Part III has been omitted as the Registrant intends
to file a definitive proxy statement pursuant to Regulation 14A with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required in Part III has been omitted as the Registrant intends
to file a definitive proxy statement pursuant to Regulation l4A with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required in Part III has been omitted as the Registrant intends
to file a definitive proxy statement pursuant to Regulation 14A with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year.
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
Page
Number
------
(a) 1. FINANCIAL STATEMENTS:
A separate index to the Consolidated Financial Statements
is presented in Part II, Item 8.......................... 17
(a) 2. FINANCIAL STATEMENT SCHEDULES:
Schedule I Summary of Investments..................... 22
Schedule II Condensed Financial Information (Parent Company). 23
Schedule III Supplementary Insurance Information.............. 27
Schedule V Valuation and Qualifying Accounts and Reserves.. 28
Schedule VI Supplementary Information Concerning
Property/Casualty Insurance Operations.......... 28
Other schedules are omitted because of the absence of conditions
under which they are required or because the required
information is provided in the Consolidated Financial Statements
or notes thereto.
Independent Auditors' Report................................. 29
18
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(CONTINUED)
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit Number
---------------------- -------
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession:
Securities Purchase Agreement, dated as of December 6, 1994,
by and between CNA Financial Corporation and The Continental
Corporation (with exhibits thereto) (Exhibit 1 to Form 8-K
dated December 9, 1994 incorporated herein by reference.).... 2.1
Merger Agreement, dated as of December 6, 1994, by and among
CNA Financial Corporation, Chicago Acquisition Corp. and The
Continental Corporation (Exhibit 2 to Form 8-K dated December
9, 1994 incorporated herein by reference.)................... 2.2
(3) Articles of incorporation and by-laws:
Certificate of Incorporation of CNA Financial Corporation, as
amended May 6, 1987 (Exhibit 3.1 to 1987 Form 10-K incorporated
herein by reference.)........................................ 3.1
By-Laws of CNA Financial Corporation, as amended February 12,
1997......................................................... 3.2*
(4) Instruments defining the rights of security holders, including
indentures:
CNA Financial Corporation hereby agrees to furnish
to the Commission upon request copies of instruments with
respect to long-term debt, pursuant to Item 601(b)(4)(iii)
of Regulation S-K.......................................... --
(10) Material contracts:
Continental Casualty Company "CNA" Annual Incentive Bonus Plan
Provisions (Exhibit 10.1 to 1994 Form 10K incorporated herein
by reference.)................................................ 10.1
Employment Agreement between CNA Financial Corporation and
Dennis H. Chookaszian, dated December 31, 1995
(Exhibit 10.2 to 1995 Form 10K incorporated herein by
reference.)................................................... 10.2
Employment Agreement between CNA Financial Corporation and
Philip L. Engel, dated December 31, 1995 (Exhibit 10.3 to 1995
Form 10K incorporated herein by reference.)................... 10.3
Continuing Services Agreement between CNA Financial Corporation
and Edward J. Noha, dated February 27, 1991 (Exhibit 6.0 to 1991
Form 8-K, filed March 18, 1991, incorporated herein by
reference.)................................................... 10.4
CNA Employees' Retirement Benefit Equalization Plan, as amended
through January 1, 1993 (Exhibit 10.4 to 1992 Form 10-K
incorporated herein by reference.)............................. 10.5
CNA Employees' Supplemental Savings Plan, as amended through
January 1, 1993 (Exhibit 10.6 to 1992 Form 10-K incorporated
herein by reference.).......................................... 10.6
19
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(continued)
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit Number Number
----------------------------- -------
(10)Material contracts (continued):
Federal Income Tax Allocation Agreement dated February
29, 1980 between CNA Financial Corporation and Loews
Corporation (Exhibit 10.2 to 1987 Form 10-K incorporated
herein by reference.)........................................ 10.7
Agreement between Fibreboard Corporation and Continental
Casualty Company, dated April 9, 1993 (Exhibit A to 1993 Form
8-K filed April 12, 1993 incorporated herein by reference.).... 10.8
Settlement Agreement entered into on October 12, 1993 by and
among Fibreboard Corporation, Continental Casualty Company,
CNA Casualty of California, Columbia Casualty Company and
Pacific Indemnity Company together the "Parties" (Exhibit 10.1
to September 30, 1993 Form 10-Q incorporated herein by
reference.)................................................... 10.9
Continental-Pacific Agreement entered into October 12, 1993
between Continental Casualty Company and Pacific Indemnity
Company (Exhibit 10.2 to September 30, 1993 Form 10-Q
incorporated herein by reference.)............................. 10.10
Global Settlement Agreement among Fibreboard Corporation,
Continental Casualty Company, CNA Casualty Company of
California, Columbia Casualty Company, Pacific Indemnity
Company and the Settlement Class dated December 23, 1993
(Exhibit 10.11 to 1993 Form 10-K incorporated herein
by reference.).............................................. 10.11
Glossary of Terms in Global Settlement Agreement, Trust
Agreement, Trust Distribution Process and Defendant Class
Settlement Agreement as of December 23, 1993 (Exhibit 10.12 to
1993 Form 10-K incorporated herein by reference.)............. 10.12
Fibreboard Asbestos Corporation Trust Agreement dated
December 23, 1993 (Exhibit 10.13 to 1993 Form 10-K incorporated
herein by reference.).......................................... 10.13
Trust Distribution Process - Annex A to the Trust Agreement as
of December 23, 1993 (Exhibit 10.14 to 1993 Form 10-K
incorporated herein by reference.)............................ 10.14
Defendant Class Settlement Agreement dated December 22, 1993
(Exhibit 10.15 to 1993 Form 10-K incorporated herein by
reference.).................................................... 10.15
Escrow Agreement among Continental Casualty Company, Pacific
Indemnity Company and The First National Bank of Chicago dated
December 23, 1993 (Exhibit 10.16 to 1993 Form 10-K incorporated
herein by reference.).......................................... 10.16
20
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(CONTINUED)
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit Number
---------------------- ------
(11) Computation of Net Income per Common Share................ 11.1*
(12) Statements regarding computation of ratios:
Computation of Ratio of Earnings to Fixed Charges......... 12.1*
Computation of Ratio of Net Income, As Adjusted,
to Fixed Charges.......................................... 12.2*
(13) 1996 Annual Report........................................ 13.1*
(21) Subsidiaries of CNA....................................... 21.1*
(23) Independent Auditor's Consent............................. 23.1*
(27) Financial Data Schedule................................... 27*
*Filed herewith
(b) REPORTS ON FORM 8-K:
None
21
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
CNA FINANCIAL CORPORATION
SUMMARY OF INVESTMENTS
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995
------------------------------ -----------------------------------
MARKET CARRYING MARKET CARRYING
(In millions of dollars) COST VALUE VALUE COST VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities available-for-sale:
Bonds:
United States government and government
agencies and authorities-taxable.... $15,046.9 $15,045.3 $15,045.3 $17,903.4 $18,511.4 $18,511.4
States, municipalities and political
subdivisions-tax exempt............. 4,859.6 4,951.2 4,951.2 3,452.8 3,603.1 3,603.1
Foreign governments and political
subdivisions........................ 1,200.1 1,213.9 1,213.9 1,509.3 1,543.3 1,543.3
Public utilities..................... 195.5 205.4 205.4 280.2 305.2 305.2
Convertibles and bonds with warrants
attached............................ 166.6 168.7 168.7 252.2 260.8 260.8
All other corporate.................. 6,021.7 6,070.5 6,070.5 5,887.2 6,104.6 6,104.6
Redeemable preferred stocks.............. 49.2 65.6 65.6 100.3 116.3 116.3
-------- -------- -------- -------- -------- --------
Total fixed maturities 27,539.6 27,720.6 27,720.6 29,385.4 30,444.7 30,444.7
available-for-sale ======== ======== ======== ======== ======== ========
Equity securities available-for-sale:
Common stocks:
Public utilities..................... 11.0 15.1 15.1 17.7 23.5 23.5
Banks, trusts and insurance companies 131.5 185.1 185.1 84.3 96.7 96.7
Industrial and other................. 335.1 431.0 431.0 631.8 795.0 795.0
Non redeemable preferred stocks.......... 224.3 227.9 227.9 2.5 2.5 2.5
-------- -------- -------- -------- -------- --------
Total equity securities 701.9 $ 859.1 859.1 736.3 $ 917.7 917.7
available-for-sale................. -------- -------- -------- -------- -------- --------
Mortgage loans.............................. 112.6 112.6 139.8 119.3
-------- -------- -------- --------
Real estate:
Investment properties.................... 14.7 10.7 6.6 3.0
Acquired in satisfaction of debt......... 0.2 0.1 0.2 0.1
-------- -------- -------- --------
Total real estate.................. 14.9 10.8 6.8 3.1
-------- -------- -------- --------
Policy loans................................ 174.4 174.4 177.1 177.2
Other invested assets....................... 616.6 681.2 483.5 499.9
Short-term investments...................... 5,853.7 5,853.7 3,724.5 3,724.5
- -------------------------------------------------------------------------------------------------------------------
Total investments $35,013.7 $35,412.4 $34,653.4 $35,886.4
===================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
FINANCIAL POSITION
- --------------------------------------------------------------------------------
DECEMBER 31 1996 1995
(In millions of dollars)
- --------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Investments in subsidiaries......................... $ 8,098.9 $ 8,060.6
Federal income taxes recoverable.................... -- 136.6
Deferred income taxes............................... 877.2 785.2
Notes receivable from affiliate..................... 205.0 205.0
Other............................................... 17.9 7.9
---------- ----------
Total assets................................ $ 9,199.0 $ 9,195.3
LIABILITIES: ========== ==========
Debt................................................ $ 1,971.2 $ 2,222.4
Federal income taxes payable........................ 28.7 --
Amounts due to affiliates........................... 101.7 190.3
Other............................................... 37.6 47.1
---------- ----------
Total liabilities........................... 2,139.2 2,459.8
---------- ----------
Total stockholders' equity.................. 7,059.8 6,735.5
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,199.0 $ 9,195.3
==============================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
(In millions of dollars)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Equity in income of subsidiaries before income tax:
Operating income ............................... $1,088.8 $ 923.5 $ 389.1
Realized investment gains (losses).............. 609.7 453.0 (256.8)
Net investment income.............................. 13.6 9.0 0.3
Realized investment gains (losses)................. (5.4) 3.1 (0.3)
--------- -------- ------
1,706.7 1,388.6 132.3
--------- -------- ------
EXPENSES:
Administrative and general expenses................ 222.6 219.7 193.1
Interest expense................................... 135.0 125.3 69.6
Other.............................................. 4.0 1.2 3.7
-------- -------- ------
361.6 346.2 266.4
-------- -------- ------
Income (loss) before income tax............. 1,345.1 1,042.4 (134.1)
Income tax benefit (expense)....................... (380.3) (285.4) 170.6
==============================================================================================
Net income $ 964.8 $ 757.0 $ 36.5
==============================================================================================
See accompanying Notes to Condensed Financial Information.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
(Continued)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
(In millions of dollars)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 964.8 $ 757.0 $ 36.5
------- ------- -----
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in earnings of unconsolidated affiliates (1,376.7) (1,200.7) (98.0)
Realized (gains) losses.......................................... 5.4 (3.1) 0.3
Changes in:
Accrued investment income....................................... - - 1.1
Federal income taxes............................................ 165.3 (112.9) 5.6
Deferred income taxes........................................... 93.3 173.2 (115.0)
Other, net...................................................... (131.9) 86.7 (23.6)
------- ------- ------
TOTAL ADJUSTMENTS..............................................(1,244.6) (1,056.8) (229.6)
-------- -------- ------
NET CASH USED IN OPERATING ACTIVITIES.......................... (279.8) (299.8) (193.1)
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of The Continental Corporation............................. - (1,125.5) -
Other acquisition.................................................... - (13.0) -
Purchases of fixed maturities........................................ (0.2) (709.0) (195.7)
Proceeds from fixed maturities:
Sales............................................................. - 501.2 19.6
Maturities........................................................ - 200.6 192.4
Net proceeds from the sale of equity securities...................... - (0.5) 4.0
Change in short-term investments..................................... (1.7) 0.8 1.1
Change in other investments.......................................... (4.6) 10.3 2.3
Other................................................................ - (3.3) (1.0)
------- ------- ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............ (6.5) (1,138.4) 22.7
-------- -------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to preferred shareholders............................. (6.3) (7.3) (4.5)
Dividend from affiliates............................................. 547.5 325.8 175.0
Proceeds from issuance of long-term debt............................. 248.1 1,325.0 -
Principal payments on long-term debt................................ (500.0) - -
Loan to The Continental Corporation.................................. - (205.0) -
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... 289.3 1,438.5 170.5
------- ------- -------
NET INCREASE IN CASH.......................................... 3.0 0.3 0.1
Cash at beginning of year............................................... 0.4 0.1 -
- ---------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 3.4 $ 0.4 $ 0.1
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS - CONTINUED
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
(In millions of dollars)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense................................................. $(140.9) $(169.5) $(70.5)
Federal income taxes............................................. 15.4 102.5 53.1
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Supplemental disclosures of cash flow information relating to acquisitions:
Noncash investing activities that are not reflected in the Statement of Cash
Flows are listed below*.
- ------------------------------------------------------------------------------------------------------------
The
Continental Other
December 31, 1995 Corporation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fair value of assets acquired......................................... $15,258.5 $ 13.0
Liabilities assumed................................................... (14,133.0) -
--------- -------
Cash paid....................................................... $ 1,125.5 $ 13.0
============================================================================================================
* There were no significant acquisitions by CNA Financial Corporation (Parent
Company) during the year ended December 31, 1996 and December 31, 1994.
</TABLE>
See accompanying Notes to Condensed Financial Information.
<PAGE>
SCHEDULE II
(CONTINUED)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
Notes to Condensed Financial Information
a. Basis of Presentation
The financial statements of the registrant should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto included in the CNA Financial Corporation Annual Report to
Shareholders.
Certain amounts applicable to prior years have been reclassified to
conform to classifications followed in 1996.
b. Debt:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
DECEMBER 31 1996 1995
(In millions of dollars)
-------------------------------------------------------------------------
Long-term
<S> <C> <C>
Variable rate debt:
Credit Facility..................................$ 400.0 $ 825.0
Commercial Paper................................. 675.0 500.0
Senior Notes:
8 7/8 %, due March 1, 1998....................... 149.6 149.2
6 1/4%, due November 15, 2003.................... 248.4 248.2
6 3/4%, due November 15, 2006.................... 248.1 --
7 1/4% Debenture, due November 15, 2023............. 247.1 247.1
1.0% Urban Development Action Grant, due May 7, 2019. 3.0 3.0
-------- --------
Total long-term debt............................. 1,971.2 1,972.5
Short-term debt......................................... -- 249.9
-------------------------------------------------------------------------
Total $1,971.2 $2,222.4
=========================================================================
</TABLE>
To finance the acquisition of Continental (including the refinancing of
$205 million of Continental debt) CNA entered into a five-year $1.325
billion revolving credit facility. In 1996, the Company renegotiated
the facility extending the maturity to May 2001. The interest rate for
the facility is based on the London Interbank Offered Rate (LIBOR),
plus 16 basis points. Additionally, there is a facility fee of 9 basis
points annually. The average interest rate on the borrowings under the
revolver at December 31, 1996 was 5.72%. Under the terms of the
facility, CNA may prepay the debt without penalty.
<PAGE>
On November 15, 1996, CNA issued $250 million 6 3/4% senior notes, due
November 15, 2006. The net proceeds from this issuance of approximately
$248 million were used to pay down a portion of the borrowings
outstanding under the revolving credit facility. As a result of this
debt issuance, borrowing capacity under the revolving credit facility
was reduced by $250 million, to $1.075 billion.
An additional $250 million of securities remain available for issuance
under a shelf registration.
25
<PAGE>
NOTES TO CONDENSED FINANCIAL INFORMATION (CONTINUED)
In 1995, to take advantage of favorable interest rates, CNA established
a commercial paper program borrowing $500 million from investors to
replace a like amount of credit facility financing. During 1996, CNA
increased its borrowings under the commercial paper program to $675
million. The average interest rate on the commercial paper at December
31, 1996 was 5.67%. The commercial paper borrowings are classified as
long-term as borrowing capacity under the credit facility will support
the commercial paper. At year end 1996, the outstanding loans under the
revolving credit facility were $400 million. There was no unused
borrowing capacity under the facility after the effects of the
commercial paper program.
In 1995, CNA entered into interest rate swap agreements with a notional
principal amount of $1.2 billion, which terminate from May to December
2000. These agreements provide that CNA pay interest at a fixed rate,
averaging 6.20% at December 31, 1996 in exchange for the receipt of
interest at the three month LIBOR rate. Concurrent with the paydown of
$250 million on the revolving credit facility, CNA terminated interest
rate swaps with a total notional amount of $250 million.
The effect of these interest rate swaps was to increase interest
expense by approximately $7 million and $2 million for the years ended
December 31, 1996 and 1995, respectively.
The weighted average interest rate (interest and facility fees) on the
variable rate debt, which includes the revolving credit facility,
commercial paper and the effect of the interest rate swaps, was 6.28%
and 6.50% at December 31, 1996 and 1995, respectively.
c. CNA has reimbursed, or will reimburse, its subsidiaries for general
management and administrative expenses, unallocated loss adjustment
expenses and investment expense of $223.1 million, $218.3 million and
$194.3 million in 1996, 1995 and 1994, respectively.
d. There were no capital contributions by CNA in 1996, 1995 or 1994.
- --------------------------------------------------------------------------------
26
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
CNA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
- -------------------------------------------------------------------------------------------------
Gross Insurance Reserves
---------------------------------------------------
CLAIM
DEFERRED AND FUTURE POLICY-
ACQUISITION CLAIM POLICY UNEARNED HOLDERS'
(In millions of dollars) COSTS EXPENSE BENEFITS PREMIUMS FUNDS
- -------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
Property/Casualty:
<S> <C> <C> <C> <C> <C>
Commercial............ $ 822.3 $26,321.8 $ 47.4 $ 3,591.3 $ 171.8
Personal.............. 262.1 1,556.8 325.5 1,043.8 -
Involuntary risks..... - 1,951.4 - 23.6 -
Life:
Individual............ 735.8 147.9 3,138.5 - 30.2
Group................. 34.0 519.2 669.9 - 543.6
------- --------- ------- ------- ------
CNA Insurance....... $1,854.2 30,497.1 $4,181.3 $ 4,658.7 $ 745.6
======= ======== ======= ======
Other and intercompany
eliminations.......... 332.4
---------
$30,829.5
========
DECEMBER 31, 1995
Property/Casualty
Commercial............ $ 701.9 $27,309.3 $ 38.5 $ 3,607.0 $ 162.6
Personal.............. 258.2 1,426.5 259.9 868.9 -
Involuntary risks..... 8.6 2,308.5 - 73.5 -
Life:
Individual............ 505.7 162.3 2,678.8 - 31.0
Group................. 18.9 473.0 538.7 - 511.4
------- --------- ------- ------ ------
CNA Insurance....... $1,493.3 31,679.6 $3,515.9 $ 4,549.4 $ 705.0
======= ======= ======= ======
Other and intercompany
eliminations.......... 352.8
---------
$32,032.4
=========
DECEMBER 31, 1994
Property/Casualty:
Commercial............ $ 395.2 $18,920.3 $ 28.5 $ 2,129.1 $ 128.4
Personal.............. 197.1 1,042.4 199.0 559.9 -
Involuntary risks..... - 1,675.9 - 1.7 -
Life:
Individual............ 427.3 145.2 2,414.9 - 31.7
Group................. 6.8 439.4 407.4 - 472.4
------- --------- ------- -------- ------
CNA Insurance....... $1,026.4 22,223.2 $3,049.8 $ 2,690.7 $ 632.5
======= ======= ======== ======
Other and intercompany
eliminations.......... 341.6
---------
$22,564.8
=========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION - CONTINUED
- -------------------------------------------------------------------------------------------------------------
Amortization
Insurance of
Net Net Claims and Deferred Other
Premium Investment Policyholders' Acquisition Operating Premiums
Revenue Income Benefits Costs Expenses Written
- -------------------------------------------------------------------------------------------------------------
December 31, 1996
Property/Casualty:
<S> <C> <C> <C> <C> <C> <C>
Commercial............ $ 8,296.3 $1,622.7 $ 6,703.2 $1,715.3 $ 1,103.9 $ 8,592.7
Personal.............. 1,598.7 166.0 1,183.8 402.2 273.5 1,731.5
Involuntary risks..... 232.1 92.6 243.6 61.6 91.6 286.5
Life:
Individual............ 630.9 227.6 666.9 26.4 128.8 -
Group................. 2,742.9 172.5 2,579.2 (13.4) 321.6 -
--------- ------- -------- -------- ------- ---------
CNA Insurance....... 13,500.9 2,281.4 11,376.7 $2,192.1 1,919.4 $ 10,610.7
========= =========
Other and intercompany
eliminations.......... (21.9) (5.4) (20.4) (39.7)
--------- -------- --------- ------
$13,479.0 $2,276.0 $ 11,356.3 $ 1,879.7
======== ======== ========= ========
December 31, 1995
Property/Casualty:
Commercial............ $ 7,225.3 $1,463.1 $ 5,995.2 $1,494.8 $ 915.3 $ 7,561.3
Personal.............. 1,214.8 132.4 891.6 271.4 228.5 1,254.3
Involuntary risks..... 283.7 104.3 234.0 16.7 145.8 310.5
Life:
Individual............ 529.8 214.6 506.8 70.5 134.3 -
Group................. 2,502.6 154.6 2,340.1 (9.9) 275.6 -
--------- ------- -------- -------- ------- ---------
CNA Insurance....... 11,756.2 2,069.0 9,967.7 $1,843.5 1,699.5 $ 9,126.1
======== =========
Other and intercompany
eliminations.......... (21.1) 7.6 (23.8) (19.7)
--------- -------- -------- -------
$11,735.1 $2,076.6 $ 9,943.9 $ 1,679.8
======== ======== ======== ========
December 31, 1994
Property/Casualty:
Commercial............ $ 5,417.1 $1,050.8 $ 4,845.8 $ 1,099.2 $ 512.3 $ 5,488.7
Personal.............. 965.7 101.5 833.2 229.6 164.1 1,037.3
Involuntary risks..... 455.7 88.1 339.6 - 186.4 438.7
Life:
Individual............ 402.0 172.2 392.2 46.7 109.6 -
Group................. 2,276.2 138.4 2,092.9 2.0 260.6 -
--------- ------- -------- ------- ------- --------
CNA Insurance....... 9,516.7 1,551.0 8,503.7 $ 1,377.5 1,233.0 $ 6,964.7
======= ========
Other and intercompany
eliminations.......... (42.3) 0.2 (42.5) 2.4
--------- -------- ------- -------
$ 9,474.4 $1,551.2 $ 8,461.2 $ 1,235.4
======== ======== ======= =======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE V
CNA FINANCIAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- -----------------------------------------------------------------------------------------------------------
Balance Balance Balance
at Charged to Charged to at
Beginning Costs and Other End of
(In millions of dollars) of Period Expenses Amounts Deductions Period
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables............ $ 288.7 $ 34.5 $ - $ 46.0 $ 277.2
======= ======= ======= ======= =======
Year Ended December 31, 1995
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables............ $ 127.5 $ 39.0 $ 143.5* $ 21.3 $ 288.7
======= ======= ======== ======= =======
Year Ended December 31, 1994
Deducted from assets:
Allowance for doubtful accounts:
Insurance receivables............ $ 117.3 $ 18.6 $ - $ 8.4 $ 127.5
======= ======= ======= ======= =======
---------------------------------------------------------------------------------------------------------
* Includes Continental allowance at acquisition.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI
CNA FINANCIAL CORPORATION
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
- ----------------------------------------------------------------------------------------------
CONSOLIDATED PROPERTY/
CASUALTY ENTITIES
-------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
(In millions of dollars)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred acquisition costs...............................$ 1,084 $ 969 $ 592
Reserves for unpaid claims and claim expenses............ 29,830 31,044 21,639
Discount, if any, deducted above (based on interest
rates ranging from 3.5% to 7.5%)......................... 2,459 2,449 1,951
Unearned premiums........................................ 4,659 4,549 2,691
Earned premiums.......................................... 10,127 8,724 6,839
Net investment income.................................... 1,881 1,700 1,240
Claim and claim expenses related to current year......... 7,922 6,787 5,611
Claim and claim expenses related to prior years.......... (91) 122 (71)
Amortization of deferred acquisition costs............... 2,179 1,783 1,329
Paid claim and claim expenses............................ 9,201 7,058 5,027
Premiums written......................................... 10,611 9,126 6,965
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CNA Financial Corporation
We have audited the consolidated financial statements of CNA Financial
Corporation (an affiliate of Loews Corporation) and subsidiaries as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996 and have issued our report thereon dated February 12, 1997. Such
consolidated financial statements and report are included in the Company's 1996
Annual Report to Shareholders and are incorporated herein by reference. Our
audits also included the financial statement schedules of CNA Financial
Corporation and subsidiaries listed in Item 14. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNA Financial Corporation
By S/LAURENCE A. TISCH
-----------------------------------------------------
Laurence A. Tisch
Chief Executive Officer
(Principal Executive Officer)
By S/PETER E. JOKIEL
-----------------------------------------------------
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE
S/ANTOINETTE COOK BUSH Director |
- ---------------------------------- |
Antoinette Cook Bush |
|
|
S/DENNIS H. CHOOKASZIAN Director |
- ---------------------------------- |
Dennis H. Chookaszian |
|
|
S/PHILIP L. ENGEL Director | Dated
- ---------------------------------- |
Philip L. Engel | March 28, 1997
|
|
S/ROBERT P. GWINN Director |
- ---------------------------------- |
Robert P. Gwinn |
|
|
S/WALTER F. MONDALE Director |
- ---------------------------------- |
Walter F. Mondale |
30
<PAGE>
SIGNATURE TITLE
S/EDWARD J. NOHA Chairman of the |
- ---------------------------------- Board and Director|
Edward J. Noha |
|
|
S/JOSEPH ROSENBERG Director |
- ---------------------------------- |
Joseph Rosenberg |
|
|
S/RICHARD L. THOMAS Director | Dated
- ---------------------------------- |
Richard L. Thomas | March 28, 1997
|
|
S/JAMES S. TISCH Director |
- ---------------------------------- |
James S. Tisch |
|
|
S/LAURENCE A. TISCH Chief Executive |
- ---------------------------------- Officer and |
Laurence A. Tisch Director |
|
|
|
S/PRESTON R. TISCH Director |
- ---------------------------------- |
Preston R. Tisch |
|
|
S/MARVIN ZONIS Director |
- ---------------------------------- |
Marvin Zonis |
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11.1
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
(In millions, except per share data)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average shares outstanding............................... 61.8 61.8 61.8 61.8 61.8
======= ======= ======= ======= =======
Net income (loss) before cumulative effect of accounting changes.. $ 964.8 $ 757.0 $ 36.5 $ 267.5 $(662.5)
Less preferred stock dividends.................................... 6.1 6.9 5.3 4.0 4.2
------- ------- ------- ------- -------
Net income (loss) before cumulative effect of accounting changes
available to common stockholders............................. 958.7 750.1 31.2 263.5 (666.7)
Cumulative effect on prior years of changes in accounting principles - - - - 331.9
------- ------- ------- ------- -------
Net income (loss) available to common stockholders............. $ 958.7 $ 750.1 $ 31.2 $ 263.5 $(334.8)
======= ======= ======= ======= =======
Earnings per share:
Net income (loss) before cumulative effect of accounting changes.. $ 15.51 $ 12.14 $ 0.51 $ 4.26 $ (10.79)
Cumulative effect on prior years of changes in accounting principles - - - - 5.37
-------- -------- ------- -------- --------
Net income (loss) available to common stockholders............. $ 15.51 $ 12.14 $ 0.51 $ 4.26 $ (5.42)
======== ======== ======== ======== =========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
(In millions of dollars, except ratios)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income tax and cumulative effect of accounting
changes..................................................... $ 1,345.1 $ 1,042.4 $(134.0) $ 93.5 $(1,374.9)
Adjustments:
Interest expense......................................... 200.4 182.3 70.5 36.3 36.7
Interest element of operating lease rental............... 31.8 46.7 19.1 18.2 17.6
--------- --------- --------- -------- ---------
Income before income tax and cumulative effect of
accounting changes, as adjusted........................ $ 1,577.3 $ 1,271.4 $ (44.4) $ 148.0 $(1,320.6)
========= ========= ========= ======== =========
Fixed charges:
Interest expense......................................... $ 200.4 $ 182.3 $ 70.5 $ 36.3 $ 36.7
Interest element of operating lease rental............... 31.8 46.7 19.1 18.2 17.6
--------- --------- ------- ------- ---------
Fixed charges............................................... $ 232.2 $ 229.0 $ 89.6 $ 54.5 $ 54.3
======== ======== ======= ======= =========
Ratio of earnings to fixed charges (1)...................... 6.8 5.6 (0.5) 2.7 (24.3)
- --------------------------------------------------------------------------------------------------------------------
(1) For purposes of computing this ratio, earnings consist of income before
income taxes and cumulative effect of accounting changes plus fixed charges
of consolidated companies. Fixed charges consist of interest and that
portion of operating lease rental expense which is deemed to be an interest
factor for such rentals.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.2
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF NET INCOME,
AS ADJUSTED, TO FIXED CHARGES
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
(In millions of dollars, except ratios)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income................................................. $ 964.8 $ 757.0 $ 36.5 $ 267.5 $ (330.6)
Adjustments:
Interest expense, after tax............................. 130.3 118.5 45.8 23.6 24.2
Interest element of operating lease rental, after tax... 20.7 30.3 12.4 11.8 11.7
--------- -------- ------- ------- --------
Net income, as adjusted.................................... $ 1,115.8 $ 905.8 $ 94.7 $ 302.9 $ (294.6)
========= ======== ======= ======= ========
Fixed charges:
Interest expense, after tax............................. $ 130.3 $ 118.5 $ 45.8 $ 23.6 $ 24.2
Interest element of operating lease rental, after tax... 20.7 30.3 12.4 11.8 11.7
--------- -------- ------ -------- ---------
Fixed charges.............................................. $ 151.0 $ 148.8 $ 58.2 $ 35.4 $ 35.9
========= ======== ====== ======== =========
Ratio of net income, as adjusted, to fixed charges (1)..... 7.4 6.1 1.6 8.6 (8.2)
- ------------------------------------------------------------------------------------------------------------------
(1) For purposes of computing this ratio, net income has been adjusted to
include fixed charges of consolidated companies, after tax. Fixed charges
consist of interest and that portion of operating lease rental expense
which is deemed to be an interest factor for such rentals.
</TABLE>
33
<PAGE>
EXHIBIT 21.1
PRIMARY SUBSIDIARIES OF CNA
PLACE OF
COMPANY INCORPORATION
- ------- --------------
AMS Services, Inc. and subsidiaries (10) Delaware
Alexsis, Inc. and subsidiaries (4) Maryland
American Casualty Company of Reading, Pennsylvania (ACCO) Pennsylvania
Boston Old Colony Insurance Company Massachusetts
Claims Administration Corp. Maryland
CNA Casualty of California California
Columbia Casualty Company Illinois
Commercial Insurance Company of Newark, N.J. New Jersey
Continental Assurance Company (CAC) Illinois
Continental Casualty Company (CCC) Illinois
Continental Lloyd's Insurance Company Texas
Continental Reinsurance Corporation California
Firemen's Insurance Company of Newark, New Jersey New Jersey
Kansas City Fire and Marine Insurance Company Missouri
National Fire Insurance Company of Hartford (NFI) Connecticut
National-Ben Franklin Insurance Company of Illinois Illinois
Niagara Fire Insurance Company Delaware
Pacific Insurance Company California
34
<PAGE>
EXHIBIT 21.1 - (continued)
PRIMARY SUBSIDIARIES OF CNA - CONTINUED
The Buckeye Union Insurance Company Ohio
The Continental Corporation, Inc. (CIC) New York
The Continental Insurance Company New Hampshire
The Continental Insurance Company of New Jersey New Jersey
Convida Holdings, Ltd and subsidiary (1) Bahamas
The Fidelity and Casualty Company of New York New Hampshire
The Glens Falls Insurance Company Delaware
The Mayflower Insurance Company, Ltd. Indiana
Transcontinental Insurance Company New York
Transcontinental Technical Services, Inc. (ServCo) Illinois
Transportation Insurance Company Illinois
Valley Forge Insurance Company Pennsylvania
Valley Forge Life Insurance Company Pennsylvania
Western National Warranty Corporation and subsidiary (1) Arizona
All other subsidiaries, when aggregated, are not considered significant.
34
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-50753 of CNA Financial Corporation and subsidiaries on Form S-3 of our
reports dated February 12, 1997, appearing in and incorporated by reference in
the Annual Report on Form 10-K of CNA Financial Corporation and subsidiaries for
the year ended December 31, 1996.
S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
March 31, 1997
36
BY-LAWS
OF
CNA FINANCIAL CORPORATION
(As Amended Effective February 12, 1997)
ARTICLE I. OFFICES.
SECTION 1. The registered office shall be in the City of Wilmington, County of
New Castle, State of Delaware.
SECTION 2. The Corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the Corporation may require.
ARTICLE II. MEETINGS OF STOCKHOLDERS.
SECTION 1. Meetings of stockholders for any purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
SECTION 2. Annual meetings of stockholders, commencing with the year 1970, shall
be held on the first Wednesday in May if not a legal holiday, and if a legal
holiday, then on the next business day following, at 10:00 a.m., or at such
other date and time as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting, at which they shall elect by
a plurality vote a Board of Directors, and transact such other business as may
properly be brought before the meeting. Elections of Directors need not be by
ballot.
SECTION 3. Written notice of the annual meeting stating the place, date and hour
of the meeting shall be given to each stockholder entitled to vote at such
meeting not less than ten nor more than fifty days before the date of the
meeting.
SECTION 4. The officer who has charge of the stock ledger of the Corporation
shall prepare and make, at least ten days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be opened
to the examination of any stockholder, for the purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
SECTION 5. Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute or by the Certificate of Incorporation,
may be called by the Chief Executive Officer or President and shall be called by
the President or Secretary at the request in writing of a majority of the Board
of Directors, or at the request in writing of stockholders owning not less than
one-fifth of all shares issued and outstanding and entitled to vote on any
proposal to be submitted to said meeting. Such request shall state the purpose
or purposes of the proposed meeting.
SECTION 6. Written notice of a special meeting stating the place, date and hour
of the meeting and the purpose or purposes for which the meeting is called,
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<PAGE>
shall be given not less than ten nor more than fifty days before the date of the
meeting, to each stockholder entitled to vote at such meeting.
SECTION 7. Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.
SECTION 8. The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
SECTION 9. When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the statutes or of the Certificate of
Incorporation, a different vote is required, in which case such express
provision shall govern and control the decision of such question.
SECTION 10. Each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
SECTION 11. Whenever the vote of stockholders at a meeting thereof is required
or permitted to be taken for or in connection with any corporate action, by any
provision of the statutes, the meeting and vote of stockholders may be dispensed
with if all of the stockholders who would have been entitled to vote upon the
action if such meeting were held shall consent in writing to such corporate
action being taken; or if the Certificate of Incorporation authorizes the action
to be taken with the written consent of the holders of less than all of the
stock who would have been entitled to vote upon the action if a meeting were
held, then on the written consent of the stockholders having not less than such
percentage of the total number of votes as may be authorized in the Certificate
of Incorporation; provided that in no case shall the written consent be by the
holders of stock having less than the minimum percentage of the total required
by statute for the proposed corporate action, and provided that prompt notice
must be given to all stockholders of the taking of corporate action without a
meeting and by less than unanimous written consent.
ARTICLE III. DIRECTORS.
SECTION 1. The number of Directors which shall constitute the whole Board shall
be twleve. Except as provided in Section 2 of this Article, the Directors shall
be elected at the annual meeting of the stockholders, and each Director shall
hold office until his successor is elected and qualified. Directors need not be
stockholders.
SECTION 2. The office of a Director shall become vacant if he dies or resigns by
a writing signed by him and delivered to the Corporation, and the Board of
Directors may declare vacant the office of a Director if he be declared of
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<PAGE>
unsound mind by an order of Court or convicted of a felony, or for any other
proper cause, of if, within sixty days after notice of his election as a
Director, he does not accept such office either in writing or by attending a
meeting of the Board of Directors.
Vacancies and newly created directorships resulting from any increase in the
authorized number of Directors may be filled by a majority of the Directors then
in office, though less than a quorum, or by a sole remaining Director, and the
Directors so chosen shall hold office until the next annual election and until
their successors are duly elected and shall qualify, unless sooner displaced. If
there are no Directors in office, then an election of Directors may be held in
the manner provided by statute. If, at the time of filing any vacancy or any
newly created directorship, the Directors then in office shall constitute less
than a majority of the whole Board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent of the total number of the shares at
the time outstanding having the right to vote for such Directors, summarily
order an election to be held to fill any such vacancies or newly created
directorships, or to replace the Directors chosen by the Directors then in
office.
SECTION 3. The business of the Corporation shall be managed by its Board of
Directors which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws directed or required to be exercised or done
by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 4. The Board of Directors of the Corporation may hold meetings, both
regular and special, either within or without the State of Delaware. The
Directors may designate a Director as the Chairman of the Board of Directors.
The Chairman of the Board of Directors shall not be an officer of the
Corporation.
SECTION 5. The first meeting of each newly elected Board of Directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting and no notice of such meeting shall be necessary to the newly
elected Directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected Board of Directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the Directors.
SECTION 6. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
Board.
SECTION 7. Special meetings of the Board of Directors may be called by the Chief
Executive Officer, the President or the Secretary, and shall be called upon the
written request of any two or more Directors. Notice of the time and place of
such meetings shall be served upon or telephoned to each Director at least 24
hours, or mailed (postage prepaid) or telegraphed (charges prepaid) to each
Director at his address as shown on the books of the Corporation at least 48
hours, prior to the time of the meeting, and if such notice is mailed or
telegraphed as above provided, the notice shall be deemed to have been given at
the time it is deposited in the United States mail or with the telegraph office
for transmission, as the case may be.
SECTION 8. At all meetings of the Board six (6) Directors shall constitute a
quorum for the transaction of business and the act of a majority of the
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<PAGE>
Directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation. If a quorum shall not be present
at any meeting of the Board of Directors, the Directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
SECTION 9. Unless otherwise restricted by the Certificate of Incorporation or
these By-Laws, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
COMMITTEES OF DIRECTORS
SECTION 10. The Board of Directors may, by resolution passed by a majority of
the whole Board, designate one or more committees, each committee to consist of
two or more of the Directors of the Corporation. The Board may designate one or
more Directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. Any such committee, to
the extent provided in the resolution, shall have and may exercise the powers of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; provided, however, that in the absence or
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Such committee or committees shall have such name or names
as may be determined from time to time by resolution adopted by the Board of
Directors.
Unless otherwise provided by the Board of Directors, a majority of the members
of any committee appointed by the Board of Directors pursuant to this Section
shall constitute a quorum at any meeting thereof and the act of a majority of
the members present at a meeting at which a quorum is present shall be the act
of such committee. Any such committee shall, subject to any rules prescribed by
the Board of Directors, prescribe its own rules for calling, giving notice of
and holding meetings and its method of procedure at such meetings and shall keep
a written record of all action taken by it.
SECTION 11. Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
SECTION 12. In the absence or disqualification of one or more members of any
Committee, the member or members present at any meeting and not disqualified
from voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member or members.
COMPENSATION OF DIRECTORS
SECTION 13. The Directors may be paid their expenses, if any, of attendance at
each meeting of the Board of Directors and may be paid a fixed sum for
attendance at each meeting of the Board of Directors or a stated fee as
Director. No such payment shall preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
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<PAGE>
ARTICLE IV. NOTICE.
SECTION 1. Whenever, under the provisions of the statutes or of the Certificate
of Incorporation or of these By-Laws, notice is required to be given to any
Director or stockholder, it shall not be construed to mean personal notice, but
such notice may be given in writing, by mail, addressed to such Director or
stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
Directors may also be given by telegram or telephone.
SECTION 2. Whenever any notice is required to be given under the provisions of
the statutes or of the Certificate of Incorporation or of these By-Laws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V. OFFICERS.
SECTION 1. The officers of the Corporation shall be chosen by the Board of
Directors and shall be a Chief Executive Officer, Secretary and Chief Financial
Officer. The Board of Directors may also choose a President and one or more Vice
Presidents. The Board of Directors may designate one or more of the Vice
Presidents as Senior Vice President or Executive Vice President and may use
descriptive words or phrases to designate the standing, seniority or area of
special competence of the Vice Presidents. Any number of offices may be held by
the same person, unless the Certificate of Incorporation or these By-Laws
otherwise provide.
SECTION 2. The Board of Directors at its first meeting after each annual meeting
of stockholders shall choose a Chief Executive Officer, a Chief Financial
Officer and a Secretary.
SECTION 3. The Board of Directors may appoint such other officers and agents as
it shall deem necessary who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board.
SECTION 4. The Board of Directors shall fix the compensation of the Chief
Executive Officer and, unless otherwise established by the Board of Directors or
a committee appointed by the Board of Directors, the Chief Executive Officer
shall fix the compensation of any or all other officers of the Corporation.
SECTION 5. The officers of the Corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the Corporation
shall be filled by the Board of Directors.
CHIEF EXECUTIVE OFFICER
SECTION 6. The Chief Executive Officer shall be the chief executive officer of
the Corporation and shall have general and active control of its business and
affairs. He shall preside at the meetings of the stockholders and the Board of
Directors, and may exercise any and all of the powers of a chief executive
officer. The Chief Executive Officer shall have such other powers and duties as
may be assigned to or vested in him from time to time by the Board of Directors
or by the Executive Committee.
SECTION 7. The Chief Executive Officer may execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
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<PAGE>
THE PRESIDENT
SECTION 8. The President, if one shall be chosen, shall have general supervision
and direction of all other officers of the Corporation, subject to the direction
of the Board of Directors, and shall carry into effect the orders of the Board
of Directors and Chief Executive Officer of the Board of Directors. The
President shall also have such other duties and powers as may be assigned to or
vested in him from time to time by the Board of Directors or by the Executive
Committee.
THE VICE PRESIDENTS
SECTION 9. The Vice Presidents shall assist the Chief Executive Officer, and
shall perform such other duties as may from time to time be directed by the
Board of Directors, the Chief Executive Officer or the President.
THE SECRETARY AND ASSISTANT SECRETARY
SECTION 10. The Secretary shall attend all meetings of the Board of Directors
and all meetings of the stockholders and record all the proceedings of the
meetings of the Corporation and of the Board of Directors in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or President,
under whose supervision he shall be. He shall have custody of the corporate seal
of the Corporation and he, or an assistant secretary, shall have authority to
affix the same to any instrument requiring it and when so affixed it may be
attested by his signature or by the signature of such assistant secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the Corporation and to attest the affixing by his signature.
SECTION 11. The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board of Directors (or if there be no
such determination, then in the order of their election), shall, in the absence
of the Secretary or in the event of his inability or refusal to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE CHIEF FINANCIAL OFFICER AND ASSISTANT TREASURER
SECTION 12. The Chief Financial Officer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors.
SECTION 13. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an account of all his transactions as
treasurer and of the financial condition of the Corporation.
SECTION 14. If required by the Board of Directors, he shall give the Corporation
a bond (which shall be renewed every six years) in such sum and with such surety
or sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
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<PAGE>
SECTION 15. The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the Chief Financial Officer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
ARTICLE VI. CERTIFICATES OF STOCK.
SECTION 1. Except as otherwise provided in the Certificate of Incorporation,
every holder of stock in the Corporation shall be entitled to have a
certificate, signed by, or in the name of the Corporation by, the Chief
Executive Officer, the President or a Vice President and the Chief Financial
Officer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of
the Corporation, certifying the number of shares owned by him in the
Corporation.
SECTION 2. If the Corporation shall be authorized to issue more than one class
or more than one series of any class, the designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
SECTION 3. Where a certificate is countersigned (1) by a transfer agent other
than the Corporation or its employees, or, (2) by a registrar other than the
Corporation or its employees, the signatures of the officers of the Corporation
may be facsimiles. In case any officer who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer at the date of issue.
LOST CERTIFICATES
SECTION 4. The Board of Directors may direct a new certificate or certificates
to be issued in place of any certificate or certificates theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of the fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate
or certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
TRANSFER OF STOCK
SECTION 5. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
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<PAGE>
duty of the Corporation to cause to be issued a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
FIXING RECORD DATE
SECTION 6. In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
SECTION 7. The Corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends,
and to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VII. GENERAL PROVISIONS.
DIVIDENDS
SECTION 1. Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
Board of Directors, or a duly constituted Committee thereof, at any regular or
special meeting, pursuant to law. Dividends may be paid in cash, in property, or
in shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
SECTION 2. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
Directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interest of the
Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
SECTION 3. The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
Corporation.
CHECKS
SECTION 4. All checks or demands for money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors may from time to time designate.
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<PAGE>
FISCAL YEAR
SECTION 5. The fiscal year of the Corporation shall be fixed by resolution of
the Board of Directors.
SEAL
SECTION 6. The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE VIII. AMENDMENTS.
SECTION 1. These By-Laws may be altered or repealed at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration or repeal
be contained in the notice of such special meeting.
ARTICLE IX. MISCELLANEOUS.
SECTION 1. Unless otherwise ordered by the Board of Directors, the Chief
Executive Officer or the President, or any Vice President, or the Secretary or
the Chief Financial Officer in person or by proxy or proxies appointed by any of
them shall have full power and authority on behalf of the Corporation to vote,
act and consent with respect to any shares of stock issued by other corporations
which the Corporation may own or as to which the Corporation otherwise has the
right to vote, act or consent.
SECTION 2. In the event the protective conditions or restrictions of any
outstanding series of Preferred Stock, fixed by the Board of Directors pursuant
to the authority conferred upon the Board of Directors by the Certificate of
Incorporation and Section 151 of Title 8 of the Delaware Code of 1953, are
inconsistent with any provision of these By-Laws, such provision shall be deemed
to be amended to remove any inconsistency.
SECTION 3. Business Combinations with interested Stockholders. Pursuant to the
provisions of Section 203(a)(2) of the General Corporation Law of Delaware, the
Corporation, by action of the Board, expressly elects not to be governed by
Section 203 of the General Corporation Law of Delaware, dealing with the
business combinations with interested stockholders. Notwithstanding anything to
the contrary in these By-Laws, the provisions of this Section may not be further
amended by the Board except as may be specifically authorized by the General
Corporation Law.
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CNA FINANCIAL CORPORATION
1996 ANNUAL REPORT
CNA
<PAGE>
PROFILE
- --------------------------------------------------------------------------------
CNA Financial Corporation (CNA)
is the largest writer of commercial property/casualty insurance
and is ranked as one of the ten largest insurance organizations
in the United States.
- --------------------------------------------------------------------------------
CNA serves businesses and individuals with a broad range of insurance and risk
management products and services. Insurance products include property and
casualty coverages; life, accident and health insurance; and pension products
and annuities. CNA services include risk management, information services,
health care management and claims administration. CNA products and services are
marketed through agents, brokers, general agents and direct sales.
CNA Financial Corporation, with 1996 assets of $60.7 billion and stockholder's
equity of $7.1 billion, is the holding company of Continental Casualty Company,
which was incorporated in 1897, Continental Assurance Company, incorporated in
1911, and The Continental Corporation, incorporated in 1968, which is the
holding company of The Continental Insurance Company, incorporated in 1853.
In 1997, CNA observes its centennial year, celebrating a century of financial
strength, stability and commitment to customers and business partners.
CNA Financial Corporation stock is traded primarily on the New York Stock
Exchange and, as of December 31, 1996, was approximately 84 percent owned by
Loews Corporation.
CNA FINANCIAL CORPORATION
-------------------------
<PAGE>
CNA
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
1996
2
FINANCIAL HIGHLIGHTS
4
LETTER FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOHA
5
LETTER FROM CNA INSURANCE COMPANIES
CHAIRMAN AND CEO DENNIS H. CHOOKASZIAN
11
FINANCIAL SECTION CONTENTS
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
30
FINANCIAL STATEMENTS
81
INDEPENDENT AUDITORS' REPORT
82
COMMON STOCK INFORMATION
83
CORPORATE DIRECTORY
CNA FINANCIAL CORPORATION
-------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Results of Operations and Financial Condition
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
(In millions of dollars,
except per share data)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------
Revenues $16,987.8 $14,699.7 $10,999.5 $11,010.8 $10,793.4
- -----------------------------------------------------------------------------------------------------------
Income (loss) before income tax 1,345.0 1,042.4 (134.0) 93.4 (1,375.0)
- -----------------------------------------------------------------------------------------------------------
Net income (loss) excluding
net realized investment
gains/losses and accounting
changes:
Property/Casualty 575.8 457.0 147.9 (266.6) (928.4)
Life 109.9 103.8 87.0 43.5 52.0
Other (108.0) (98.2) (47.9) (28.6) (21.4)
- -----------------------------------------------------------------------------------------------------------
Net operating income (loss) 577.7 462.6 187.0 (251.7) (897.8)
Net realized investment gains (losses) 387.1 294.4 (150.5) 519.2 235.3
Accounting changes -- -- -- -- 331.9
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ 964.8 $ 757.0 $ 36.5 $ 267.5 $ (330.6)
============================================================================================================
EARNINGS PER SHARE
- ------------------------------------------------------------------------------------------------------------
Net operating income (loss) $ 9.25 $ 7.37 $ 2.94 $ (4.14) $ (14.60)
Net realized investment gains (losses) 6.26 4.77 (2.43) 8.40 3.81
Accounting changes -- -- -- -- 5.37
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 15.51 $ 12.14 $ 0.51 $ 4.26 $ (5.42)
============================================================================================================
FINANCIAL POSITION
- ------------------------------------------------------------------------------------------------------------
Assets $60,734.7 $60,360.4 $44,320.4 $41,912.3 $39,743.9
Debt 2,764.9 3,025.5 913.8 915.3 415.0
Stockholders' equity 7,059.8 6,735.5 4,545.9 5,381.1 4,789.2
Book value per common share 111.81 106.56 71.13 84.65 75.07
============================================================================================================
STATUTORY SURPLUS
- ------------------------------------------------------------------------------------------------------------
Property/Casualty $ 6,348.8 $ 5,695.9 $ 3,367.3 $ 3,598.4 $ 3,136.8
Life 1,163.4 1,127.6 1,055.6 1,022.0 1,003.0
============================================================================================================
* Includes The Continental Corporation since May 10, 1995.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL POSITION
This page of CNA Financial Corporation's annual report has four bar graphs which
illustrate the trend in revenues, assets and stockholders' equity from 1986
through 1996.
CNA FINANCIAL CORPORATION (1986-1996)
($ in billions except per share data)
|---------------------|-----------|--------|---------------|----------------|
|Measurement Period | | | Stockholders' | Book Value Per|
|(Fiscal Year Covered)| Revenues | Assets | Equity | Common Share |
|---------------------|-----------|--------|---------------|----------------|
| | | | | |
|FYE 12/31/86.........| 6.5 | 18.2 | 2.7 | 40.37 |
|FYE 12/31/87.........| 6.9 | 21.6 | 3.1 | 46.40 |
|FYE 12/31/88.........| 8.3 | 25.9 | 3.6 | 54.87 |
|FYE 12/31/89.........| 9.1 | 30.9 | 4.2 | 64.74 |
|FYE 12/31/90.........| 9.9 | 34.7 | 4.5 | 70.23 |
|FYE 12/31/91.........| 11.1 | 39.2 | 5.1 | 80.24 |
|FYE 12/31/92.........| 10.8 | 39.7 | 4.8 | 75.07 |
|FYE 12/31/93.........| 11.0 | 41.9 | 5.4 | 84.65 |
|FYE 12/31/94.........| 11.0 | 44.3 | 4.5 | 71.13 |
|FYE 12/31/95.........| 14.7 | 60.4 | 6.7 | 106.56 |
|FYE 12/31/96.........| 17.0 | 60.7 | 7.1 | 111.81 |
|---------------------|-----------|--------|---------------|----------------|
CNA FINANCIAL CORPORATION
-------------------------
3
<PAGE>
A LETTER TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
1996
FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOHA
CNA Financial Corporation reported strong earnings in 1996. Net income was
$964.8 million, or $15.51 per share, compared with net income of $757.0 million,
or $12.14 per share, in 1995.
Exclusive of securities transactions, net income for 1996 amounted to $577.7
million, or $9.25 per share, compared with $462.6 million, or $7.37 per share,
in 1995.
Consolidated revenues for 1996 were approximately $17.0 billion, compared with
approximately $14.7 billion in 1995.
Continuation of an upward trend in earnings, the substantial completion of the
merger with The Continental Corporation, and several business expansion
initiatives were highlights of a successful year. Thanks to the contributions of
employees and business partners, CNA continued to strengthen its leadership in
the insurance marketplace.
Taking a broader perspective, the decade of the `90s is a time of rapid change
for the insurance industry. Consolidation, intensifying competition and
globalization are transforming the market for insurance products and services.
In this environment of challenge and opportunity, CNA is well positioned for
continued success.
Across the broad range of its businesses, CNA builds on a foundation of
financial strength. At year-end 1996, the statutory surplus of our
property/casualty companies was approximately $6.3 billion, one of the largest
in the industry. The statutory surplus of CNA's life insurance subsidiaries was
approximately $1.2 billion. In addition, CNA continues to maintain a
high-quality investment portfolio heavily weighted toward U.S. government bonds.
In addition to its financial foundation, CNA builds on a heritage of service and
commitment. Continental Casualty Company, the founding company of CNA, was
founded in 1897. Since then, CNA has kept its promises to its customers. It has
grown by staying focused on a set of fundamental strengths: a solid financial
base, lasting business relationships and a strong will to stay in the forefront
of its chosen markets. This tradition gives CNA a running start toward a new
century of even greater achievement.
In 1996, CNA served its customers, grew profitably and set a course for future
success. On behalf of the board of directors, I would like to thank you, our
shareholders, for your commitment and support.
Sincerely,
S/EDWARD J. NOHA
Edward J. Noha
Chairman of the Board
CNA Financial Corporation
CNA FINANCIAL CORPORATION
-------------------------
4
<PAGE>
A LETTER TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
1996
FROM CNA INSURANCE COMPANIES
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DENNIS H. CHOOKASZIAN
In 1996, CNA had another successful year, serving its customers well, achieving
solid profits and moving ahead on several opportunities for business expansion.
Several factors contributed to the strong earnings, including improved loss
experience in property/casualty businesses, efficiencies from the 1995 merger
with The Continental Corporation, and continuing growth and profit in the
individual life business. In addition, 1996 earnings were bolstered by gains on
CNA's investment portfolio.
CNA achieved its goal of substantially completing the merger with Continental.
The final stage of the merger, including integration of computer systems,
remains on course.
Building on the momentum of the Continental merger, CNA focused on a number of
business expansion activities. In the accident and health business, CNA acquired
the managed care division of CoreSource, Inc., a leader in the field of
developing and managing health care networks for large corporate customers
outside major metropolitan areas. The acquired organization, which now operates
independently as CNA Health Partners, supports our long-term strategy of
profitable growth in the managed health care environment.
In reinsurance, CNA launched a facultative reinsurance operation, a major
strategic addition to our capabilities in the U.S. market. The new operation
expands the range of CNA services and presents opportunities to expand existing
relationships with treaty reinsurance customers.
In specialty insurance, CNA and Capsure Holdings Corp. (Capsure) agreed to form
a new stock company, CNA Surety Corporation, subject to the approval of
Capsure's shareholders. Combining the surety businesses of CNA and Capsure, CNA
Surety Corporation will be the largest U.S. surety organization with a
substantial leadership position in all segments of the surety marketplace. The
transaction is expected to be finalized in the second quarter of 1997.
In addition, during the first quarter of 1997, CNA announced the formation of a
new company, Hedge Financial Products, which will pursue opportunities to
securitize insurance risks. The formation of Hedge Financial puts CNA at the
forefront of the emerging securitization business, in which insurance risk is
converted into monetized instruments that can be traded among investors.
Also in 1997, CNA entered into an agreement by which it will become a co-owner
of RVI Guaranty Co., Ltd., the largest monoline residual value insurance company
in the world. This type of insurance protects the residual value of assets
financed by banks and other financial institutions, including leased
automobiles, commercial equipment and real estate. This agreement will enable
CNA to participate in a largely untapped segment of the commercial insurance
market and to broaden its long-standing relationships with
financial institutions.
CNA FINANCIAL CORPORATION
-------------------------
5
<PAGE>
A LETTER TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
1996
Along with business expansion, CNA advanced on many fronts in the area of
technology in 1996. We improved service and reduced costs of the basic systems
and structures that form the technology infrastructure of CNA. During the fourth
quarter, CNA entered into an agreement with Computer Sciences Corporation (CSC)
to set up the CSC Advanced Technology Center in Chicago that will further
improve our technology processes.
In addition to the Technology Center, CNA and CSC agreed to launch a new life
insurance outsourcing business. The new service will handle many of the
administrative processes involved in life insurance, for example, issuing
policies and managing recordkeeping functions. Outsourcing has become
increasingly attractive to life insurance companies because of intense
competitive pressures and the complexity of automating their administrative
functions.
CNA also invested in InsWeb, the first interactive insurance marketplace on the
Internet. The investment positions CNA to sell insurance products over the
Internet in conjunction with its agents.
Along with efforts to advance its technological capabilities, CNA strengthened
its marketing focus through the development of a corporate positioning and
branding strategy. Based on the key CNA values of financial strength, stability
and commitment, the strategy entails a concerted effort to present the CNA name
in a consistent, compelling fashion.
The branding and positioning strategy coincides well with a milestone in CNA's
history. In 1997, CNA's founding company, Continental Casualty Company,
celebrates its 100th anniversary. The centennial presents a unique opportunity
to link the revitalized marketing strategy to CNA's legacy of strong values and
dedicated employees.
In addition to these corporate activities, 1996 was a year of accomplishment for
CNA's various businesses.
PROPERTY/CASUALTY
CNA is the largest U.S. writer of commercial property/casualty insurance,
encompassing such coverages as workers' compensation, general liability,
multiple peril, marine, agriculture, professional and specialty lines, and
reinsurance.
In 1996, CNA continued to build on its proven strategy of industry segmentation.
For the past two years, CNA has capitalized on opportunities to apply this
approach to the large book of general commercial business acquired in the
Continental merger. By aligning the full range of its business processes with
the industry segmentation strategy, CNA is moving toward the goal of being the
low-cost, high-quality provider of insurance products and services in the
commercial marketplace.
Specifically, CNA expanded its offering of simplified products to increase
convenience and choice for agents and small commercial insureds. In the small
and medium commercial segment, CNA launched seven new Commercial Affiliation
Marketing (CAM) programs for targeted classes of business. In addition, CNA
CNA FINANCIAL CORPORATION
-------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
1996
strengthened its commitment to the High Performance Agency Program, a preferred
agency program based on partnership with independent agents. At the same time,
CNA entered into strategic partnerships with brokers to reach classes of
customers who have traditionally worked with brokers to meet their risk
management needs.
In the large commercial marketplace, CNA reported strong sales volume, including
several important new accounts. These successes reflect CNA's ability to respond
to large corporate customers with a broad offering of products and services. In
addition, CNA has built up its specialized service units to deliver
best-in-market services in the areas of risk management information, claims,
cost management and consulting.
In agricultural insurance, CNA continued to build on the business acquired from
the Continental merger. The purchase of a 40 percent interest in the voting
common stock of North American Crop Underwriters established a strategic
relationship between CNA and a well-respected provider of farm and crop
insurance.
Beyond its strong presence in basic commercial insurance, CNA is one of the
largest underwriters of professional and specialty coverages. This business
includes liability insurance for healthcare providers, architects & engineers,
lawyers, accountants and other professionals; entertainment insurance; liability
coverage for corporate directors and officers; and excess and surplus lines
insurance. In addition, CNA is a major presence in marine insurance, surety,
credit, aviation and warranty. Several of these businesses are built on
long-standing successful partnerships with managing general underwriters such as
Victor O. Schinnerer, Aon Corporation and Poe & Brown.
During 1996, CNA's professional and specialty businesses performed well. The
Company continued to pursue a strategy of focusing on select customer groups and
developing exceptional knowledge of their coverage needs. Thanks to a new
structured process for increasing our understanding of customers in conjunction
with our distribution partners, we are creating "virtual teams" around key
market segments. In addition, CNA continued to strengthen its expertise in
specialty lines by hiring staff who have worked in the professions we serve.
The Marine Office of America Corporation (MOAC), the leading ocean marine
underwriter in North America, had one of its most successful years ever, based
on superior underwriting and unmatched knowledge of the marine market. On a
historical note, MOAC insured all the sailing, rowing and kayaking events, as
well as the marinas and service vessels associated with the Olympic Games in
Atlanta.
In the international market for primary insurance, CNA is moving ahead with
plans to establish a strong, flexible international franchise. These plans
encompass alliances with other international insurers, efforts to build
indigenous operations and selected acquisitions. CNA continues to develop a
strategic partnership relationship with Assicurazioni Generali S.p.A., one of
the largest European insurance organizations.
CNA FINANCIAL CORPORATION
-------------------------
7
<PAGE>
A LETTER TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
1996
In reinsurance, along with the launch of the facultative reinsurance operation,
CNA pursued several avenues of growth. In the United States, CNA enlarged its
treaty reinsurance line in the alternative risk market, and in such established
markets as professional liability and financial reinsurance. Internationally,
the reinsurance operations moved ahead with a strategy of establishing CNA as
the market of choice among key brokers and ceding customers. In the London
market, CNA became an investor in four Lloyd's of London syndicates, and also
received approval from Lloyd's for the establishment of a CNA syndicate. In
Europe, we continued to expand business relationships from offices in Amsterdam,
Milan and Zurich.
In addition to commercial insurance and reinsurance, CNA's property/casualty
operations include personal automobile and homeowners insurance sold to
individuals.
In 1996, CNA continued to build the foundation of a revitalized personal
insurance business. The company finalized and began implementing a long-term
growth strategy to position CNA as one of the largest and most successful
personal lines organizations over the next decade. Key elements of the strategy
include substantially increasing business from existing distribution channels,
identifying likely acquisition candidates and exploring expanded modes of
distribution.
INDIVIDUAL LIFE
CNA had its second consecutive year of strong growth and improved service in the
individual life insurance marketplace. CNA's products include term, universal
and participating life policies, long-term care coverage and annuities.
Expanded marketing effort resulted in increased applications for life products
by more than 40 percent to over 285,000. First-year paid premium for life and
annuity products rose to more than $215 million in 1996 from $138 million in
1995, while annuity premiums rose to $221 million in 1996 from $174 million in
1995.
Meanwhile, CNA continued to strengthen its service capability. To meet the
continuing demands of new sales, CNA made significant additions to staff,
completed a change in computer architecture and finished reorganizing its
service function into producer teams. In addition, the business process
outsourcing agreement with CSC will further enhance our ability to provide
low-cost, quality service to distributors and policyholders.
In addition to providing excellent service, CNA is building its position in the
individual life business with rapid introduction of new products and an emphasis
on strong distribution partnerships. 1996 product introductions included a
portfolio of variable products, new universal life and second-to-die products,
and a series of products for high-risk individuals.
GROUP LIFE AND HEALTH
In this marketplace, CNA focuses on four general product categories: medical
benefits; pension products; reinsurance; and group life, accident & disability
CNA FINANCIAL CORPORATION
-------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
1996
and long-term care insurance. These products are sold to businesses, groups and
associations.
In the market for private medical benefits, CNA's strategy is based on the
development of very close partnerships with health care providers. In 1996, we
advanced this strategy by developing and marketing products and services that
build on the growing presence of Physician Hospital Organizations and Integrated
Delivery Systems in the managed care environment. We also strengthened our
capabilities in the areas of provider network development and management,
medical management and health care systems integration. These activities were
reinforced by the acquisition of CNA Health Partners.
Meanwhile, CNA's $2 billion in premium Federal Employees Health Benefits Program
benefited from ongoing investments in communications and claims automation.
In pension products, CNA is broadening its product offerings in the small to
medium-size market through California Central Trust Bank Corporation (CalTrust),
a California trust and savings bank, a subsidiary acquired as a result of the
Continental merger.
In life and group reinsurance, CNA continued to build on a strong market
position. On the life side, we are implementing a growth strategy based on
strong service to the facultative and treaty markets. On the group side, CNA is
moving forward with a strategy of being a risk partner for managed care
organizations.
In group life, accident & disability and long-term care insurance, CNA focused
on system improvements, claims process redesign and enhanced products and
distribution within the context of an effort to position itself as a market
leader.
In summary, CNA ended a very successful first century in 1996. Through the
support of our business partners and the continuing dedication of CNA employees,
we moved ahead with a range of business expansion opportunities while continuing
to produce strong earnings.
Looking ahead, 1997 is likely to be even more challenging than 1996. It is
expected that excess capacity in the industry across virtually all lines will
put greater pressure on margins. CNA will continue to focus on efficiency,
flexibility and profitability with an emphasis on technology, distribution
outreach and selected opportunities for business expansion. These directions,
combined with its foundation of financial strength, position CNA for continued
success. Our challenge is to build on the legacy of the past for an even
brighter future.
Sincerely,
S/DENNIS H. CHOOKASZIAN
Dennis H. Chookaszian
Chairman and Chief Executive Officer
CNA Insurance Companies
CNA FINANCIAL CORPORATION
-------------------------
9
<PAGE>
CNA
<PAGE>
FINANCIAL SECTION CONTENTS
- --------------------------------------------------------------------------------
1996
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
30
CONSOLIDATED BALANCE SHEET
32
STATEMENT OF CONSOLIDATED OPERATIONS
33
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
34
STATEMENT OF CONSOLIDATED CASH FLOWS
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
81
INDEPENDENT AUDITORS' REPORT
82
COMMON STOCK INFORMATION
83
CORPORATE DIRECTORY
CNA FINANCIAL CORPORATION
-------------------------
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Consolidated Results
Consolidated Results
In 1996, CNA substantially completed its merger with The Continental Corporation
(Continental) while continuing to build on the strength of 1995's operating
results. The results reflect continued improvement in the underlying
operations, including improved loss experience, particularly in workers' compen-
sation business and growth in individual life, partially offset by
increased weather related catastrophes. Additionally, capital gains contribut-
ed significantly to earnings.
CNA acquired Continental through a cash merger for approximately $1.1 billion on
May 10, 1995 (See Note L). As a result, Continental became a wholly owned
subsidiary of CNA Financial Corporation, and the consolidated results of
operations include Continental subsequent to the acquisition date. CNA funded
the cash purchase price with proceeds from a five-year revolving credit
facility. Continental is an insurance holding company principally engaged in the
business of owning a group of property and casualty insurance companies.
CNA is the largest commercial insurer in the United States, third largest
property-casualty company and the twenty second largest life insurance company
in the country, based on 1995 net written premium. Based on market share, CNA
ranks first among United States insurers in commercial affiliation marketing,
commercial multiple peril, personal packages and ocean marine; second in
commercial auto, general liability, medical malpractice, federal employees
health benefit plans, multiple peril crop, surety, offshore energy, accounts
receivable credit; third in automobile warranty, directors & officers,
farmowners multiple peril, and recreational watercraft; fourth in workers'
compensation and sixth in reinsurance in the United States. In addition, CNA
ranks first, second or third for various errors & omissions coverages for
architects and engineers, accountants, lawyers and other professionals.
Revenues excluding realized gains/losses were $16.4 billion, up 15.0% from 1995
and up 45.6% from 1994. For 1996, revenues reflect increases of $1.7 billion
(14.9%) in earned premiums, $199.4 million (9.6%) in net investment income and
$190.0 million (44.8%) in other revenues.
For 1996, CNA reported net operating income (which excludes net realized
investment gains/losses) of $577.7 million, or $9.25 per share, compared to
$462.6 million, or $7.37 per share, for 1995 and $187.0 million, or $2.94 per
share, for 1994.
Realized investment gains, net of tax, amounted to $387.1 million, or $6.26 per
share in 1996, compared to net realized investment gains of $294.4 million, or
$4.77 per share in 1995 and net realized investment losses of $150.5 million, or
$2.43 per share, in 1994.
Net income for 1996 was $964.8 million, or $15.51 per share, compared with net
income of $757.0 million, or $12.14 per share, for 1995 and $36.5 million, or
$0.51 per share in 1994.
CNA FINANCIAL CORPORATION
-------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations
Results of Operations:
- ----------------------
The following chart summarizes key components of consolidated operating results
for each of the last three years.
<TABLE>
<CAPTION>
CONSOLIDATED OPERATIONS
- -------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994
- -------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
OPERATING SUMMARY (excluding realized investment
gains/losses):
Revenues:
Premiums $13,479.0 $11,735.1 $9,474.4
Net investment income 2,276.0 2,076.6 1,551.2
Other 614.2 424.2 220.1
- -------------------------------------------------------------------------------------------
Total revenues 16,369.2 14,235.9 11,245.7
Benefits and expenses 15,628.5 13,649.5 11,144.4
Income before income tax 740.7 586.4 101.3
Income tax (expense) benefit (163.0) (123.8) 85.7
- -------------------------------------------------------------------------------------------
Net operating income
(excluding realized investment gains/losses) $ 577.7 $ 462.6 $ 187.0
===========================================================================================
SUPPLEMENTAL FINANCIAL DATA:
Net operating income (loss) by group:
Property/Casualty $ 575.8 $ 457.0 $ 147.9
Life 109.9 103.8 87.0
Other, primarily interest expense (108.0) (98.2) (47.9)
- --------------------------------------------------------------------------------------------
577.7 462.6 187.0
- --------------------------------------------------------------------------------------------
Net realized investment gains (losses) by group:
Property/Casualty 303.5 207.9 (104.6)
Life 95.7 85.4 (45.6)
Other (12.1) 1.1 (0.3)
- ---------------------------------------------------------------------------------------------
387.1 294.4 (150.5)
- ---------------------------------------------------------------------------------------------
Net income (loss) by group:
Property/Casualty 879.3 664.9 43.3
Life 205.6 189.2 41.4
Other, primarily interest expense (120.1) (97.1) (48.2)
- --------------------------------------------------------------------------------------------
$ 964.8 $ 757.0 $ 36.5
============================================================================================
*Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Property/Casualty Operations
Property/Casualty Operations
<TABLE>
<CAPTION>
PROPERTY/CASUALTY GROUP
- --------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994
- --------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Operating Summary (excluding realized
investment gains/losses):
Revenues:
Premiums $10,127.1 $8,723.8 $6,838.5
Net investment income 1,881.3 1,699.8 1,240.4
Other 508.4 348.0 170.4
- --------------------------------------------------------------------------------------------
12,516.8 10,771.6 8,249.3
Benefits and expenses 11,778.7 10,193.3 8,210.1
- --------------------------------------------------------------------------------------------
Operating income before income tax 738.1 578.3 39.2
Income tax (expense) benefit (162.3) (121.3) 108.7
- --------------------------------------------------------------------------------------------
Net operating income
(excluding realized investment gains/losses) $ 575.8 $ 457.0 $ 147.9
============================================================================================
*Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>
Commercial lines customers include large national corporations, small and
medium-sized businesses, groups and associations, and professionals. Coverages
are written primarily through traditional insurance contracts, under which risk
is transferred to the insurer. Many large commercial account policies are
written under retrospectively-rated contracts, which are experience-rated.
Premiums for such contracts may be adjusted, subject to limitations set by
contract, based on loss experience of the insureds. Other experience-rated
policies include provisions for dividends based on loss experience.
Experience-rated contracts reduce but do not eliminate risk to the insurer.
The property/casualty group markets personal lines of insurance, primarily
automobile and homeowners coverages sold to individuals under monoline and
package policies.
Property/casualty involuntary risks include mandatory participation in residual
markets, statutory assessments for insolvencies of other insurers, and other
charges.
The property/casualty group also provides loss control, policy administration
and claim administration services under service contracts for fees. Such
services are provided primarily in the workers' compensation market, where
retention of more risk by the employer through self-insurance or high-deductible
programs has become increasingly prevalent.
<PAGE>
Property/casualty profitability continued to show improvement in 1996 and
reflects both increases in investment income and improved underwriting results.
Pretax operating income excluding net realized investment gains/losses for the
property/casualty insurance subsidiaries was $738.1 million in 1996, compared to
$578.3 million and $39.2 million in 1995 and 1994, respectively. Net operating
income excluding net realized investment gains/losses of CNA's property/casualty
insurance subsidiaries was $575.8 million for 1996, compared to $457.0 million
and $147.9 million in 1995 and 1994, respectively.
CNA FINANCIAL CORPORATION
-------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
Property/Casualty Operations (cont.)
Property/casualty revenues, excluding net realized investment gains/losses were
$12.5 billion, up approximately 16.2% from $10.8 billion in 1995 and up from
$8.2 billion in 1994. Continental revenues, excluding net realized investment
gains/losses, for 1996 and 1995 were $3.2 billion and $2.1 billion,respectively.
The 1995 Continental results are subsequent to May 10, 1995.
Property/casualty earned premiums were $10.1 billion in 1996, up approximately
16.1% from the $8.7 billion earned in 1995 and up from $6.8 billion in 1994.
Continental earned premiums for 1996 and 1995 were $2.7 billion and $1.7
billion, respectively. The 1995 Continental results are subsequent to May 10,
1995.
Property/casualty investment income for 1996 was $1.9 billion, up approximately
10.7% from the $1.7 billion in 1995 and up 51.7% from the $1.2 billion in 1994.
Investment income increased primarily due to the inclusion of the Continental
portfolio for the full year of 1996 offset in part by slightly lower yields on
the bond segment of the investment portfolio.
The bond segment of the investment portfolio yielded 6.8% in 1996 compared with
6.9% and 6.4% in 1995 and 1994, respectively.
The underwriting loss for 1996 was $1,143.2 million, compared to $1,121.5
million and $1,201.2 million in 1995 and 1994, respectively. The GAAP combined
ratio was 108.9 for 1996, compared with 110.3 and 115.0 for 1995 and 1994,
respectively.
Catastrophe losses for 1996 on a pretax basis were approximately $315 million,
compared with $149 million in 1995 and $283 million in 1994. CNA's 1996
catastrophe losses were primarily weather related losses, including winter
storms and flooding. CNA's 1995 catastrophe losses related primarily to tropical
storms and hail storms in Texas. CNA's 1994 catastrophe losses related primarily
to the Northridge earthquake near Los Angeles and severe winter storms
in the Northeast.
CNA FINANCIAL CORPORATION
-------------------------
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Property Casualty Operations (cont.)
The following table shows the components of underwriting results for commercial
lines:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - COMMERCIAL
- -------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994
- -------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Premiums Earned:
Professional and specialty $1,844.9 $1,557.7 $1,010.1
General liability and commercial automobile 1,754.1 1,648.9 1,261.1
Workers' compensation 1,542.5 1,475.8 1,426.3
Multiple peril 1,046.9 869.9 389.0
Accident and health 919.0 699.1 557.1
Reinsurance and other 1,188.9 973.9 773.5
- -------------------------------------------------------------------------------------------------
8,296.3 7,225.3 5,417.1
Losses and expenses 9,149.4 8,146.1 6,362.8
- -------------------------------------------------------------------------------------------------
Net underwriting losses before investment income $ (853.1) $ (920.8) $ (945.7)
==================================================================================================
* Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>
Premiums for the property/casualty commercial segment increased 14.8% in 1996 to
$8.3 billion from $7.2 billion in 1995 and up from $5.4 billion in 1994.
Commercial premiums for Continental were $1.7 billion and $1.4 billion in 1996
and 1995, respectively. The Continental results for 1995 were subsequent to May
10, 1995.
Professional and specialty earned premium increased approximately 18.4% to $1.8
billion in 1996, up from $1.6 billion in 1995 and $1.0 billion in 1994. The 1996
premium increase was primarily a result of a full year of Continental premium
revenue which added approximately $175 million in additional premium from 1995
levels. Continental added approximately $460 million of the 1995 increase over
1994.
General liability and commercial automobile earned premiums were approximately
$1.8 billion in 1996, up approximately 6.4% from the $1.6 billion earned in 1995
and up 39.1% from the $1.3 billion in 1994. The increase in general liability
premium resulted primarily from an increase in commercial affiliation marketing
business of $180 million. Continental premium revenue was approximately $275
million of the increase in 1995 premium over 1994.
Earned premium from workers' compensation increased approximately 4.5% in 1996,
up from the $1.5 billion and $1.4 billion earned in 1995 and 1994, respectively.
The increase in workers' compensation premium earned resulted from the inclusion
of Continental business for a full year.
Multiple peril earned premium increased approximately 20.3% to $1.0 billion in
1996, from $0.9 billion in 1995 and $0.4 billion in 1994. The 1996 premium
increase of $177 million is primarily attributable to an increase in commercial
package business of $90 million and $40 million resulting from inclusion of
Continental for a full year. Continental premium in 1995 was approximately $440
million or 91% of the growth from 1994.
CNA FINANCIAL CORPORATION
-------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Property/Casualty Operations (cont.)
Accident and health earned premiums were approximately $0.9 billion in 1996,
increasing approximately 31.5% from the $0.7 billion earned in 1995 and up from
the $0.6 billion in 1994. Accident and health premium increased primarily due to
increases in mass market association premium of $145 million, group long-term
disability premium of $25 million, as well as an increase from a full year of
Continental of $28 million.
Earned premium from reinsurance and other increased approximately 22.1% to $1.2
billion in 1996, up from the $1.0 billion and $0.8 billion earned in 1995 and
1994, respectively.
Reinsurance and other premium earned increased by approximately $215 million to
which the inclusion of Continental results for a full year contributed $163
million. Continental added approximately $105 million to 1995 results.
Underwriting results in commercial lines improved to a loss of $853.1 million,
an improvement of approximately 7.4% from the $920.8 million loss in 1995 and an
improvement of 9.8% from the $945.7 million in 1994. This improvement is
primarily the result of improved loss experience, particularly in workers'
compensation business, partially offset by increased weather related
catastrophes.
The following table shows the components of underwriting results for personal
lines:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - PERSONAL
- ---------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994
- ---------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Premiums Earned:
Personal lines packages $1,063.3 $ 781.6 $ 562.6
Monoline automobile and property coverages 366.5 325.4 314.2
Accident and health 168.9 107.8 88.9
- ---------------------------------------------------------------------------------------------
1,598.7 1,214.8 965.7
Losses and expenses 1,782.5 1,316.7 1,150.9
- ---------------------------------------------------------------------------------------------
Net underwriting losses before investment income $ (183.8) $ (101.9) $ (185.2)
==============================================================================================
* Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>
Personal lines earned premium increased 31.6% to $1.6 billion from the $1.2
billion earned in 1995 and up from the $966 million earned in 1994. The 1996
increase in personal lines premium resulted primarily from the cancellation of a
quota share agreement, under which Continental ceded premium, and the inclusion
of Continental business for the full year of 1996. Continental was responsible
for $206 million of the $249 million in premium revenue growth from 1994 to
1995.
The underwriting loss in personal lines was $183.8 million, an increase of
approximately 80.4% from the $101.9 million loss in 1995 and an improvement of
approximately 0.8% from the $185.2 million loss in 1994. The change from 1995 to
1996 was primarily due to increased weather related catastrophes and additional
premium volume due to the cancellation of the quota share agreement, noted
above.
CNA FINANCIAL CORPORATION
-------------------------
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Property/Casualty Operations (cont.)
The following table shows the components of underwriting results for involuntary
risks:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - INVOLUNTARY RISKS
- ------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994
- ------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Premiums Earned:
Workers' compensation $ 135.6 $178.2 $350.0
Private passenger automobile 57.9 79.7 46.4
Commercial automobile 36.4 19.9 54.3
Property and multiple peril 2.2 5.9 5.0
- ------------------------------------------------------------------------------------------------
232.1 283.7 455.7
Losses and expenses 338.4 382.5 526.0
- ------------------------------------------------------------------------------------------------
Net underwriting losses before investment income $(106.3) $(98.8) $(70.3)
================================================================================================
* Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>
Involuntary risk earned premium decreased to $232 million down approximately
18.2% from the $284 million earned in 1995 and down from the $456 million earned
in 1994. The decrease in involuntary risk premium resulted from a greater
willingness on the part of the voluntary market to write these types of risks,
particularly workers' compensation and private passenger automobile
coverages.
CNA FINANCIAL CORPORATION
-------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Property/Casualty Operations (Cont.)
CNA, consistent with sound insurance reserving practices, regularly adjusts its
reserve estimates in subsequent reporting periods as new facts and circumstances
emerge that indicate the previous estimates need to be modified. These
adjustments, referred to as "reserve development," are inevitable given the
complexities of the reserving process and are recorded in the statement of
operations in the period the need for the adjustments becomes apparent.
The following table reflects the effects of management's ongoing evaluation of
reserve levels and is comprised of the following components:
RESERVE DEVELOPMENT
- ------------------------------------------------------
Year Ended
December 31 1996 1995 1994
- ------------------------------------------------------
(In millions of dollars, (adverse)/favorable)
Environmental
Pollution $(65) $(226) $(181)
Asbestos (51) (274) (37)
Other 207 378 289
- ------------------------------------------------------
Total $ 91 $(122) $ 71
======================================================
Management believes its reserves for environmental pollution and asbestos claims
are appropriately established based upon known facts and current case law.
However, due to the inconsistencies of court coverage decisions, the number of
waste sites subject to clean-up, the standards for clean-up and liability, and
other factors, the ultimate exposure to CNA for these claims may vary materially
From the amounts currently recorded, resulting in a potential increase in the
claim reserves recorded. In addition, issues related to, among other things,
specific policy provisions, multiple insurers and allocation of liability among
insurers, consequences of conduct of the insured, missing policies and proof of
coverage make quantification of liabilities exceptionally difficult and subject
to adjustment based upon newly available data. Due to the uncertainties and
factors described above, management believes it is not practicable to develop a
meaningful range for any such additional reserves that may be required. See Note
E to the Consolidated Financial Statements for further discussion of
environmental pollution and asbestos reserves.
Unfavorable 1996 environmental pollution and asbestos reserve development of $65
million and $51 million, respectively, results from CNA's on-going monitoring of
current payment and settlement patterns, current pending cases and potential
future claims.
Other 1996 and 1995 favorable reserve development, which aggregated to $207
million and $378 million, respectively, was principally due to favorable claim
frequency (rate of claim occurrence) and severity (average cost per claim)
experience in the workers' compensation line of business. These trends reflect
the positive effects of changes in workers' compensation laws, more moderate
increases in medical costs, and a generally strong economy in which individuals
return to the workplace more quickly.
Other favorable reserve development during 1994 aggregated to $289 million,
which was principally attributable to positive severity experience in
professional liability lines and improvement in voluntary and involuntary
workers' compensation experience.
CNA FINANCIAL CORPORATION
-------------------------
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Life Operations
Life Operations
<TABLE>
<CAPTION>
LIFE GROUP
- ---------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
OPERATING SUMMARY (excluding realized
investment gains/losses):
Revenues:
Individual Premium
Accident and health $ 1.8 $ 32.7 $ 32.6
Life and annuity 629.1 497.1 369.4
- ----------------------------------------------------------------------------------------------
Total individual 630.9 529.8 402.0
- ----------------------------------------------------------------------------------------------
Group Premium
Accident and health 2,548.0 2,189.7 2,111.2
Life and annuity 194.9 312.9 165.0
- ----------------------------------------------------------------------------------------------
Total group 2,742.9 2,502.6 2,276.2
- ----------------------------------------------------------------------------------------------
Total premiums 3,373.8 3,032.4 2,678.2
Net investment income 400.0 369.2 310.6
Other 106.4 76.2 49.6
- ----------------------------------------------------------------------------------------------
Total revenues 3,880.2 3,477.8 3,038.4
Total benefits and expenses 3,709.5 3,317.5 2,904.0
- ----------------------------------------------------------------------------------------------
Operating income before income tax 170.7 160.3 134.4
Income tax expense 60.8 56.5 47.4
- ----------------------------------------------------------------------------------------------
Net operating income (excluding realized
investment gains/losses) $ 109.9 $ 103.8 $ 87.0
==============================================================================================
</TABLE>
During 1996, CNA's individual and group operations experienced another year of
strong growth, building on the momentum established last year. Profits rose due
to increased investment income and continued favorable mortality experience as
well as a change in interest rate spread assumptions on interest sensitive
products.
CNA sells a variety of individual and group insurance products. The individual
insurance products consist primarily of term, universal life, participating
policies and individual annuity products. Products developed in 1996 included a
portfolio of variable products and new universal life products which are
expected to be marketed in 1997. Group insurance products include life, accident
and health consisting primarily of major medical and hospitalization, and
pension products, such as guaranteed investment contracts and annuities. CNA has
undertaken a number of initiatives to enhance service, manage health care
utilization demand and quality, and strengthen CNA's networks of physicians,
hospitals and other providers. In the medical and hospitalization market, CNA
underwrites the Federal Employees Health Benefits Program (FEHBP) which had
revenues of $2.1 billion, $1.9 billion and $1.8 billion in 1996, 1995 and 1994,
respectively.
CNA FINANCIAL CORPORATION
--------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
Life Operations (cont.)
Life insurance revenues, excluding net realized investment gains, were up 11.6%
to $3.9 billion for 1996 as compared to $3.5 billion for 1995 and up 27.7% from
$3.0 billion for 1994.
Life premiums for 1996 were up 11.3% to $3.4 billion as compared to $3.0 billion
for 1995 and up 26.0% from 1994 premiums of $2.7 billion.
Life and annuity premiums continue to increase as demand for CNA's Viaterm
product remains strong, with premium increasing approximately $76 million over
1995's level, as well as an increase in annuity premiums of approximately $47
million. Individual policies in-force increased 22% in 1996 to 799,000 from
653,000 in 1995. Individual accident and health premiums declined due to CNA
selling its individual disability income business in late 1995.
Group accident and health premium increases were primarily attributable to
increases in CNA's FEHBP business of approximately $230 million and an increase
in other group medical business of approximately $75 million. These increases
were offset, in part, by reductions in group life and annuity business.
Life investment income increased by approximately 8.3% due to a larger asset
base generated from the increased cashflows resulting from premium growth. The
bond segment of the life investment portfolio yielded 6.5% in 1996 compared with
6.9% and 6.6% in 1995 and 1994, respectively.
CNA's life insurance net operating income excluding net realized investment
gains was $109.9 million for 1996, compared to $103.8 million and $87.0 million
for 1995 and 1994, respectively.
CNA FINANCIAL CORPORATION
---------------------------
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Investments
Investments
- -----------
The following table summarizes CNA's general account investments shown at cost
or amortized cost for each of the last five years.
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS - GENERAL ACCOUNT
- -------------------------------------------------------------------------------------------------
December 31 1996 % 1995 % 1994 % 1993 % 1992 %
- -------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Fixed maturities
(at amortized cost):
Bonds:
Taxable $22,631 65 $25,832 75 $17,484 63 $11,933 48 $ 7,286 33
Tax-exempt 4,860 14 3,453 10 3,717 13 4,725 19 9,502 42
Redeemable
preferred stocks 49 -- 100 -- 423 2 445 2 568 3
Equity securities:
Common stocks 478 1 734 2 729 3 433 2 305 1
Non-redeemable
preferred stocks 224 1 3 -- 8 -- -- -- 5 --
Mortgage loans and
real estate 123 -- 122 -- 47 -- 62 -- 89 --
Policy loans 174 -- 177 1 176 1 174 1 179 1
Other invested assets 617 2 483 1 103 -- 69 -- 55 --
Short-term investments 5,854 17 3,725 11 5,036 18 6,944 28 4,444 20
- --------------------------------------------------------------------------------------------------
Investments $35,010 100% $34,629 100% $27,723 100% $24,785 100% $22,433 100%
==================================================================================================
Investments at
Carrying Value* $35,412 $35,886 $26,943 $25,363 $22,478
==================================================================================================
*As reported in the Consolidated Balance Sheet
</TABLE>
CNA's general account investment portfolio is managed to maximize after-tax
investment return while minimizing credit risk with investments concentrated in
high quality securities to support its insurance underwriting operations.
At December 31, 1996, total Separate Account business cash and investments
amounted to $5.7 billion with taxable fixed maturities representing
approximately 80.9% of the total. Approximately 81.6% of Separate Accounts
investments are used to fund guaranteed investment contracts for which
Continental Assurance Company guarantees principal and a specified return to the
contractholders. The duration of fixed maturity securities included in the
guaranteed investment contract portfolio are matched approximately with the
corresponding payout pattern of the liabilities of the guaranteed investment
contracts.
<PAGE>
CNA has the capacity to hold its fixed maturity portfolio to maturity. However,
securities may be sold as part of CNA's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates, tax
and credit considerations, or other similar factors. Accordingly, the fixed
maturity securities are classified as available-for-sale.
CNA FINANCIAL CORPORATION
------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
Investments (cont.)
The general account portfolio consists primarily of high quality (BBB or higher)
marketable fixed maturities, 92.7% and 93.9% of which are rated as investment
grade at December 31, 1996 and 1995, respectively.
The following table summarizes the ratings of CNA's general account fixed
maturity debt portfolio at carrying value (market):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31 1996 % 1995 % 1994 %
- ----------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
U.S. government and affiliated securities $11,625.5 42.0% $18,904.7 62.3% $12,697.8 63.8%
Other AAA rated 9,184.2 33.2 4,625.2 15.3 3,666.3 18.4
AA and A rated 3,657.3 13.3 3,511.5 11.6 2,153.6 10.8
BBB rated 1,167.4 4.2 1,424.5 4.7 475.1 2.4
Below investment grade 2,020.3 7.3 1,862.1 6.1 919.6 4.6
- ---------------------------------------------------------------------------------------------------------
Total $27,654.7 100% $30,328.0 100% $19,912.4 100%
=========================================================================================================
</TABLE>
The following table summarizes the ratings of CNA's guaranteed investment
contract separate account fixed maturity debt portfolio at carrying value
(market):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31 1996 % 1995 % 1994 %
- --------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and affiliated securities $ 192.4 5.0% $ 1,743.4 36.4% $ 1,302.6 28.4%
Other AAA rated 2,244.9 58.1 827.6 17.3 933.4 20.4
AA and A rated 661.5 17.1 913.6 19.1 806.9 17.6
BBB rated 292.2 7.6 361.1 7.5 436.3 9.5
Below investment grade 471.6 12.2 944.0 19.7 1,102.1 24.1
- --------------------------------------------------------------------------------------------------------
Total $ 3,862.6 100% $ 4,789.7 100% $ 4,581.3 100%
========================================================================================================
</TABLE>
The ratings in the two tables above are primarily from independent rating
agencies. In 1996, 1995 and 1994, respectively, 89%, 93% and 95% of the general
account portfolio and 85%, 95% and 94% of the guaranteed investment portfolio
were rated by Standard and Poor's. In addition, CNA's investment in mortgage
loans and real estate as a percentage of total assets, is substantially below
the industry average.
High yield securities are bonds rated as below investment grade by bond rating
agencies, plus private placements and other unrated securities which, in the
opinion of management, are below investment grade (below BBB). High yield
CNA FINANCIAL CORPORATION
--------------------------
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Investments (cont.)
securities generally involve a greater degree of risk than that of investment
grade securities. Expected returns should, however, compensate for the added
risk. The risk is also considered in the interest rate assumptions in the
underlying insurance products. As of December 31, 1996, CNA's concentration in
high yield bonds including Separate Account business was approximately 4.2% of
total assets, compared with approximately 4.7% of total assets as of December
31, 1995.
Included in CNA's fixed maturity securities at December 31, 1996 (general and
guaranteed investment portfolios) are $8.6 billion of asset-backed securities,
consisting of approximately 46.5% in U.S. government agency issued pass-through
certificates, 37.1% in collateralized mortgage obligations (CMOs), and 16.4% in
corporate asset-backed obligations. The majority of CMOs held are U.S.
government agency issues, which are actively traded in liquid markets and are
priced by broker-dealers.
CNA limits the risks associated with interest rate fluctuations and prepayments
by concentrating its CMO investments in planned amortization classes with
relatively short principal repayment windows. CNA avoids investments in complex
mortgage derivatives without readily ascertainable market prices. At December
31, 1996, the amortized cost of asset-backed securities was in excess of the
fair value by approximately $5 million compared with unrealized gains of
approximately $200 million at December 31, 1995.
At December 31, 1996 and 1995, short-term investments primarily consisted of
U. S. Treasury bills and commercial paper. The components of the short-term
investment portfolio were as follows:
SHORT-TERM INVESTMENTS
- -------------------------------------------------
December 31 1996 1995
- -------------------------------------------------
(In millions of dollars)
Security repurchase
collateral $ 100.5 $ 776.0
Escrow* 1,062.2 1,044.6
Commercial paper 3,207.3 1,613.1
Money markets 746.4 114.2
Other 737.3 176.6
- -------------------------------------------------
Total short-term
investments $5,853.7 $3,724.5
=================================================
*See Note A to the Consolidated Financial Statements.
<PAGE>
CNA invests from time to time in certain derivative financial instruments to
increase investment returns and to reduce the impact of changes in interest
rates on certain corporate borrowings. CNA considers its derivative securities
as held for trading purposes, except for interest rate swaps associated with
corporate borrowings, and as such, such derivative securities are recorded at
fair value at the reporting date with changes in market value reflected in
income. The interest rate swaps on corporate borrowings are accounted for as an
adjustment to interest expense. See Note C of the Consolidated Financial
Statements for further information.
CNA's general account investments in bonds and redeemable preferred stocks were
carried at their fair value of $27.7 billion at December 1996, compared with
$30.4 billion at December 31, 1995. At December 31, 1996 and 1995, net
unrealized gains on fixed maturity securities amounted to approximately $181
million and $1,059 million, respectively. The gross unrealized gains and losses
for the fixed maturity securities portfolio at December 31, 1996, were $444
million and $263 million, respectively, compared to $1,136 million and $77
million, respectively, at December 31, 1995.
CNA FINANCIAL CORPORATION
--------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
Investments (cont.)
Net unrealized gains on general account bonds at December 31, 1996 and 1995
include net unrealized gains on high yield securities of $41 million and $67
million, respectively. Carrying values of high yield securities in the general
account were $2.0 billion and $1.9 billion at December 31, 1996 and 1995,
respectively.
At December 31, 1996, all fixed maturity securities in the guaranteed investment
contract portfolio were carried at fair value and amounted to $3.9 billion. At
December 31, 1996, net unrealized losses on fixed maturity securities amounted
to approximately $1 million. This compares to $63 million in net unrealized
gains at December 31, 1995. The gross unrealized gains and losses for the fixed
maturity securities portfolio at December 31, 1996, were $55 million and $56
million, respectively, compared to $122 million and $59 million, respectively,
at December 31, 1995.
At December 31, 1996, high yield securities in the guaranteed investment
contract portfolio were carried at fair value and amounted to $472 million,
compared with $944 million at December 31, 1995. Net unrealized losses on high
yield securities held in such Separate Accounts were $6 million and $14 million
at December 31, 1996 and 1995, respectively.
CNA FINANCIAL CORPORATION
-------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
Liquidity and Capital Resources:
- --------------------------------
The liquidity requirements of CNA, excluding the acquisition of Continental
described below, have been met primarily by funds generated from operations. The
principal operating cash flow sources of CNA's property/casualty and life
insurance subsidiaries are premiums, investment income, and sales and maturities
of investments. The primary operating cash flow uses are payments for claims,
policy benefits and operating expenses.
Net cash flows from operations are primarily invested in marketable securities.
Investment strategies employed by CNA's insurance subsidiaries consider the cash
flow requirements of the insurance products sold and the tax attributes of the
various types of marketable investments.
For the year ended December 31, 1996, CNA's operating activities generated net
positive cash flows of approximately $620 million, compared with $875 million in
1995 and $982 million in 1994. CNA believes that future liquidity needs will be
met primarily by cash generated from operations.
As a result of the settlement of the Fibreboard litigation, CNA anticipates that
1997 operating cash flows will be substantially lower, due to anticipated claim
payments. The Fibreboard claim payments for 1997 will include approximately $500
million in payments made in late December 1996, which are reflected in the
balance sheet as other liabilities (see Note F of the Consolidated Financial
Statements).
To finance the acquisition of Continental (including the refinancing of $205
million of Continental debt) CNA entered into a five-year $1.325 billion
revolving credit facility. The interest rate for the facility is based on the
one, two, three, or six month London Interbank Offered Rate (LIBOR), plus 16
basis points. Additionally, there is a facility fee of 9 basis points annually.
The average interest rate on the borrowings under the revolver was 5.72% and
6.12% at December 31, 1996 and 1995, respectively. Under the terms of the
facility, CNA may prepay the debt without penalty, giving CNA flexibility to
arrange longer-term financing on more favorable terms.
On November 15, 1996, CNA issued $250 million, 6.75% Senior Notes, due
November 15, 2006. The net proceeds from this issuance of approximately $248
million were used to pay down a portion of the borrowings under the revolving
credit facility.
As a result of this additional debt issuance, the borrowing capacity under the
revolving credit facility was reduced by $250 million to $1.075 billion.
In 1995, CNA entered into five year interest rate swap agreements with several
banks. These agreements convert variable rate debt into fixed rate debt
resulting in fixed rates on notional amounts of $1.2 billion as of December 31,
1995. In conjunction with the pay down of $250 million of the revolving credit
facility, the Company terminated swaps with a like notional amount. The
weighted-average fixed swap rate was 6.20% and 6.29% at December 31, 1996 and
1995, respectively.
<PAGE>
The effect of these interest rate swaps was to increase interest expense by
approximately $7 million and $2 million for the years ended December 31, 1996
and 1995, respectively.
CNA FINANCIAL CORPORATION
-------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
Liquidity and Capital Resources (cont.)
During 1995, to take advantage of favorable interest rates, CNA established a
commercial paper program, borrowing from investors and replacing a like amount
of bank financing. As of December 31, 1996 and 1995, the commercial paper
program borrowing totaled $675 million and $500 million, respectively. The
weighted-average interest rate on commercial paper was 5.67% and 6.05% at
December 31, 1996 and 1995, respectively. The commercial paper borrowings are
classified as long-term, as borrowing capacity under the committed bank facility
will support the commercial paper program (at an undrawn cost of 9 basis
points). The weighted-average interest rate (interest and facility fees) on the
revolving credit facility, commercial paper and the effect of the interest rate
swaps, was 6.28% and 6.50% at December 31, 1996 and 1995, respectively.
As of December 31, 1996, the outstanding loans under the revolving credit
facility were $400 million. There was no unused borrowing capacity under the
facility after the effects of the commercial paper program as described above.
The table below reflects ratings issued by A.M. Best, Standard and Poor's,
Moody's and Duff & Phelps for CNA's Continental Casualty Company (CCC)
Intercompany Pool, Continental Insurance Company (CIC) Intercompany Pool and
Continental Assurance Company (CAC) Intercompany Pool. Also rated were the
senior debt of both CNA and The Continental Corporation (Continental) and CNA's
preferred stock.
<TABLE>
<CAPTION>
|-------------------|==================================||---------------------------------------------|
| | INSURANCE RATINGS || DEBT AND STOCK RATINGS |
| |==================================||---------------------------------------------|
<S> <C> <C> <C> <C> <C> <C> <C>
| | Financial Strength || | |
| | | | || | CNA | |Continental |
| | CCC | CAC | CIC || Senior |Commercial| Preferred | Senior |
| | | | || Debt | Paper | Stock | Debt |
| |------------|------------|--------||---------|----------|-----------|------------|
| A.M. Best | A | A | A- || - | - | - | - |
| Moody's | A1 | A1* | A2 || A3 | P2 | a3 | Baa1 |
| |------------|------------|--------|| | | | |
| | Claims Paying Ability || | | | |
| |==================================|| | | | |
| Standard & Poor's | A+ | AA | A- || A- | A2 | A- | BBB- |
| Duff & Phelps | AA- | AA | - || A- | - | A- | - |
|-------------------|==================================||---------|----------|-----------|------------|
*Applies to Continental Assurance Company only.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
Accounting Standards
Accounting Standards
- --------------------
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. This statement requires that long-lived assets
and certain identifiable intangibles to be held and used by the entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. This
Statement is effective for 1996 financial statements. This Statement did not
have a significant impact on CNA.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation. " This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The requirements of this
Statement is effective for 1996 financial statements. This Statement had no
impact on CNA as the Company has no compensation which qualifies.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This Statement
provides standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement has been
amended and is now effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 or
1997, depending on the type of transaction. This Statement will not have a
significant impact on CNA.
Accounting Disclosure Rules and Practices
In January 1997, the Securities and Exchange Commission approved amendments to
Regulation S-X, Regulation S-K, Regulation S-B, and various forms to clarify and
expand existing disclosure requirements with respect to derivative financial
instruments and derivative commodity instruments. The new rules would require
enhanced descriptions in the footnotes to the financial statements of accounting
policies for derivative financial instruments and derivative commodity
instruments. They would also require disclosure outside the financial statements
of qualitative and quantitative information about market risk related to
derivative financial instruments, other financial instruments, and derivative
commodity instruments. The requirement of these amendments are effective for
1997 financial statements. These amendments will not have a significant impact
on CNA.
CNA FINANCIAL CORPORATION
-------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
Forward-Looking Statements
Forward-Looking Statements
When included in this report, the words "expects," "intends," "anticipates,"
"estimates," and analogous expressions are intended to identify forward-looking
statements. Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, competition, changes in financial markets (credit,
currency, commodities and stocks), changes in foreign, political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, judicial decisions and rulings, and various other matters, many of
which are beyond the Company's control. These forward-looking statements speak
only as of the date of this Report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.
CNA FINANCIAL CORPORATION
-------------------------
29
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
- --------------------------------------------------------------------------------------------------
December 31 1996 1995
- --------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C>
Investments-Note B:
Fixed maturities available for sale
(cost: $27,539.6 and $29,385.4) $27,720.6 $30,444.7
Equity securities available for sale
(cost: $701.9 and $736.3) 859.1 917.7
Mortgage loans and real estate (less accumulated
depreciation: $4.1 and $3.6) 123.4 122.4
Policy loans 174.4 177.2
Other invested assets 681.2 499.9
Short-term investments-Note A 5,853.7 3,724.5
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 35,412.4 35,886.4
- --------------------------------------------------------------------------------------------------
Cash 257.1 221.6
Insurance receivables:
Reinsurance receivables 6,965.0 7,169.1
Other insurance receivables 5,942.5 5,833.9
Less allowance for doubtful accounts (277.2) (288.7)
Deferred acquisition costs 1,854.2 1,493.3
Accrued investment income 507.4 545.4
Receivables for securities sold 264.4 185.2
Federal income taxes recoverable (includes $151.4
and $153.0 due from Loews)-Note D 133.8 132.7
Deferred income taxes-Note D 1,347.0 1,254.9
Property and equipment at cost
(less accumulated depreciation $436.3 and $313.7) 645.4 584.7
Prepaid reinsurance premiums 295.2 495.4
Intangibles-Note L 417.7 456.3
Other assets 848.9 522.1
Separate Account business 6,120.9 5,868.1
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $60,734.7 $60,360.4
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET (cont.)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
December 31 1996 1995
<S> <C> <C>
Liabilities:
Insurance reserves:
Claim and claim expense-Note E $30,829.5 $32,032.4
Unearned premiums 4,658.7 4,549.4
Future policy benefits 4,181.3 3,515.9
Policyholders' funds 745.6 705.0
Securities sold under repurchase agreements 100.5 774.1
Payables for securities purchased 405.2 163.3
Participating policyholders' equity 118.5 140.1
Short-term debt-Note H 0.0 257.6
Long-term debt-Note H 2,764.9 2,767.9
Other liabilities 3,749.8 2,851.1
Separate Account business 6,120.9 5,868.1
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 53,674.9 53,624.9
- --------------------------------------------------------------------------------------------------
Commitments and contingent liabilities-Notes E, F and G
Stockholders'equity-Note K:
Common stock ($2.50 par value;
Authorized - 200,000,000 shares;
Issued - 61,841,969 shares) 154.6 154.6
Money market cumulative preferred stock 150.0 150.0
Additional paid-in capital 434.7 434.7
Retained earnings 6,024.3 5,065.6
Net unrealized investment gains-Note B 298.7 933.1
Treasury stock, at cost (2.5) (2.5)
- --------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 7,059.8 6,735.5
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $60,734.7 $60,360.4
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
31
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
<S> <C> <C> <C>
Revenues:
Premiums-Note G $13,479.0 $11,735.1 $ 9,474.4
Net investment income-Note B 2,276.0 2,076.6 1,551.2
Realized investment gains (losses)-Note B 618.6 463.8 (246.2)
Other 614.2 424.2 220.1
- --------------------------------------------------------------------------------------------------
16,987.8 14,699.7 10,999.5
- --------------------------------------------------------------------------------------------------
Benefits and expenses:
Insurance claims and
policyholders' benefits-Note G 11,370.6 9,951.7 8,450.3
Amortization of deferred acquisition costs 2,192.1 1,843.5 1,377.5
Other operating expenses 1,879.7 1,679.8 1,235.2
Interest expense 200.4 182.3 70.5
- --------------------------------------------------------------------------------------------------
15,642.8 13,657.3 11,133.5
- --------------------------------------------------------------------------------------------------
Income (loss) before income tax 1,345.0 1,042.4 (134.0)
Income tax (expense) benefit -Note D (380.2) (285.4) 170.5
- --------------------------------------------------------------------------------------------------
NET INCOME $ 964.8 $ 757.0 $ 36.5
- --------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 15.51 $ 12.14 $ 0.51
==================================================================================================
WEIGHTED AVERAGE OUTSTANDING SHARES
OF COMMON STOCK 61.8 61.8 61.8
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Net
Unrealized
Additional Investment
Common Preferred Treasury Paid-In Retained Gains
Stock Stock Stock Captital Earnings (Losses) Total
- ------------------------------------------------------------------------------------------------------------
In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1993 $154.6 $150.0 $(2.5) $434.7 $4,284.3 $ 360.0 $5,381.1
Net Income - - - - 36.5 - 36.5
Change in net unrealized
gains/(losses) - Note B. - - - - - (866.4) (866.4)
Preferred dividends - - - - (5.3) - (5.3)
- -----------------------------------------------------------------------------------------------------------
BALANCE
DECEMBER 31, 1994 $154.6 $150.0 $(2.5) $434.7 $4,315.5 $ (506.4) $4,545.9
===========================================================================================================
Balance,
December 31, 1994 $154.6 $150.0 $(2.5) $434.7 $4,315.5 $ (506.4) $4,545.9
Net income - - - - 757.0 - 757.0
Change in net unrealized
gains/(losses) - Note B - - - - - 1,439.5 1,439.5
Preferred dividends - - - - (6.9) - (6.9)
- -----------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1995 $154.6 $150.0 $(2.5) $434.7 $5,065.6 $ 933.1 $6,735.5
============================================================================================================
Balance,
December 31, 1995 $154.6 $150.0 $(2.5) $434.7 $5,065.6 $ 933.1 $6,735.5
Net income - - - - 964.8 - 964.8
Change in net unrealized
gains/(losses) - Note B - - - - - (634.4) (634.4)
Preferred dividends - - - - (6.1) - (6.1)
- -----------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1996 $154.6 $150.0 $(2.5) $434.7 $6,024.3 $ 298.7 $7,059.8
===========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
33
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income $ 964.8 $ 757.0 $ 36.5
----------------------------------
Adjustments to reconcile net income to
net cash flows from operating activities:
Net realized investment (gains)/losses, pre-tax (618.6) (463.8) 246.2
Participating policyholders' interest (4.8) (3.6) (12.0)
Amortization of intangibles 25.1 18.9 3.1
Amortization of bond discount (177.6) (142.7) (95.5)
Depreciation 138.2 101.0 66.1
Changes in:
Insurance receivables, net 83.8 (802.5) (430.2)
Deferred acquisition costs (360.9) (160.8) (41.0)
Accrued investment income 38.0 (30.4) (161.2)
Federal income taxes (1.0) (39.3) (14.9)
Deferred income taxes 352.6 221.0 (96.3)
Prepaid reinsurance premiums 200.2 129.8 (7.8)
Insurance reserves (358.0) 427.0 1,468.9
Reinsurance payables (228.5) 285.9 (25.0)
Other, net 566.9 577.5 45.3
- ------------------------------------------------------------------------------------------------
Total adjustments (344.6) 118.0 945.7
- ------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM
OPERATING ACTIVITIES $ 620.2 $ 875.0 $ 982.2
- ------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
Statement of Consolidated Cash Flows (Cont.)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
- --------------------------------------
Purchases of fixed maturities $(34,312.2) $(29,255.3) $(34,149.4)
Proceeds from fixed maturities:
Sales 34,864.3 24,065.1 25,287.0
Maturities, calls and redemptions 1,796.3 2,855.2 4,506.3
Purchases of equity securities (971.6) (1,094.1) (892.8)
Proceeds from sale of equity securities 1,077.4 1,317.2 649.9
Change in short-term investments (2,028.9) 2,941.5 1,895.8
Purchases of property and equipment (205.3) (126.2) (109.5)
Change in securities sold under repurchase agreements (673.6) (1,704.5) 1,865.3
Change in other investments 146.1 157.9 (21.7)
Purchase of The Continental Corporation - (1,125.5) -
Cash acquired in connection with the Continental merger - 165.1 -
Other acquisitions - (72.0) -
Other, net 19.7 (38.5) 1.8
- ------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (287.8) (1,914.1) (967.3)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Dividends paid to preferred shareholders (6.3) (6.9) (4.9)
Receipts from investment contracts credited
to policyholder account balances 11.0 22.6 32.8
Return of policyholder account
balances on investment contracts (40.6) (34.3) (22.4)
Change in short-term debt (257.7) 3.0 -
Principal payments on long-term debt (253.7) (3.3) (2.9)
Retirement of notes payable - (205.0) -
Proceeds from issuance of long-term debt 250.4 1,337.0 0.5
- -------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES (296.9) 1,113.1 3.1
- -------------------------------------------------------------------------------------------------
NET CASH FLOWS 35.5 74.0 18.0
Cash at beginning of period 221.6 147.6 129.6
- -------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 257.1 $ 221.6 $ 147.6
=================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
35
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Statement of Consolidated Cash Flows (cont.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash (paid) received:
Interest expense $(210.8) $(169.5) $(71.4)
Federal income taxes 15.5 (102.5) 70.0
==================================================================================================
Supplemental disclosure of cash flow information relating to acquisitions:
Noncash investing activities that are not reflected in the Statement of Cash
Flows are listed below*.
- -------------------------------------------------------------------------------------------------
The Continental
Year Ended December 31, 1995 Corporation Other
- -------------------------------------------------------------------------------------------------
(In millions of dollars)
Fair value of assets acquired, excluding cash acquired $ 15,094 $ 231
Liabilities assumed (14,133) (159)
- -------------------------------------------------------------------------------------------------
Cash paid, net of cash acquired $ 961 $ 72
=================================================================================================
See accompanying Notes to Consolidated Financial Statements.
* There were no significant acquisitions by CNA Financial Corporation during the
years ended December 31, 1996 and December 31, 1994.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note A - Significant Accounting Policies:
Note A - Significant Accounting Policies:
- -----------------------------------------
BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The Consolidated Financial Statements include CNA Financial Corporation (CNA or
the Company) and its subsidiaries which consist of property/casualty insurance
companies (principally Continental Casualty Company and The Continental
Insurance Company) and life insurance companies (principally Continental
Assurance Company and Valley Forge Life Insurance Company). Loews Corporation
(Loews) owns approximately 84% of the outstanding common stock of CNA.
CNA acquired The Continental Corporation (Continental) through a cash merger for
approximately $1.1 billion on May 10, 1995, and as a result, the financial
statements include the results of Continental subsequent to that date.
CNA is a multiple-line insurer underwriting property and casualty coverages;
life, accident and health insurance; and pension and annuity business. CNA
serves a wide spectrum of insureds, including individuals; small, medium and
large businesses; associations; professionals and groups.
The accompanying Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles. Certain amounts
applicable to prior years have been reclassified to conform to classifications
followed in 1996. All significant intercompany amounts have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INSURANCE
- --------------------------------------------------------------------------------
Premium revenue
Insurance premiums on property/casualty and health insurance contracts are
earned ratably over the terms of the policies after provision for estimated
adjustments on retrospectively-rated policies and deductions for ceded
insurance. Revenues on universal lifetype contracts are comprised of contract
charges and fees which are recognized over the coverage period. Other life
insurance premiums are recognized as revenue when due after deductions for ceded
insurance.
Claim and claim expense reserves
Claim and claim expense reserves, except reserves for structured settlements,
workers' compensation lifetime claims and accident and health disability claims,
are based on undiscounted (a) case basis estimates for losses reported on direct
business, adjusted in the aggregate for ultimate loss expectations,
CNA FINANCIAL CORPORATION
------------------------
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note A - Significant Accounting Policies (cont.)
(b)estimates of unreported losses based upon past experience, (c) estimates of
losses on assumed insurance, and (d) estimates of future expenses to be incurred
in settlement of claims. In establishing these estimates, consideration is given
to current conditions and trends as well as past Company and industry
experience.
Claim and claim expense reserves are based on estimates and the ultimate
liability may vary significantly from such estimates. CNA regularly reviews its
reserves, and any adjustments that are made to the reserves are reflected in
operating income in the period the need for such adjustments become apparent.
Further discussion of claim and claim expense reserves may be found in Note E.
Structured settlements have been negotiated for claims on certain
property/casualty insurance policies. Structured settlements are agreements to
provide periodic payments to claimants, which are fixed and determinable as to
the amount and time of payment. Certain structured settlements are funded by
annuities purchased from Continental Assurance Company for which the related
annuity obligations are recorded in future policy benefits reserves. Obligations
for structured settlements not funded by annuities are carried at the present
value of future benefits. At December 31, 1996 and 1995, such reserves,
discounted at interest rates ranging from 6.25% to 7.5%, totaled $924 million
and $897 million, respectively, (reflecting a discount of $1,556 million and
$1,555 million, respectively).
Workers' compensation lifetime claims and accident and health disability claim
reserves are discounted at interest rates ranging from 3.5% to 6.0% with
mortality and morbidity assumptions reflecting the Company's and current
industry experience. At December 31, 1996 and 1995, such discounted reserves
totaled $2,165 million and $2,240 million, respectively (reflecting a discount
of $903 million and $894 million, respectively).
Future policy benefits reserves
Reserves for traditional life insurance products are computed based upon the net
level premium method using actuarial assumptions as to interest rates,
mortality, morbidity, withdrawals and expenses. Actuarial assumptions include a
margin for adverse deviation and generally vary by plan, age at issue and policy
duration. Interest rates range from 3% to 11% and mortality, morbidity and
withdrawal assumptions reflect CNA and industry experience prevailing at the
time of issue. Renewal expense estimates include the estimated effects of
inflation and expenses beyond the premium paying period.
Involuntary risks
CNA's share of involuntary risks is mandatory and generally a function of its
share of the voluntary market by line of insurance in each state. CNA records
the estimated effects of its mandatory participation in residual markets on an
accrual basis. CNA records assessments for insolvencies as they are paid.
Accrual of such assessments is not practical, as past experience is not a
reliable indicator of future activity.
Reinsurance
CNA assumes and cedes insurance with other insurers and reinsurers and members
of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk
and minimize exposures on larger risks. The reinsurance coverages are tailored
CNA FINANCIAL CORPORATION
-------------------------
38
<PAGE>
- -------------------------------------------------------------------------------
Note A - Significant Accounting Policies (cont.)
to the specific risk characteristics of each product line with CNA's retained
amount varying by type of coverage. Generally, reinsurance coverage for property
risks is on an excess of loss, per risk basis. Liability coverages are generally
reinsured on a quota share basis in excess of CNA's retained risk. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim
liability.
Deferred acquisition costs
Costs of acquiring property/casualty insurance business which vary with and are
primarily related to the production of such business are deferred and amortized
ratably over the period the related premiums are recognized. Such costs include
commissions, premium taxes and certain underwriting and policy issuance costs.
Anticipated investment income is considered in the determination of the
recoverability of deferred acquisition costs.
Life acquisition costs are capitalized and amortized based on assumptions
consistent with those used for computing policy benefit reserves. Acquisition
costs on ordinary life business are amortized over the assumed premium paying
periods. Universal life and annuity acquisition costs are amortized in
proportion to the present value of estimated gross profits over the products'
assumed durations, which are regularly evaluated and adjusted as appropriate.
Valuation of investments
CNA classifies its fixed maturity securities (bonds and redeemable preferred
stocks) and its equity securities as available-for-sale, and as such, they are
carried at fair value. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in investment income.
CNA considers its derivative securities as held for trading purposes, except for
interest rate swaps associated with corporate borrowings, and as such, trading
derivatives are recorded at fair value at the reporting date. Interest rate
swaps associated with corporate borrowings are accounted for as an adjustment to
interest expense.
Mortgage loans are carried at unpaid principal balances, including unamortized
premium or discount. Real estate is carried at depreciated cost. Policy loans
are carried at unpaid balances. Short-term investments are carried at amortized
cost which approximates market value.
Investment gains and losses
All securities transactions are recorded on the trade date. Realized investment
gains and losses are determined on the basis of the amortized cost of the
specific securities sold. Investments are written down to estimated fair values
and losses are charged to income when a decline in value is considered to be
other than temporary.
Unrealized investment gains and losses on fixed maturity and equity securities
are reflected as part of stockholders' equity, net of applicable deferred income
taxes and participating policyholders' interest. Unrealized investment gains and
losses on derivative securities, except for the interest rate swaps associated
with corporate borrowings, are reflected as part of realized investment gains
and losses. Unrealized gains or losses related to changes in the value of the
interest rate swaps associated with corporate borrowings are not recognized.
CNA FINANCIAL CORPORATION
--------------------------
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note A - Significant Accounting Policies (cont.)
Securities sold under repurchase agreements
CNA has a securities lending program where securities are loaned to third
parties, primarily major brokerage firms. Borrowers of these securities must
deposit 100% of the fair value of the securities if the collateral is cash, or
102%, if the collateral is securities. Cash deposits from these transactions are
invested in short-term investments (primarily commercial paper). CNA continues
to receive the interest on loaned debt securities, as beneficial owner, and
accordingly, loaned debt securities are included within fixed maturity
securities. The liabilities for securities sold subject to repurchase agreements
are recorded at their contractual repurchase amounts.
Restricted investments
On December 30, 1993, CNA deposited $986.8 million in an escrow account,
pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note F.
The funds are included in short-term investments and are invested in U.S.
Treasury securities. The escrow account amounted to $1,071.2 million and
$1,044.6 million at December 31, 1996 and 1995, respectively.
Participating business
Participating business represented 0.5%, 0.6%, and 0.9% of gross life insurance
in force and 0.7%, 0.8%, and 1.0% of life insurance premium income for 1996,
1995, and 1994, respectively. Participating policyholders' equity is determined
by allocating 90% of the net income or loss and unrealized investment gains or
losses related to such business as allowed by applicable laws, less dividends
determined by the Board of Directors. In the accompanying Statement of
Consolidated Operations, revenues and benefits and expenses include amounts
related to participating policies; the net income or loss allocated to
participating policyholders' equity is a component of insurance claims and
policyholders' benefits.
Separate Account business
Continental Assurance Company issues certain investment and annuity contracts.
The supporting assets and liabilities of these contracts are legally segregated
and reflected in the accompanying Consolidated Balance Sheet as assets and
liabilities of Separate Account business. Continental Assurance Company
guarantees principal and a specified return to the contractholders on
approximately 82% of the Separate Account business. Substantially all assets of
the Separate Account business are carried at fair value.
CNA FINANCIAL CORPORATION
--------------------------
40
<PAGE>
- -------------------------------------------------------------------------------
Note A - Significant Accounting Policies (cont.)
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes includes deferred taxes, resulting from temporary
differences between the financial statement and tax return bases of assets and
liabilities under the liability method. Such temporary differences primarily
relate to insurance reserves (principally claim reserve discounting), unearned
premium reserves, net unrealized investment gains/losses and deferred
acquisition costs. Deferred taxes also arise from net operating loss
carryforwards.
PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the various classes of
property and equipment and determined principally on accelerated methods. The
cost of maintenance and repairs is charged to income as incurred; major
improvements are capitalized.
MANAGEMENT SERVICES
- --------------------------------------------------------------------------------
CNA reimburses Loews for management services, travel and similar expenses, and
expenses of investment facilities and services provided to CNA. Such expenses
amounted to approximately $14.8 million, $10.7 million and $8.3 million in 1996,
1995 and 1994, respectively.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Earnings per share applicable to common stock are based on weighted average
outstanding shares of common stock of 61,798,000 in 1996, 1995 and 1994,
respectively.
CNA FINANCIAL CORPORATION
-------------------------
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note B - Investments
Note B--Investments:
- --------------------
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
(In millions of dollars)
Fixed maturities:
Bonds:
Taxable $1,716.4 $1,512.1 $1,009.8
Tax-exempt 272.5 262.8 333.7
Redeemable preferred stocks 2.0 3.9 13.5
Equity securities 24.6 47.3 17.6
Mortgage loans 9.6 12.6 4.3
Real estate 1.1 0.9 0.9
Policy loans 12.5 12.6 10.2
Short-term investments 231.3 214.7 130.5
Security repurchase transactions-income 77.0 166.8 149.7
Other 45.1 46.2 22.2
- ---------------------------------------------------------------------------------------------------
2,392.1 2,279.9 1,692.4
Investment expense (43.2) (46.1) (23.7)
Security repurchase transactions expenses and fees (72.9) (157.2) (117.5)
- ---------------------------------------------------------------------------------------------------
Net investment income $2,276.0 $2,076.6 $1,551.2
===================================================================================================
</TABLE>
CNA FINANCIAL CORPORATION
---------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
NOTE B - Investments (cont.)
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- ------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities $ 292.8 $ 221.8 $ (296.9)
Equity securities 216.3 140.6 44.5
Derivative securities 18.1 18.7 6.3
Other, including Separate Account business 91.4 82.7 (0.1)
-----------------------------------
618.6 463.8 (246.2)
Allocated to participating policyholders (14.3) (7.8) 10.9
Income tax (expense) benefit (217.2) (161.6) 84.8
- ------------------------------------------------------------------------------------------------
Net realized investment gains (losses) 387.1 294.4 (150.5)
- ------------------------------------------------------------------------------------------------
Change in net unrealized investment gains (losses):
Fixed maturities (874.8) 1,854.7 (1,299.8)
Equity securities (26.2) 162.9 (57.0)
Other, including Separate Account business (44.9) 323.2 (45.5)
-----------------------------------
(945.9) 2,340.8 (1,402.3)
Allocated to participating policyholders 18.0 (44.2) 32.5
Income tax benefit (expense) 293.5 (857.1) 503.4
- ------------------------------------------------------------------------------------------------
Change in net unrealized investment (losses) gains (634.4) 1,439.5 (866.4)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
investment gains (losses) $(247.3) $1,733.9 $(1,016.9)
=================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
---------------------- ------------------------------ -------------------------
Fixed Equity Fixed Equity Fixed Equity
Maturities Securities Maturities Securities Maturities Securities
- ----------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $34,864.3 $1,077.4 $24,065.1 $1,317.2 $ 25,287.0 $649.9
==========================================================================================================
Gross realized gains $ 412.2 $ 241.2 $ 412.3 $ 198.9 $ 178.5 $ 65.8
Gross realized losses (119.4) (24.9) (190.5) (58.3) (475.4) (21.3)
- ----------------------------------------------------------------------------------------------------------
Net realized gains
(losses) on sales $ 292.8 $ 216.3 $ 221.8 $ 140.6 $ (296.9) $ 44.5
==========================================================================================================
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note B - Investments (cont.)
<TABLE>
<CAPTION>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------
1996 1995
--------------------------------- ----------------------------------
December 31 Gains Losses Net Gains Losses Net
- ---------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities $443.8 $(262.8) $181.0 $1,136.4 $ (77.1) $1,059.3
Equity securities 254.3 (97.1) 157.2 197.5 (16.1) 181.4
Other, including Separate
Account business 171.0 (69.5) 101.5 304.1 (70.9) 233.2
-----------------------------------------------------------------------
$869.1 $(429.4) 439.7 $1,638.0 $(164.1) $1,473.9
======= ======= ======== =======
Allocated to participating
policyholders -- (18.1)
Deferred income tax
expense (141.0) (522.7)
- ---------------------------------------------------------------------------------------------------
Net unrealized
investment gains $298.7 $ 933.1
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C>
United States Treasury securities and
obligations of government agencies $ 9,854.8 $ 72.4 $ 91.9 $ 9,835.3
Asset-backed securities 6,297.9 53.3 58.9 6,292.3
States, municipalities and political
subdivisions - tax-exempt 4,859.6 120.9 29.3 4,951.2
Corporate securities 4,730.1 121.0 63.2 4,787.9
Other debt securities 1,748.0 59.5 19.2 1,788.3
Redeemable preferred stocks 49.2 16.7 .3 65.6
- --------------------------------------------------------------------------------------------
Total fixed maturities 27,539.6 443.8 262.8 27,720.6
Equity securities 701.9 254.3 97.1 859.1
- --------------------------------------------------------------------------------------------
Total $28,241.5 $698.1 $359.9 $28,579.7
============================================================================================
</TABLE>
CNA FINANCIAL CORPORATION
--------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
Note B - Investments Cont.)
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C>
United States Treasury securities and
obligations of government agencies $13,064.0 $ 479.5 $ 1.3 $13,542.2
Asset-backed securities 5,939.7 160.3 13.8 6,086.2
States, municipalities and political
subdivisions - tax-exempt 3,452.8 163.7 13.4 3,603.1
Corporate securities 4,522.3 210.3 39.9 4,692.7
Other debt securities 2,306.3 105.4 7.5 2,404.2
Redeemable preferred stocks 100.3 17.2 1.2 116.3
- --------------------------------------------------------------------------------------------------
Total fixed maturities 29,385.4 1,136.4 77.1 30,444.7
Equity securities 736.3 197.5 16.1 917.7
- --------------------------------------------------------------------------------------------------
Total $30,121.7 $1,333.9 $93.2 $31,362.4
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
BY CONTRACTUAL MATURITY
- ------------------------------------------------------------------------------------------------
1996 1995
-------------------------- ------------------------
Amortized Market Amortized Market
December 31 Cost Value Cost Value
- ------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,494.1 $ 2,506.4 $ 849.8 $ 853.0
Due after one year through five years 8,376.9 8,294.8 11,912.8 12,117.3
Due after five years through ten years 4,810.4 4,828.5 4,537.8 4,761.4
Due after ten years 5,560.3 5,798.6 6,145.3 6,626.8
Asset-backed securities not due
at a single maturity date 6,297.9 6,292.3 5,939.7 6,086.2
- --------------------------------------------------------------------------------------------------
Total $27,539.6 $27,720.6 $29,385.4 $30,444.7
==================================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because securities may
be called or prepaid with or without call or prepayment penalties.
The carrying value of investments (other than equity securities) that have not
produced income for the last twelve months is $101.3 million at December 31,
1996, compared to $94.8 million for the same period in 1995. There are no
investments in a single issuer, other than the U.S. government, that, when
aggregated, exceed 10% of stockholders' equity.
CNA FINANCIAL CORPORATION
-------------------------
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note C -- Financial Instruments
Note C - Financial Instruments:
- ------------------------------
In the normal course of business, CNA invests in various financial assets,
incurs various financial liabilities, and enters into agreements involving
derivative securities, including off-balance sheet financial instruments.
Fair values are required to be disclosed for all financial instruments, whether
or not recognized in the balance sheet, for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
may be based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rates and estimates of future cash flows. Potential taxes and other
transaction costs have not been considered in estimating fair value. The
estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts that CNA could realize in a current market exchange.
Any difference would not be expected to be material.
All nonfinancial instruments such as deferred acquisition costs, property and
equipment, deferred income taxes, intangibles and insurance reserves are
excluded from fair value disclosure. Thus, the total fair value amounts cannot
be aggregated to determine the underlying economic value of CNA.
The carrying amounts reported in the balance sheet approximate fair value for
cash, short-term investments, other insurance receivables, accrued investment
income, receivables for securities sold, securities sold under repurchase
agreements, payables for securities purchased, short-term debt and certain other
assets and other liabilities because of their short-term nature. Accordingly,
these assets and liabilities are not listed in the tables below.
The carrying amounts and estimated fair values of CNA's other financial
instrument assets and liabilities are listed below. Derivative instruments are
shown in a separate table.
CNA FINANCIAL CORPORATION
-------------------------
46
<PAGE>
- --------------------------------------------------------------------------------
Note C -- Financial Instruments (cont.)
<TABLE>
<CAPTION>
FINANCIAL ASSETS
- -------------------------------------------------------------------------------------
1996 1995
--------------------------- ----------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
- -------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C>
Investments:
Fixed maturities - Note B $27,720.6 $27,720.6 $30,444.7 $30,444.7
Equity securities - Note B 859.1 859.1 917.7 917.7
Mortgage loans 112.6 114.5 119.3 115.9
Policy loans 174.4 162.7 177.2 166.6
Other invested assets 681.2 681.2 499.9 543.4
Separate Account business:
Fixed maturities 4,608.3 4,608.3 5,499.3 5,499.3
Equity securities 169.2 169.2 242.7 242.7
Short-term Investments 906.1 906.1 84.5 84.5
Other 437.3 437.3 41.6 48.7
- -------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used by CNA in estimating its fair
value disclosures for the above financial instruments.
Fixed maturity securities and equity securities are based on quoted market
prices, where available. For securities not actively traded, fair values are
estimated using values obtained from independent pricing services, costs to
settle, or quoted market prices of comparable instruments.
The fair values for mortgage loans and policy loans are estimated using
discounted cash flow analyses at interest rates currently offered for similar
loans to borrowers with comparable credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Valuation techniques to determine fair value of other invested assets and other
Separate Account business assets consist of discounted cash flows and quoted
market prices of (a) the investments, (b) comparable instruments, or (c)
underlying assets of the investments.
CNA FINANCIAL CORPORATION
-------------------------
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note C -- Financial Instruments (cont.)
<TABLE>
<CAPTION>
FINANCIAL LIABILITIES
- ---------------------------------------------------------------------------------------------
1996 1995
----------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
December 31 AMOUNT FAIR VALUE Amount Fair Value
- ---------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C>
Premium deposits and annuity contracts $1,064.5 $1,017.6 $ 825.5 $ 776.8
Long-term debt 2,764.9 2,762.2 2,767.9 2,819.9
Financial guarantee liabilities 382.0 378.3 479.6 472.8
Separate Account business:
Guaranteed investment contracts 3,989.5 4,011.5 4,315.8 4,455.5
Deferred annuities 73.0 84.1 74.1 108.2
Variable separate accounts 568.6 568.6 228.0 228.0
Other 895.6 895.6 585.8 585.8
- ---------------------------------------------------------------------------------------------
</TABLE>
Premium deposits and annuity contracts are valued based on cash surrender values
and the outstanding fund balances.
CNA's Senior Notes and debenture are valued based on quoted market prices. The
fair value for other long-term debt is estimated using discounted cash flow
analyses, based on current incremental borrowing rates for similar types of
borrowing arrangements.
The fair value of the liability for financial guarantee contracts is based on
discounted cash flows utilizing interest rates currently being offered for
similar contracts or spot interest rates.
The fair value of guaranteed investment contracts and deferred annuities of the
Separate Account business are estimated using discounted cash flow calculations,
based on interest rates currently being offered for similar contracts with
similar maturities. The fair values of the liabilities for variable Separate
Account business are based on the quoted market values of the underlying assets
of each variable Separate Account. The fair value of other Separate Account
business liabilities approximates carrying value.
CNA FINANCIAL CORPORATION
-------------------------
48
<PAGE>
- -------------------------------------------------------------------------------
Note C - Financial Instruments (cont.)
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------
CNA invests from time to time in certain derivative financial instruments to
increase investment returns and to eliminate the impact of changes in interest
rates on certain corporate borrowings. Financial instruments used for such
purposes include interest rate swaps, put and call options, commitments to
purchase securities, futures and forwards. The gross notional principal or
contractual amounts of these instruments in the general account at December 31,
1996, totaled $1,730.2 million compared to $2,762.1 million at December 31,
1995.
The fair values associated with these instruments are generally affected by
changes in interest rates and the stock market. The credit exposure associated
with these instruments is generally limited to the unrealized fair value of the
instruments and will vary based on changes in market prices. The risk of default
depends on the creditworthiness of the counterpart to the instrument. Although
the Company is exposed to the aforementioned credit risk, it does not expect any
counterparty to fail to perform as contracted based on their high credit
ratings. Due to the nature of the derivative securities, the Company does not
require collateral.
The fair value of derivatives generally reflects the estimated amounts that CNA
would receive or pay upon termination of the contracts at the reporting date.
Dealer quotes are available for substantially all of CNA's derivatives. For
securities not actively traded, fair values are estimated using values obtained
from independent pricing services, costs to settle, or quoted market prices of
comparable instruments.
CNA FINANCIAL CORPORATION
-------------------------
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note C -- Financial Instruments (cont.)
A summary of the aggregate notional or contractual amounts and estimated fair
values of these instruments at December 31, 1996 and 1995, as well as the
monthly average fair values, are presented below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1996 1995
-----------------------------------------------------------------------------------------
Fair Value Fair Value
----------------- -------------------
CONTRACTUAL/ Contractual/
NOTIONAL ASSET MONTHLY RECOGNIZED Notional Asset Monthly Recognized
December 31 VALUE (LIABILITY) AVERAGE GAIN(LOSS) Value (Liability) Average Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate swaps -
acquisition debt $ 950.0 $3.0 $ 6.7 $(4.8) $1,200.0 $(28.7) $(14.9) $ --
Trading:
Futures 38.2 0.7 1.6 (1.0) -- -- -- --
Forwards 193.8 (2.1) (1.8) (13.1) -- -- -- --
Interest rate swaps 85.0 (0.4) 2.3 29.0 93.0 10.0 1.0 8.9
Commitments to
purchase government
and municipal
securities 406.5 (0.8) (1.0) -- -- -- -- --
Options purchased 56.7 2.1 4.8 6.8 973.2 41.4 10.0 9.8
Options written-debt
and equity securities -- -- (1.5) 1.2 495.9 (10.0) (1.7) --
- -------------------------------------------------------------------------------------------------------------------
TOTAL $1,730.2 $2.5 $11.1 $18.1 $2,762.1 $ 12.7 $(5.6) $18.7
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
An interest rate swap is an agreement in which two parties agree to exchange, at
specified intervals, interest payment streams calculated on an agreed-upon
notional principal amount with at least one stream based upon a specified float-
ing rate index. CNA has entered into interest rate swap agreements to convert
the variable rate of the borrowing under the revolving credit facility and the
commercial paper program to a fixed rate. At December 31, 1996, CNA had
outstanding interest rate swap agreements with several banks having a total
notional principal amount of $950.0 million. Those agreements which terminate
from May to December 2000 effectively fix the Company's interest rate exposure
on $950.0 million of variable rate debt.
Futures are contracts to buy or sell a standard quantity and quality of a
commodity, financial instrument, or index at a specified future date and price.
CNA FINANCIAL CORPORATION
-------------------------
50
<PAGE>
- --------------------------------------------------------------------------------
Note C - Financial Instruments (cont.)
Forwards are contracts between two parties to purchase and sell a specific
quantity of a commodity, government security, foreign currency, or other
financial instrument at a price specified now, with delivery and settlement of
specified future date.
Commitments to purchase government and municipal securities are a commitment to
purchase securities in the future at a predetermined price. Such commitments are
made when management believes this market is favorable to the current cash
market.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
CNA FINANCIAL CORPORATION
-------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note D -- Income Taxes
Note D - Income Taxes:
- ----------------------
CNA and its eligible subsidiaries (CNA Tax Group) are included in the
consolidated Federal income tax return of Loews and its eligible subsidiaries.
Loews and CNA have agreed that for each taxable year, CNA will (i) be paid by
Loews the amount, if any, by which the Loews consolidated Federal income tax
liability is reduced by virtue of the inclusion of the CNA Tax Group in the
Loews consolidated Federal income tax return, or (ii) pay to Loews an amount, if
any, equal to the Federal income tax which would have been payable by the CNA
Tax Group filing a separate consolidated return. In the event that Loews should
have a net operating loss in the future computed on the basis of filing a
separate consolidated tax return without the CNA Tax Group, CNA may be required
to repay tax recoveries previously received from Loews. This agreement between
Loews and CNA may be canceled by either party upon thirty days written notice.
For 1996, the inclusion of the CNA Tax Group in the consolidated Federal income
tax return of Loews will result in an increased Federal income tax liability for
Loews. Accordingly, CNA will pay to Loews approximately $99 million for 1996. In
1995 and 1994, the inclusion of the CNA Tax Group reduced the Federal income tax
liability for Loews. Accordingly, CNA received from Loews approximately $78
million for 1995 and $26 million for 1994.
At December 31, 1996, CNA had net operating loss carryforwards of approximately
$800 million for income tax purposes that expire in years 2000 through 2010.
Those carryforwards resulted from the Company's 1995 acquisition of Continental.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
CNA FINANCIAL CORPORATION
-------------------------
52
<PAGE>
- --------------------------------------------------------------------------------
Note D - Income Taxes (cont.)
Significant components of CNA's deferred tax assets and liabilities as of
December 31, 1996 and 1995 are shown in the table below.
<TABLE>
<CAPTION>
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C>
Insurance reserves:
Property/casualty claim reserve discounting $1,145.2 $1,328.0
Unearned premium reserves 268.0 251.0
Life reserve differences 141.1 153.4
Other insurance reserves 31.4 22.8
Deferred acquisition costs (570.1) (457.2)
Investment valuation differences 32.4 74.8
Postretirement benefits other than pensions 142.5 140.5
Net unrealized gains (141.0) (522.7)
Net operating loss carryforwards 279.9 298.0
Other, net 267.6 216.3
- ----------------------------------------------------------------------------------------------
Total deferred tax assets and liabilities 1,597.0 1,504.9
Valuation allowance (250.0) (250.0)
- ----------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $1,347.0 $1,254.9
==============================================================================================
</TABLE>
At December 31, 1996, gross deferred tax assets and liabilities amounted to
$2.652 billion and $1.305 billion, respectively. At December 31, 1995, gross
deferred tax assets and liabilities amounted to $2.717 billion and $1.462
billion, respectively.
The Loews/CNA Tax Group has a history of profitability and anticipates future
taxable income sufficient to fully support recognition of its deferred tax
balance at December 31, 1996, including but not limited to the reversal of
existing temporary differences and the implementation of tax planning
strategies, if needed. A valuation allowance is maintained due to the
uncertainty regarding the realizability of deferred tax assets related to the
Continental acquisition.
CNA FINANCIAL CORPORATION
-------------------------
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note D - Income Taxes (cont.)
Significant components of CNA's income tax provision are as follows:
<TABLE>
<CAPTION>
PROVISION FOR INCOME TAX
=========================================================================================
Year Ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Current tax (expense) benefit on:
Ordinary loss $ 163.5 $ 94.0 $ 16.8
Realized investment (gains) losses (192.4) (158.4) 57.4
- ----------------------------------------------------------------------------------------
Total current tax (expense) benefit (28.9) (64.4) 74.2
- ----------------------------------------------------------------------------------------
Deferred tax (expense) benefit on:
Ordinary (income) loss (326.5) (217.8) 68.9
Realized investment (gains) losses (24.8) (3.2) 27.4
- ----------------------------------------------------------------------------------------
Total deferred tax (expense) benefit $(351.3) (221.0) 96.3
- ----------------------------------------------------------------------------------------
TOTAL INCOME TAX (EXPENSE) BENEFIT $(380.2) $(285.4) $170.5
========================================================================================
</TABLE>
<PAGE>
A reconciliation of the expected income tax (expense) benefit resulting from the
use of statutory tax rates to the effective income tax (expense) benefit
follows:
<TABLE>
<CAPTION>
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES
=================================================================================================
% of % of % of
Pretax Pretax Pretax
Year Ended December 31 1996 Income 1995 Income 1994 Income
- -------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense on ordinary
income at statutory rates $(259.2) (35.0)% $(205.2) (35.0)% $(35.5) (35.0)%
Exempt interest and dividends
received deduction 86.5 11.7 79.2 13.5 110.1 108.7
Other items, net 9.7 1.3 2.2 0.4 11.1 10.9
- --------------------------------------------------------------------------------------------------
Income tax (expense) benefit
on ordinary income (163.0) (22.0) (123.8) (21.1) 85.7 84.6
- ---------------------------------------------------------------------------------------------------
Expected tax (expense) benefit on
realized investment gains/losses
at statutory rates (211.5) (35.0) (159.6) (35.0) 82.4 35.0
Other items, net (5.7) (0.9) (2.0) (0.3) 2.4 1.0
- ---------------------------------------------------------------------------------------------------
Income tax (expense) benefit on
realized investment gains/losses (217.2) (35.9)% (161.6) (35.3)% 84.8 36.0%
- ---------------------------------------------------------------------------------------------------
INCOME TAX (EXPENSE) BENEFIT $(380.2) $(285.4) $170.5
===================================================================================================
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
54
<PAGE>
- --------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses
- ------------------------------------------------------------------
CNA's property/casualty insurance claims and claims expense reserves represent
the estimated amounts necessary to settle all outstanding claims, including
claims which are incurred but not reported, as of the reporting date. The
Company's reserve projections are based primarily on detailed analysis of the
facts in each case, CNA's experience with similar cases, and various historical
development patterns. Consideration is given to such historical patterns as
field reserving trends, loss payments, pending levels of unpaid claims and
product mix, as well as court decisions, economic conditions and public
attitudes. All of these can affect the estimation of reserves. The effects of
inflation, which can be significant, are implicitly considered in the reserving
process and are part of the recorded reserve balance. Reserves are not
discounted except in the case of workers' compensation lifetime claims and
accident and health disability claims where the reserves are explicitly
discounted at rates allowed by insurance regulators that range from 3.5% to
6.0% and structured settlements where such reserves are discounted at
interest rates ranging from 6.25% to 7.5%.
Estimating loss reserves is a difficult process as there are many factors that
can ultimately affect the final settlement of a claim and, therefore, the
reserve that is needed. Changes in the law, results of litigation, medical
costs, the cost of repair materials and labor rates can all impact ultimate
claim costs. In addition, time can be a critical part of reserving
determinations since the longer the span between the incidence of a loss and the
payment or settlement of the claim, the more variable the ultimate settlement
amount can be. Accordingly, short-tail claims, such as property damage claims,
tend to be more reasonably predictable than long-tail claims, such as general
liability and professional liability claims.
CNA FINANCIAL CORPORATION
-------------------------
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
The table below provides a reconciliation between beginning and ending claim and
claim expense reserve balances for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIMS AND CLAIM EXPENSES
- ------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------
In millions of dollars)
<S> <C> <C> <C>
Reserves at beginning of year:
Gross $31,044 $21,639 $20,812
Ceded reinsurance 6,089 2,705 2,491
- -------------------------------------------------------------------------------------------
Net reserves at beginning of year 24,955 18,934 18,321
Continental reserves at acquisition - net --- 6,063 ---
- -------------------------------------------------------------------------------------------
Total net reserves 24,955 24,997 18,321
- -------------------------------------------------------------------------------------------
Net incurred claims and claim expenses:
Provision for insured events of current year 7,922 6,787 5,611
Increase (decrease) in provision
for insured events of prior years (91) 122 (71)
Amortization of discount 149 106 100
- -------------------------------------------------------------------------------------------
Total net incurred 7,980 7,015 5,640
- -------------------------------------------------------------------------------------------
Net payments attributable to:
Current year events 2,676 2,000 1,388
Prior year events 6,524 5,057 3,639
- ------------------------------------------------------------------------------------------
Total net payments 9,200 7,057 5,027
- ------------------------------------------------------------------------------------------
Net reserves at end of year 23,735 24,955 18,934
Ceded reinsurance at end of year 6,095 6,089 2,705
- ------------------------------------------------------------------------------------------
Gross reserves at end of year* $29,830 $31,044 $21,639
==========================================================================================
* Excludes life claim and claim expense reserves and intercompany eliminations
of $1 billion, $988 million, and $926 million as of December 31, 1996, 1995 and
1994, respectively, included in the Consolidated Balance Sheet.
</TABLE>
<PAGE>
The following reserve development reflects the effects of management's ongoing
evaluation of reserve levels and is comprised of the following components:
RESERVE DEVELOPMENT
- --------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions of dollars,(adverse)/favorable)
Environmental Pollution $(65) $(226) $(181)
Asbestos (51) (274) (37)
Other 207 378 289
- --------------------------------------------------------------------------------
Total $ 91 $(122) $ 71
- --------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
------------------------
56
<PAGE>
- --------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
ENVIRONMENTAL AND ASBESTOS
- --------------------------------------------------------------------------------
The CNA property/casualty insurance companies have potential exposures related
to environmental pollution and asbestos claims.
Environmental pollution clean-up is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to clean-up. The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial interpretations in many cases have expanded
the scope of coverage and liability beyond the original intent of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of 1980
("Superfund") and comparable state statutes ("mini-Superfund") govern the
clean-up and restoration of abandoned toxic waste sites and formalize the
concept of legal liability for clean-up and restoration by "Potentially
Responsible Parties" ("PRP's"). Superfund and the mini-Superfunds (Environmental
Clean-up Laws or "ECLs") establish mechanisms to pay for clean-up of waste sites
if PRP's fail to do so, and to assign liability to PRP's. The extent of
liability to be allocated to a PRP is dependent on a variety of factors.
Further, the number of waste sites subject to clean-up is unknown. To date,
approximately 1,300 clean-up sites have been identified by the Environmental
Protection Agency on its National Priorities List. On the other hand, the
Congressional Budget Office is estimating that there will be 4,500 National
Priority List sites, and other estimates project as many as 30,000 sites that
will require clean-up under ECLs. Very few sites have been subject to clean-up
to date; the addition of new clean-up sites has substantially slowed in recent
years. The extent of clean-up necessary and the assignment of liability has not
been established.
CNA and the insurance industry are disputing coverage for many such claims. Key
coverage issues include whether Superfund response costs are considered damages
under the policies, trigger of coverage, applicability of pollution exclusions,
the potential for joint and several liability and definition of an occurrence.
Similar coverage issues exist for clean-up of waste sites not covered under
Superfund. To date, courts have been inconsistent in their rulings on these
issues.
A number of proposals to reform Superfund have been made by various parties.
Despite Superfund taxing authority expiring at the end of 1995, no reforms have
been enacted by Congress. No predictions can be made as to what positions the
Congress or the Administration will take and what legislation, if any, will
result. If there is legislation, and in some circumstances even if there is no
legislation, the federal role in environmental clean up may be materially
reduced in favor of state action. Substantial changes in the federal statute or
the activity of the EPA may cause states to reconsider their environmental clean
up statutes and regulations. There can be no meaningful prediction of the
pattern of regulation that would result.
Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to clean-up, and the
standards for clean-up and liability, the ultimate exposure to CNA for
environmental pollution claims cannot be meaningfully quantified.
CNA FINANCIAL CORPORATION
-------------------------
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
Claim and claim expense reserves represent management's estimates of ultimate
liabilities based on currently available facts and case law. However, in
addition to the uncertainties previously discussed, additional issues related
to, among other things, specific policy provisions, multiple insurers and
allocation of liability among insurers, consequences of conduct by the insured,
missing policies and proof of coverage make quantification of liabilities
exceptionally difficult and subject to adjustment based on new data.
As of December 31, 1996 and December 31, 1995, CNA carried approximately $908
million and $1,063 million, respectively, of claim and claim expense reserves,
net of reinsurance recoverable, for reported and unreported environmental
pollution claims. The reserves relate to claims for accident years 1988 and
prior, which coincides with CNA's adoption of the Simplified Commercial General
Liability coverage form which included an absolute pollution exclusion.
Unfavorable reserve development for the year ended December 31, 1996 was $65
million as compared to unfavorable reserve development for the years ended
December 31, 1995 and 1994 which totaled $226 million and $181 million,
respectively. Unfavorable environmental reserve development results from CNA's
on-going monitoring of settlement patterns, current pending cases and potential
future claims.
CNA has exposure to asbestos claims, including those attributable to CNA's
litigation with Fibreboard Corporation. A detailed discussion of CNA's
litigation with Fibreboard Corporation regarding asbestos-related bodily injury
claims can be found in Note F. Estimation of asbestos claim reserves encounter
many of the same limitations discussed above for environmental pollution claims
such as inconsistency of court decisions, specific policy provisions, multiple
insurers and allocation of liability among insurers, missing policies and proof
of coverage. As of December 31, 1996 and 1995, CNA carried approximately $1,506
million and $2,191 million, respectively, of claim and claim expense reserves,
net of reinsurance recoverable, for reported and unreported asbestos-related
claims. Unfavorable reserve development for the years ended December 31, 1996,
1995 and 1994 totaled $51 million,$274 million and $37 million, respectively.
The results of operations in future years may continue to be adversely affected
by environmental pollution and asbestos claims and claim expenses. Management
will continue to monitor potential liabilities and make further adjustments as
warranted.
CNA FINANCIAL CORPORATION
--------------------------
58
<PAGE>
- -------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
OTHER
- -----
Other 1996 and 1995 reserve development, which aggregated to $207 million and
$378 million, respectively, of favorable reserve development, was principally
due to favorable claim frequency (rate of claim occurrence) and severity
(average cost per claim) experience in the workers' compensation line of
business.
These trends reflect the positive effects of changes in workers compensation
laws, more moderate increases in medical costs, and a generally strong economy
in which individuals return to the workplace more quickly.
Other favorable reserve development during 1994 aggregated to $289 million which
was principally attributable to positive severity experience in
professional liability lines and improvement in voluntary and involuntary
workers' compensation experience.
CNA, consistent with sound reserving practices, regularly adjusts its reserve
estimates in subsequent reporting periods as new facts and circumstances emerge
that indicate the previous estimates need to be modified.
Beginning the latter part of 1995 and through 1996 to date, CNA has been
actively settling many of its larger environmental pollution and asbestos-
related claim exposures. This strategy has resulted in a large volume of
claim payments during 1996, and corresponding reductions in reserves. In
addition, Fibreboard claim payments escalated in 1996 as some scheduled
payments came due. Management does not believe that these recent activities
have changed facts or circumstances evident at December 31, 1995, therefore, no
material modifications to previous reserve estimates have been made in 1996.
CNA FINANCIAL CORPORATION
-------------------------
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
The following tables provide additional data related to CNA's environmental
pollution and asbestos-related claims activity. Continental claims activity for
1995 is included for the period May 10, 1995 through December 31, 1995.
<TABLE>
<CAPTION>
Reserve Summary
- --------------------------------------------------------------------------------
December 31 1996 1995
------------------------ ---------------------------
Environmental Environmental
Pollution Asbestos Pollution Asbestos
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C>
Gross reserves:
Reported claims $ 288.9 $1,551.4 $ 288.4 $1,947.1
Unreported claims 714.0 94.0 895.0 369.0
-----------------------------------------------------
1,002.9 1,645.4 1,183.4 2,316.1
Less reinsurance recoverable (95.1) (139.2) (120.4) (125.0)
- --------------------------------------------------------------------------------
Net reserves $ 907.8 $1,506.2 $1,063.0 $2,191.1
================================================================================
The following tables summarize claim activity for environmental pollution and
asbestos.
</TABLE>
<TABLE>
<CAPTION>
Environmental Pollution
Changes in Reserves
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Net reserves at beginning of year $1,063.0 $ 948.8* $432.6
Reserve strengthening 64.7 226.0 180.6
Less: Gross payments 304.2 183.4 131.8
Reinsurance recoveries (84.3) (71.6) (24.3)
---------------------------------------
Net payments 219.9 111.8 107.5
- --------------------------------------------------------------------------------
Net reserves at end of year $ 907.8 $1,063.0 $505.7
================================================================================
* Includes Continental net reserves of $443.1 million at May 10, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Asbestos
Changes in Reserves
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Net reserves at beginning of year $2,191.1 $2,109.1** $2,080.0
Reserve strengthening 50.5 273.7 36.8
Less: Gross payments 787.7 267.8 245.9
Reinsurance recoveries (52.3) (76.1) (67.8)
---------------------------------------
Net payments 735.4 191.7 178.1
- --------------------------------------------------------------------------------
Net reserves at end of year $1,506.2 $2,191.1 $1,938.7
================================================================================
** Includes Continental net reserves of $170.4 million at May 10, 1995.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
60
<PAGE>
- --------------------------------------------------------------------------------
Note F - Legal Proceedings and Contingent Liabilities
Fibreboard Litigation
- ---------------------
CNA's primary property/casualty subsidiary, Continental Casualty Company
("Casualty"), has been party to litigation with Fibreboard Corporation
("Fibreboard") involving coverage for certain asbestos-related claims and
defense costs (San Francisco Superior Court, Judicial Council Coordination
Proceeding 1072). As described below, Casualty, Fibreboard, another insurer
(Pacific Indemnity, a subsidiary of the Chubb Corporation), and a
negotiating committee of asbestos claimant attorneys (collectively referred
to as Settling Parties) have reached a Global Settlement (the "Global
Settlement") to resolve all future asbestos-related bodily injury claims
involving Fibreboard, which is subject to court approval. Casualty, Fibre-
board and Pacific Indemnity have also reached an agreement (the "Trilateral
Agreement"), on a settlement to resolve the coverage litigation in the
event the Global Settlement does not obtain final court approval or is
subsequently successfully attacked. The implementation of either the Global
Settlement or the Trilateral Agreement would have the effect of settling
Casualty's litigation with Fibreboard.
On July 27, 1995, the United States District Court for the Eastern District of
Texas entered judgment approving the Global Settlement Agreement and the
Trilateral Agreement. As expected, appeals were filed as respects both of these
decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of
Appeals in New Orleans affirmed the judgment approving the Global Settlement
Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral
Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and Suggestions
for Rehearing by the entire Fifth Circuit Court of Appeals as respects the
decision on the Global Settlement Agreement were denied. Two petitions for
certiorari were filed in the Supreme Court.
No further appeal was filed with respect to the Trilateral Agreement; therefore,
court approval of the Trilateral Agreement has become final.
Global Settlement Agreement
On April 9, 1993, Casualty and Fibreboard entered into an agreement pursuant to
which, among other things, the parties agreed to use their best efforts to
negotiate and finalize a global class action settlement with asbestos-related
bodily injury and death claimants.
On August 27, 1993, the Settling Parties reached an agreement in principle for
an omnibus settlement to resolve all future asbestos-related bodily injury
claims involving Fibreboard. The Global Settlement Agreement was executed on
December 23, 1993. The agreement calls for contribution by Casualty and Pacific
Indemnity of an aggregate of $1.525 billion to a trust fund for a class of all
future asbestos claimants, defined generally as those persons whose claims
against Fibreboard were neither filed nor settled before August 27, 1993. An
additional $10 million is to be contributed to the fund by Fibreboard. As
indicated hereinabove, although the Global Settlement approval has so far been
affirmed on appeal, further review is being sought. There is limited precedent
with settlements which determine the rights of future claimants to seek relief.
Subsequent to the announcement of the agreement in principle, Casualty,
Fibreboard and Pacific Indemnity entered into the Trilateral Agreement which
among other things, settles the coverage case in the event the Global Settlement
approval is not
CNA FINANCIAL CORPORATION
-------------------------
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note F - Legal Proceedings and Contingent Liabilities (cont.)
ultimately upheld. In such case, Casualty and Pacific Indemnity will contribute
to a settlement fund an aggregate of $2 billion, less certain adjustments.
Such fund would be devoted to the payment of Fibreboard's asbestos liabilities
other than liabilities for claims settled before August 23, 1993. Casualty's
share of such fund would be $1.44 billion reduced by a portion of an additional
payment of $635 million which Pacific Indemnity has agreed to pay for claims
either filed or settled before August 27, 1993. As a result of the final
approval of the Trilateral Agreement, Casualty has assumed responsibility for
the claims that were settled before August 27, 1993. As a part of the Global
Settlement and the Trilateral Agreement, Casualty is to be released by
Fibreboard from any further liability under the comprehensive general liability
policy written for Fibreboard by Casualty, including but not limited to
liability for asbestos-related claims against Fibreboard. As indicated above,
court approval of the Trilateral Agreement has become final.
Casualty and Fibreboard have entered into a supplemental agreement which governs
the interim arrangements and obligations between the parties until such time as
there is either final court approval or disapproval of the Global Settlement
Agreement. It also governs certain obligations between the parties upon the
Global Settlement being upheld on appeal including the payment of claims which
are not included in the Global Settlement.
In addition, Casualty and Pacific Indemnity have entered into an agreement (the
"Casualty-Pacific Agreement") which sets forth the parties' agreement with
respect to the means for allocating among themselves responsibility for payments
arising out of the Fibreboard insurance policies. Under the Casualty-Pacific
Agreement, Casualty and Pacific Indemnity have agreed to pay 64.71% and 35.29%,
respectively, of the $1.525 billion to be used to satisfy the claims of future
claimants, plus certain expenses. The $1.525 billion has already been deposited
into an escrow for such purpose. As a result of final approval of the Trilateral
Agreement, Pacific Indemnity's share for unsettled present claims and presently
settled claims will be $635 million.
Through December 31, 1996, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 135,200 claims, for an
estimated settlement amount of approximately $1.60 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under these settlements. Approximately $1.31 billion was paid through
December 31, 1996, including approximately $500 million paid in the fourth
quarter of 1996 as a result of the Trilateral Agreement becoming final. As
described above, such payments are partially recoverable from Pacific Indemnity.
Casualty may negotiate other agreements with various classes of claimants
including groups who may have previously reached agreement with Fibreboard.
Casualty believes that final court approval of the Trilateral Agreement and its
implementation has eliminated any further material exposure with respect to the
Fibreboard matter, and subsequent reserve adjustments, if any, will not
materially affect the equity of CNA.
OTHER LITIGATION
- --------------------------------------------------------------------------------
CNA and its subsidiaries are also parties to other litigation arising in the
ordinary course of business. The outcome of this other litigation will not, in
the opinion of management, materially affect the results of operations or equity
of CNA.
CNA FINANCIAL CORPORATION
-------------------------
62
<PAGE>
- --------------------------------------------------------------------------------
Note G - Reinsurance
Note G -- Reinsurance
- ---------------------
The effects of reinsurance on earned premiums are shown in the following
schedules:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Earned Assumed/
Premiums Net
----------------------------------------------------------
Year Ended December 31 Direct Assumed Ceded Net %
- ---------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
1996
Life $ 736 $ 121 $ 55 $ 802 15.1%
Accident and health 3,575 187 176 3,586 5.2
Property/casualty 8,957 1,558 1,424 9,091 17.1
- ---------------------------------------------------------------------------------------
TOTAL PREMIUMS $13,268 $1,866 $1,655 $13,479 13.8%
=======================================================================================
1995
Life $ 701 $ 109 $ 21 $ 789 13.8%
Accident and health 3,017 125 106 3,036 4.1
Property/casualty 7,868 1,335 1,293 7,910 16.9
- ---------------------------------------------------------------------------------------
Total premiums $11,586 $1,569 $1,420 $11,735 13.4%
=======================================================================================
1994
Life $ 408 $ 107 $ 23 $ 492 21.7%
Accident and health 2,678 158 45 2,791 5.7
Property/casualty 5,601 1,251 661 6,191 20.2
- ---------------------------------------------------------------------------------------
Total premiums $ 8,687 $1,516 $ 729 $ 9,474 16.0%
=======================================================================================
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note G - Reinsurance (cont.)
The effects of reinsurance on written premiums are shown in the following
schedules:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended December 31 Written Premiums
----------------------------------------------------
Assumed/
(In millions of dollars) Direct Assumed Ceded Net Net %
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Life $ 736 $ 121 $ 55 $ 802 15.1%
Accident and health 3,708 188 183 3,713 5.1
Property/casualty 9,032 1,632 1,287 9,377 17.4
- ------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $13,476 $1,941 $1,525 $13,892 14.0%
================================================================================================
1995
Life $ 701 $ 109 $ 21 $ 789 13.8%
Accident and health 3,159 126 137 3,148 4.0
Property/casualty 9,421 1,408 1,814 9,015 15.6
- ------------------------------------------------------------------------------------------------
Total premiums $13,281 $1,643 $1,972 $12,952 12.7%
================================================================================================
1994
Life $ 408 $ 107 $ 23 $ 492 21.7%
Accident and health 2,746 159 45 2,860 5.5
Property/casualty 5,647 1,251 669 6,229 20.1
- ------------------------------------------------------------------------------------------------
Total premiums $8,801 $1,517 $ 737 $ 9,581 15.8%
================================================================================================
</TABLE>
The ceding of insurance does not discharge primary liability of the original
insurer. CNA places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. Further, for carriers that are not
authorized reinsurers in its states of domiciles, CNA receives collateral,
primarily in the form of bank letters of credit, securing a large portion of the
recoverables. Such collateral totaled approximately $800.9 million and $1.1
billion at December 31, 1996 and 1995, respectively.
CNA's largest recoverable from a single reinsurer, including prepaid
reinsurance premiums, is with Lloyds of London and approximates $440 million
and $435 million at December 31, 1996 and 1995, respectively.
Insurance claims and policyholder benefits are net of reinsurance recoveries of
$1,220.0 million, $934.8 million and $827.9 million for 1996, 1995 and 1994,
respectively.
<PAGE>
The impact of reinsurance on life insurance in-force is shown in the following
schedule:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Life Insurance In-Force Assumed/
-----------------------------------
(In millions of dollars) Direct Assumed Ceded Net Net%
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
December 31, 1996 $171,715 $65,294 $32,561 $204,448 31.9%
December 31, 1995 111,917 54,129 8,578 157,468 34.4
December 31, 1994 75,419 52,014 5,953 121,480 42.8
============================================================================
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
Note H - Debt
Note H -- Debt
- --------------
Long-term and short-term borrowings consisted of the following:
<TABLE>
<CAPTION>
LONG-TERM AND SHORT-TERM DEBT
- --------------------------------------------------------------------------------------------
December 31 1996 1995
- --------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C>
Long-term:
Variable Rate Debt:
Credit Facility $ 400.0 $ 825.0
Commercial Paper 675.0 500.0
Senior Notes:
8 7/8%, due March 1, 1998 149.6 149.2
8 1/4%, due April 15, 1999 102.0 102.8
7 1/4%, due March 1, 2003 145.9 145.4
6 1/4%, due November 15, 2003 248.4 248.2
6 3/4%, due November 15, 2006 248.1 -
8 3/8%, due August 15, 2012 97.9 97.9
71/4% Debenture, due November 15, 2023 247.1 247.1
11% Secured Mortgage Notes, due June 30, 2013 386.6 386.6
5.9% - 16.29% Secured Capital Leases, due through December 31, 2011 46.8 46.0
Other debt, due 1997 through 2019 (rates of 1% to 12.71%) 17.5 19.7
- ---------------------------------------------------------------------------------------------
Total long-term debt 2,764.9 2,767.9
Short-term debt - 257.6
- ---------------------------------------------------------------------------------------------
TOTAL DEBT $2,764.9 $3,025.5
=============================================================================================
</TABLE>
To finance the acquisition of Continental (including the refinancing of $205
million of Continental debt) CNA entered into a five-year $1.325 billion
revolving credit facility. In 1996, the Company renegotiated the facility
extending the maturity to May 2001. The interest rate for the facility is based
on the London Interbank Offered Rate (LIBOR), plus 16 basis points.
Additionally, there is a facility fee of 9 basis points annually. The average
interest rate on the borrowings under the revolver at December 31, 1996 was
5.72%. Under the terms of the facility, CNA may prepay the debt without penalty.
On November 15, 1996, CNA issued $250 million of 6 3/4% senior notes, due
November 15, 2006. The net proceeds from this issuance of approximately $248
million were used to pay down a portion of the borrowings outstanding under the
revolving credit facility. As a result of this debt issuance, borrowing capacity
under the revolving credit facility was reduced by $250 million, to $1.075
billion.
An additional $250 million of securities remain available for issuance under a
shelf registration.
<PAGE>
In 1995, to take advantage of favorable interest rates, CNA established a
commercial paper program borrowing $500 million from investors to replace a like
amount of credit facility financing. During 1996, CNA increased its borrowings
under the commercial paper program to $675 million. The average interest rate on
the commercial paper at December 31, 1996 was 5.67%. The commercial paper
borrowings are classified as long-term as borrowing capacity under the credit
facility will support the commercial paper.
CNA FINANCIAL CORPORATION
-------------------------
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE H - Debt (cont.)
At year end 1996, the outstanding loans under the revolving credit facility
were $400 million. There was no unused borrowing capacity under the facility
after the effects of the commercial paper program.
In 1995, CNA entered into interest rate swap agreements with a notional
principal amount of $1.2 billion, which terminate from May to December 2000.
These agreements provide that CNA pay interest at a fixed rate, averaging 6.20%
at December 31, 1996 in exchange for the receipt of interest at the three month
LIBOR rate. Concurrent with the paydown of $250 million on the revolving credit
facility, CNA terminated interest rate swaps with a total notional amount of
$250 million.
The effect of these interest rate swaps was to increase interest expense by
approximately $7 million and $2 million for the years ended December 31, 1996
and 1995, respectively.
The weighted average interest rate (interest and facility fees) on the variable
rate debt, which includes the revolving credit facility, commercial paper, and
the effect of the interest rate swaps, was 6.28% and 6.50% at December 31, 1996
and 1995, respectively.
On March 1, 1996, CNA paid at the due date $250 million of 8 5/8% senior notes.
These notes were classified as short-term debt in 1995.
The weighted average interest rates of outstanding short-term debt, excluding
current maturities of long-term debt, for the year ended December 31, 1995 was
6.19%. There was no debt classified as short-term debt at December 31, 1996.
The following table shows the future aggregate minimum principal payments on
debt and capitalized lease obligations:
- -------------------------------------------------------
Future Aggregate Minimum Principal Payments
- -------------------------------------------------------
(In millions of dollars)
1997 $ 4.0
1998 153.8
1999 104.9
2000 5.5
2001 1,081.3
Thereafter 1,426.4
- ------------------------------------------------------
Total $ 2,775.9
======================================================
CNA FINANCIAL CORPORATION
--------------------------
66
<PAGE>
- --------------------------------------------------------------------------------
Note I -- Benefit Plans
Note I - Benefit Plans:
- ----------------------
PENSION PLANS
- --------------------------------------------------------------------------------
CNA has several noncontributory pension plans covering all full-time employees
age 21 or over who have completed at least one year of service. The benefits for
the plans are based on years of credited service and the employee's highest
sixty consecutive months of compensation.
CNA's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plans are invested
primarily in U.S. government securities with the balance in short-term
investments, common stocks and other fixed income securities.
In conjunction with the Continental merger, CNA established a separate trust to
administer the Continental Corporation Retirement Plans. The retirement benefits
received by Continental employees are equivalent to the benefits to which
employees under the CNA Employees' Retirement Plan are entitled.
Effective January 1, 1996, the retirement plans redefined compensation to
include base pay, overtime and bonuses. This amendment generated an unrecognized
prior service cost of $20.2 million.
The funded status is determined using assumptions at the end of the year.
Pension cost is determined using assumptions at the beginning of the year.
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT OBLIGATION
- -----------------------------------------------------------------------------------------------------
December 31 1996* 1995 * 1994
- -----------------------------------------------------------------------------------------------------
OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded
PLANS PLANS Plans Plans Plans
- ------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Actuarial present value of accumulated
plan benefits:
Vested $517.2 $622.5 $491.1 $646.0 $376.4
Nonvested 37.7 32.4 28.3 14.1 39.1
- -----------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION $554.9 $654.9 $519.4 $660.1 $415.5
=====================================================================================================
* The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
</TABLE>
CNA FINANCIAL CORPORATION
---------------------------
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note I - Benefit Plans (cont.)
<TABLE>
<CAPTION>
NET PENSIONS ASSET (LIABILITY)
- -----------------------------------------------------------------------------------------------------
December 31 1996* 1995 * 1994
- ------------------------------------------------------------------------------------------------------
OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded
PLANS PLANS Plans Plans Plans
- ------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Projected benefit obligation $777.8 $ 788.3 $770.0 $ 809.3 $651.4
Plan assets at fair value 701.9 503.6 629.7 496.3 495.5
- ------------------------------------------------------------------------------------------------------
Plan assets less than projected
benefit obligation (75.9) (284.7) (140.3) (313.0) (155.9)
Unrecognized net asset at January 1, 1986
being recognized over 12 years (7.1) --- (12.2) --- (17.3)
Unrecognized prior service costs 19.1 77.7 21.4 104.0 20.8
Unrecognized net loss 122.2 (11.8) 164.6 13.5 174.0
- ------------------------------------------------------------------------------------------------------
NET PENSION ASSET (LIABILITY) $ 58.3 $(218.8) $ 33.5 $(195.5) $ 21.6
======================================================================================================
* The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
</TABLE>
<TABLE>
<CAPTION>
NET PERIODIC PENSION COST
- -------------------------------------------------------------------------------------------------------------------
December 31 1996* 1995* 1994*
- -------------------------------------------------------------------------- ----------------------------- ----------
OVERFUNDED UNDERFUNDED Overfunded Underfunded Overfunded
PLANS PLANS Plans Plans Plans
- -------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Net periodic pension cost:
Service cost - benefits attributed to
employee service during the year $36.5 $18.8 $ 32.1 $11.6 $32.3
Interest cost on projected benefit obligation 53.5 56.8 51.1 32.8 44.7
- --------------------------------------------------------------------------------------------------------------------
Actual return on plan assets (31.1) (29.0) (115.4) (43.4) 11.6
Net amortization and deferral (16.0) (6.0) 72.4 19.5 (43.3)
NET PERIODIC PENSION COST $42.9 $40.6 $ 40.2 $20.5 $45.3
====================================================================================================================
* The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
</TABLE>
<PAGE>
Actuarial assumptions are set forth in the following table.
<TABLE>
<CAPTION>
ASSUMPTIONS
- ----------------------------------------------------------------------------------------------------
December 31 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.50% 7.25% 8.50% 7.25%
Rate of increase in compensation levels* 2.75 2.75 4.00 4.50
Expected long-term rate of return on plan assets 7.75-8.50 7.50-8.50 8.75 7.50
- -----------------------------------------------------------------------------------------------------
* Excludes age/service related merit and productivity increases.
</TABLE>
CNA FINANCIAL CORPORATION
--------------------------
68
<PAGE>
- --------------------------------------------------------------------------------
Note I - Benefit Plans (cont.)
POSTRETIREMENT HEALTH CARE AND LIFE
INSURANCE BENEFITS
- --------------------------------------------------------------------------------
CNA provides certain health and dental care benefits for eligible retirees,
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNA continues to fund benefit costs
principally on the basis of current benefit payments.
Additionally, in conjunction with the Continental merger, CNA is administering a
separate trust for the postretirement health care and life insurance benefits
for Continental employees who retired prior to January 1, 1996. The benefits
received by Continental retirees are equivalent to the benefits to which
employees under the CNA postretirement health care and life insurance plan are
entitled.
<TABLE>
<CAPTION>
ACCRUED POSTRETIREMENT BENEFIT COST
- ----------------------------------------------------------------------------------------
December 31 1996* 1995* 1994
- ----------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $172.0 $185.5 $ 27.1
Fully eligible, active plan participants 89.0 59.2 53.7
Other active plan participants 88.2 62.5 41.1
- ----------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 349.2 307.2 121.9
Unrecognized prior service cost -- -- (11.2)
Unrecognized net gain (loss) (12.3) 7.4 19.7
- ----------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $336.9 $314.6 $130.4
========================================================================================
* The 1996 and 1995 data includes postretirement benefit obligations for The
Continental Corporation retirees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NET PERIODIC POSTRETIREMENT BENEFIT COST
- ---------------------------------------------------------------------------------------
Year Ended December 31 1996* 1995* 1994
- ---------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost - benefits attributed to employee
service during the year $11.9 $ 6.0 $ 8.6
Interest cost on accumulated postretirement
benefit obligation 24.1 17.5 10.3
Amortization .4 (1.0) .7
- ---------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $36.4 $ 22.5 $19.6
=======================================================================================
* The 1996 and 1995 data includes postretirement benefit obligations for The
Continental Corporation retirees.
</TABLE>
CNA FINANCIAL CORPORATION
--------------------------
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note I - Benefit Plans (Cont.)
ASSUMPTIONS
- --------------------------------------------------------------------------
December 31 1996 1995 1994
- --------------------------------------------------------------------------
Discount rate:
Assumptions used in determining
net periodic benefit cost: 7.25% 8.50% 7.25%
Assumptions used in determining
projected benefit obligation (liability) 7.50 7.25 8.50
- --------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 12% in 1996, declining by 1% per year to
an ultimate rate of 5% in 2002. The health care cost trend rate assumption has a
significant effect on the amount of the benefit obligation and periodic cost
reported. An increase in the assumed health care cost trend rate of 1% in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $24.2 million and the aggregate net periodic postretirement
benefit cost for 1996 by $3.1 million.
SAVINGS PLANS
- --------------------------------------------------------------------------------
The CNA Employees' Savings Plan is a contributory plan which allows employees to
make regular contributions of up to 6% of their salary. CNA contributes an
additional amount equal to 70% of the employee's regular contribution. Employees
may also make additional contributions of up to 10% of their salaries for which
there is no additional contribution by CNA.
In 1995, CNA made contributions to the Continental Incentive Savings Plan using
an equivalent formula to that used for the CNA Employees' Savings Plan.
Effective January 1, 1996, the Continental Incentive Savings Plan was merged
with the CNA Employees' Savings Plan.
Contributions by the Company to the savings plans were $23.8 million, $21.6
million and $17.0 million in 1996, 1995 and 1994, respectively
CNA FINANCIAL CORPORATION
-------------------------
70
<PAGE>
- --------------------------------------------------------------------------------
Note J -- Leases
Note J - Leases:
- ----------------
CNA occupies facilities under lease agreements that expire at various dates
throughout 2011. CNA's home office is partially situated on grounds under leases
expiring in 2058. In addition, data processing, office and transportation
equipment is leased under agreements that expire at various dates through 2001.
Most leases contain renewal options that may provide for rent increases based on
prevailing market conditions. Some leases contain purchase options based on fair
market values or contractual values, if greater. Rent expense for the years
ended December 31, 1996, 1995 and 1994 was $85.2 million, $92.4 million and
$50.9 million, respectively.
The table below shows the future minimum lease payments to be made under
non-cancelable leases at December 31, 1996.
Future Minimum Lease Payments
- --------------------------------------------
(in millions of dollars)
1997 $115.6
1998 88.4
1999 71.1
2000 57.4
2001 44.1
Thereafter 262.3
- -------------------------------------------
Total $638.9
===========================================
CNA FINANCIAL CORPORATION
--------------------------
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note K -- Stockholders' Equity and Statutory Financial Information
Note K - Stockholders' Equity and Statutory Financial Information:
- ------------------------------------------------------------------
SUMMARY OF CAPITAL STOCK
- --------------------------------------------------------------------------------
Number of Shares
-------------------------------
December 31 1996 1995
- --------------------------------------------------------------------------------
Preferred stock, without par value-non-voting:
Authorized 12,500,000 12,500,000
Money market cumulative preferred stock,
without par value non-voting:
Issued and outstanding:
Series E (stated value $100,000 per share) 750 750
Series F (stated value $100,000 per share) 750 750
Common stock with par value of $2.50-voting stock:
Authorized 200,000,000 200,000,000
Issued 61,841,969 61,841,969
Outstanding 61,798,262 61,798,262
Treasury stock 43,707 43,707
- --------------------------------------------------------------------------------
The dividend rate on money market preferred stock is determined approximately
every 49 days by auction. The money market preferred stock is redeemable at
CNA's option, as a whole or in part, at $100,000 per share plus accrued and
unpaid dividends.
CNA FINANCIAL CORPORATION
-------------------------
72
<PAGE>
- --------------------------------------------------------------------------------
Note K - Stockholder's Equity and Statutory Financial Information (cont.)
STATUTORY ACCOUNTING PRACTICES
- ------------------------------
CNA's insurance affiliates are domiciled in various states, provinces or
countries. These affiliates prepare their statutory financial statements in
accordance with accounting practices prescribed or otherwise permitted by the
respective state's insurance department. Prescribed statutory accounting
practices are set forth in a variety of publications of the National Association
of Insurance Commissioners as well as state laws, regulations, and general
administrative rules. The Company's insurance affiliates have no material
permitted accounting practices.
CNA's ability to pay dividends to its stockholders is affected, in part, by
receipt of dividends from its affiliates. The payment of dividends to CNA by its
insurance affiliates without prior approval of the insurance department of each
affiliate's state of domicile is limited to formula amounts. As of December 31,
1996, approximately $941 million was not subject to prior insurance department
approval.
Statutory capital and surplus and net income, determined in accordance with
accounting practices prescribed by the regulations and statutes of various
insurance departments, for property/casualty and life insurance subsidiaries are
as follows:
- --------------------------------------------------------------------------------
Statutory Capital and Surplus Statutory Net Income
----------------------------- ------------------------
December 31 Year Ended December 31
- ----------------------------------------------------- -------------------------
1996 1995** 1996 1995** 1994*
- --------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty
Insurance Subsidiaries $6,348.8 $5,695.9 $1,208.0 $1,208.3 $67.3
Life Insurance Subsidiaries 1,163.4 1,127.6 57.6 30.2 65.1
- --------------------------------------------------------------------------------
* Excludes The Continental Corporation.
** Includes The Continental Corporation for the twelve months ended
December 31, 1995.
CNA FINANCIAL CORPORATION
---------------------------
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note L - Continental Acquistion
Note L -- Continental Acquisition:
- ----------------------------------
On December 6, 1994, CNA entered into a merger agreement to acquire all the
outstanding common stock of The Continental Corporation (Continental). To
finance the acquisition, CNA entered into a five-year $1.325 billion revolving
credit facility (see Note H). The merger was consummated on May 10, 1995.
The acquisition of Continental has been accounted for as a purchase; therefore,
Continental's operations are included in the Consolidated Financial Statements
since May 10, 1995. Based on CNA's final evaluation and appraisal of the net
assets, goodwill approximated $316 million before amortization. The goodwill
is being amortized over twenty years at an annual charge to income of
approximately $16 million.
The unaudited pro forma condensed results of operations presented below assume
the Continental acquisition had occurred at the beginning of the periods
presented:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pro- Forma - Unaudited
Year Ended December 31 1995 1994
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C>
Revenues $16,154.8 $16,106.5
========= ==========
Realized investment gains (losses)
included in revenue $ 582.8 $ (170.2)
========= ==========
Income (loss) from continuing
operations before income tax $ 1,085.0 $(1,233.0)
Income tax (expense) benefit (316.0) 562.3
---------- ----------
Income (loss) from continuing operations 769.0 (670.7)
Income from discontinued operations,
net of income tax -- 39.5
- --------------------------------------------------------------------------------
Net income (loss) $ 769.0 $ (631.2)
================================================================================
</TABLE>
The unaudited pro forma condensed financial information is not necessarily
indicative of the results of operations that would have occurred had the
Continental acquisition been consummated at the beginning of the period
presented or of future operations of the combined companies.
CNA FINANCIAL CORPORATION
-------------------------
74
<PAGE>
- --------------------------------------------------------------------------------
Note L - Continental Acquistion (cont.)
Discontinued Operations:
Certain discontinued operations were acquired as part of the Continental merger.
Operating results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31 1996 1995*
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C>
Revenues:
Premiums $ 1.6 $ 4.8
Net investment income 31.1 25.6
Realized investment gains 6.0 1.4
Other 3.8 --
- --------------------------------------------------------------------------------
Total revenues 42.5 31.8
Benefits and expenses 42.5 31.8
- --------------------------------------------------------------------------------
Income (loss) before income taxes -- --
Income taxes -- --
- --------------------------------------------------------------------------------
Income (loss) from
discontinued operations $ -- $ --
================================================================================
</TABLE>
*Includes the results of Continental since May 10, 1995.
Net assets of discontinued insurance operations are included in Other Assets,
net of intercompany eliminations, and are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31 1996 1995*
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C>
Assets:
Investments $ 669.1 $ 657.2
Cash 22.2 34.1
Insurance receivables (net) 407.8 424.2
Other assets 389.2 231.9
- --------------------------------------------------------------------------------
Total assets 1,488.3 1,347.2
- --------------------------------------------------------------------------------
Liabilities:
Claim and claim expenses 846.9 955.7
Other liabilities 427.1 257.6
- --------------------------------------------------------------------------------
Total liabilities 1,274.0 1,213.3
- --------------------------------------------------------------------------------
Net assets $ 214.3 $ 133.9
================================================================================
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note M -- Business Segments
<TABLE>
<CAPTION>
Note M-- Business Segments:
- ---------------------------
REVENUES
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994
- -------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Property/Casualty-commercial $10,241.7 $ 8,952.9 $ 6,562.3
Property/Casualty-personal 1,892.3 1,425.9 1,143.2
Property/Casualty-involuntary risks 382.8 392.8 543.8
Life-individual 923.1 777.2 595.8
Life-group 2,957.1 2,700.6 2,442.6
- -------------------------------------------------------------------------------------------------------------
CNA Insurance 16,397.0 14,249.4 11,287.7
Other and intercompany eliminations (27.8) (13.5) (42.0)
- -------------------------------------------------------------------------------------------------------------
Revenues excluding realized
investment gains (losses) 16,369.2 14,235.9 11,245.7
Realized investment gains (losses):
Property/Casualty 473.6 320.6 (164.7)
Life 163.6 139.2 (81.2)
Other (18.6) 4.0 (0.3)
- -------------------------------------------------------------------------------------------------------------
Total realized investment gains (losses) 618.6 463.8 (246.2)
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $16,987.8 $14,699.7 $10,999.5
=============================================================================================================
*Includes the results of Continental since May 10, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAX
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994
- -------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Property/Casualty-commercial $ 769.6 $ 555.5 $ 105.0
Property/Casualty-personal (17.8) 24.6 (83.6)
Property/Casualty-involuntary risks (13.7) (1.8) 17.8
Life-individual 100.9 65.4 47.3
Life-group 69.8 94.9 87.1
- --------------------------------------------------------------------------------------------------------------
CNA Insurance 908.8 738.6 173.6
Interest, other and intercompany eliminations (168.1) (152.2) (72.3)
- --------------------------------------------------------------------------------------------------------------
Income (loss) excluding realized
investment gains (losses) 740.7 586.4 101.3
- --------------------------------------------------------------------------------------------------------------
Realized investment gains (losses)
net of policyholder's interest:
Property/Casualty 473.6 320.6 (164.7)
Life 149.3 131.4 (70.3)
Other (18.6) 4.0 (0.3)
- --------------------------------------------------------------------------------------------------------------
Total realized investment gains (losses)
net of policyholders' interest 604.3 456.0 (235.3)
- --------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) BEFORE INCOME TAX $1,345.0 $1,042.4 $(134.0)
==============================================================================================================
*Includes the results of Continental since May 10, 1995.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
76
<PAGE>
- --------------------------------------------------------------------------------
Note M -- Business Segments
<TABLE>
<CAPTION>
NET INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995* 1994
- ----------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Property/Casualty-commercial $ 585.4 $ 431.3 $ 169.0
Property/Casualty-personal (5.8) 21.9 (41.7)
Property/Casualty-involuntary risks (3.8) 3.8 20.6
Life-individual 65.5 42.6 30.5
Life-group 44.4 61.2 56.5
- -----------------------------------------------------------------------------------------------------
CNA Insurance 685.7 560.8 234.9
Interest, other and intercompany eliminations (108.0) (98.2) (47.9)
- -----------------------------------------------------------------------------------------------------
Net income excluding net realized
investment gains (losses) 577.7 462.6 187.0
- -----------------------------------------------------------------------------------------------------
Net realized investment gains (losses):
Property/Casualty 303.5 207.9 (104.6)
Life 95.7 85.4 (45.6)
Other (12.1) 1.1 (0.3)
- ----------------------------------------------------------------------------------------------------
Total net realized investment gains (losses) 387.1 294.4 (150.5)
- ----------------------------------------------------------------------------------------------------
TOTAL NET REVENUES $ 964.8 $ 757.0 $ 36.5
====================================================================================================
*Includes the results of Continental since May 10, 1995.
</TABLE>
<TABLE>
<CAPTION>
ASSETS
- -----------------------------------------------------------------------------------------------------
December 31 1996 1995* 1994
- -----------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Property/Casualty-commercial $39,927.0 $40,886.4 $27,441.2
Property/Casualty-personal 4,664.9 4,614.1 2,344.7
Property/Casualty-involuntary risks 2,406.9 2,464.7 2,166.6
Life-individual 4,739.8 3,996.5 3,733.0
Life-group 9,274.3 9,003.6 8,711.3
- -----------------------------------------------------------------------------------------------------
CNA Insurance 61,012.9 60,965.3 44,396.8
Other and intercompany eliminations (278.2) (604.9) (76.4)
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $60,734.7 $60,360.4 $44,320.4
=====================================================================================================
*Includes Continental since May 10, 1995.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note M - Business Segments (cont.)
Assets and investment income of the property/casualty group are allocated to
business segments on the basis of insurance reserves after attribution of
separately identifiable assets. Life group assets and investment income are
allocated to business segments based on cash flows after attribution of
separately identifiable assets. Income taxes have been allocated on the basis of
taxable operating income of the respective insurance segments. Property/casualty
involuntary risks include mandatory participation in residual markets, statutory
assessments for insolvencies of other insurers and other involuntary charges.
CNA's share of involuntary risks is generally a function of its share of the
voluntary market by line of insurance in each state.
Through August 1, 1989, CNA's property/casualty operations wrote financial
guarantee insurance contracts. These contracts primarily represent industrial
development bond guarantees and equity guarantees typically extending from ten
to thirteen years. For these guarantees, CNA received an advance premium which
is recognized over the exposure period and in proportion to the underlying
exposure insured.
At December 31, 1996 and 1995, gross exposure of financial guarantee insurance
contracts amounted to $582 million and $707 million, respectively. The degree of
risk attached to this exposure is substantially reduced through reinsurance,
diversification of exposures and collateral requirements. In addition, security
interests in the real estate are also obtained. Approximately 47% and 44% of the
risks were ceded to reinsurers at December 31, 1996 and 1995. Total exposure,
net of reinsurance, amounted to $311 million and $395 million at December 31,
1996 and 1995, respectively. At December 31, 1996 and 1995, collateral
consisting of letters of credit and debt service reserves amounted to $28
million and $39 million, respectively.
Gross unearned premium reserves for financial guarantee contracts were $11
million and $17 million at December 31, 1996 and 1995, respectively. Gross claim
and claim expense reserves totaled $371 million and $463 million at December 31,
1996 and 1995, respectively.
Life revenues include $2.1 billion, $1.9 billion and $1.8 billion in 1996, 1995
and 1994, respectively, under contracts covering U.S. government employees and
their dependents (FEHBP).
CNA FINANCIAL CORPORATION
---------------------------
78
<PAGE>
- --------------------------------------------------------------------------------
Note N - Unaudited Quarterly Financial Data
Note N - Unaudited Quarterly Financial Data:
- --------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
- --------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
1996 QUARTERS
Revenues $4,315.4 $4,095.2 $4,255.5 $4,321.7 $16,987.8
Net operating income
excluding realized gains/losses 145.3 151.5 160.7 120.2 577.7
Net income 329.3 202.1 238.5 194.9 964.8
Earnings per share 5.30 3.25 3.83 3.13 15.51
1995 Quarters
Revenues $3,052.8 $3,659.2 $4,000.9 $3,986.8 $14,699.7
Net operating income
excluding realized gains/losses 131.5 127.2 103.2 100.7 462.6
Net income 152.8 256.7 166.3 181.2 757.0
Earnings per share 2.44 4.12 2.66 2.91 12.14
1994 Quarters
Revenues $2,604.4 $2,731.0 $2,844.3 $2,819.8 $10,999.5
Net operating income (loss)
excluding realized gains/losses (16.8) 17.7 63.6 122.5 187.0
Net income (loss) (78.1) (36.3) 55.0 95.9 36.5
Earnings per share (1.28) (0.61) 0.87 1.53 0.51
- ---------------------------------------------------------------------------------------------------------
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note O - Proposed Acquisition
Note O -- Proposed Acquisition:
- ------------------------------
In the fourth quarter of 1996, CNA entered into a merger agreement with Capsure
Holdings Corp. (Capsure) to form a new stock company, CNA Surety Corporation.
CNA will be the majority shareholder of the new company owning approximately 62%
of the shares. The remaining shares will be held by existing Capsure
shareholders and option holders. The transaction will be accounted for as a
purchase and is expected to close in the second quarter of 1997. The transaction
closing is subject to the approvals of the Capsure shareholders, state insurance
regulators, certain governmental authorities and the satisfaction of certain
other conditions. Until the required approvals are received and the transaction
is complete, the companies will continue to operate independently.
Capsure provides surety and fidelity bonds nationwide through its subsidiaries
Western Surety Company and Universal Surety of America. Capsure's revenues for
the year ended December 31, 1996 were approximately $111 million. Total assets
were approximately $313 million at December 31, 1996.
CNA FINANCIAL CORPORATION
-------------------------
80
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
CNA Financial Corporation
We have audited the consolidated balance sheets of CNA Financial Corporation (an
affiliate of Loews Corporation) and subsidiaries as of December 31, 1996 and
1995 and the related statements of consolidated operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CNA Financial Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
S/DELOITTE & TOUCHE LLP
Chicago, Illinois
February 12, 1997
CNA FINANCIAL CORPORATION
-------------------------
81
<PAGE>
COMMON STOCK INFORMATION
- ------------------------------------------------------------------------------
CNA's common stock is listed on the New York, Chicago and Pacific Stock
Exchanges and is also traded on the Philadelphia Stock Exchange. The number of
holders of record of CNA's common stock as of March 3, 1997, was 2,963. As of
March 3, 1997, Loews Corporation owned approximately 84 percent of CNA's
outstanding common stock.
The table below sets forth the high and low closing sales prices for CNA's
common stock based on the New York Stock Exchange Composite Transactions. No
dividends have been paid on CNA's common stock in order to develop and maintain
a strong surplus position for CNA's insurance subsidiaries, which is necessary
to support business growth in an increasingly competitive environment. CNA's
ability to pay dividends is influenced, in part, by dividend restrictions of its
principal operating insurance subsidiaries as described in Note K to the
Consolidated Financial Statements.
COMMON STOCK INFORMATION
- -------------------------------------------------------------
1996 1995
-----------------------------------------------
Quarter HIGH LOW High Low
- -------------------------------------------------------------
Fourth 108 5/8 95 7/8 123 1/4 106 1/8
Third 104 1/2 95 7/8 106 1/2 86
Second 112 95 3/4 86 7/8 74
First 117 1/2 109 1/2 76 1/2 64 3/4
- -------------------------------------------------------------
INVITATION TO THE ANNUAL MEETING
- --------------------------------------------------------------------------------
Shareholders are cordially invited to attend the annual meeting at 10 a.m.
Wednesday, May 7, 1997, in Room 207N, CNA Plaza, 333 South Wabash Avenue,
Chicago. Shareholders unable to attend are requested to exercise their right to
vote by proxy. Proxy material will be mailed to shareholders prior to the
meeting.
FORM 10-K
- --------------------------------------------------------------------------------
A copy of CNA Financial Corporation's annual report on Form 10-K, which is filed
with the Securities and Exchange Commission, will be furnished to shareholders
without charge upon written request to:
Donald M. Lowry
Senior Vice President,
Secretary and General Counsel
CNA Financial Corporation
CNA Plaza, 43 South
Chicago, Illinois 60685
CNA FINANCIAL CORPORATION
-------------------------
82
<PAGE>
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
DIRECTORS
- --------------------------------------------------------------------------------
Antoinette Cook Bush
Partner; Skadden, Arps, Slate, Meagher & Flom
Dennis H. Chookaszian
Chairman and Chief Executive Officer,
CNA Insurance Companies
Philip L. Engel
President,
CNA Insurance Companies
Robert P. Gwinn
Retired Chairman and Chief Executive Officer,
Encyclopedia Britannica
Walter F. Mondale
Partner; Dorsey & Whitney LLP
Edward J. Noha
Chairman of the Board,
CNA Financial Corporation
Joseph Rosenberg
Senior Investment Strategist,
Loews Corporation
Richard L. Thomas
Chairman, Audit Committee; Retired Chairman of the Board,
First Chicago NBD Corporation and The First
National Bank of Chicago
James S. Tisch
Chairman, Finance Committee;
President and Chief Operating Officer,
Loews Corporation
Laurence A. Tisch
Chief Executive Officer of CNA;
Co-Chairman of the Board and
Co-Chief Executive Officer,
Loews Corporation
Preston R. Tisch
Chairman, Executive Committee;
Co-Chairman and Co-Chief Executive Officer,
Loews Corporation
Marvin Zonis
Professor of International Political Economy,
Graduate School of Business University of Chicago
<PAGE>
EXECUTIVE COMMITTEE
- --------------------------------------
Preston R. Tisch, Chairperson
Antoinette Cook Bush
Dennis H. Chookaszian
Philip L. Engel
Robert P. Gwinn
Walter F. Mondale
Edward J. Noha
Joseph Rosenberg
Richard L. Thomas
James S. Tisch
Laurence A. Tisch
Marvin Zonis
FINANCE COMMITTEE
- ---------------------------------------
James S. Tisch, Chairperson
Antoinette Cook Bush
Dennis H. Chookaszian
Philip L. Engel
Robert P. Gwinn
Walter F. Mondale
Edward J. Noha
Joseph Rosenberg
Richard L. Thomas
Laurence A. Tisch
Preston R. Tisch
Marvin Zonis
AUDIT COMMITTEE
- ---------------------------------------
Richard L. Thomas, Chairperson
Antoinette Cook Bush
Robert P. Gwinn
Walter F. Mondale
Marvin Zonis
INCENTIVE COMPENSATION COMMITTEE
- ---------------------------------------
Antoinette Cook Bush, Chairperson
Robert P. Gwinn
Richard L. Thomas
Marvin Zonis
CNA FINANCIAL CORPORATION
-------------------------
83
<PAGE>
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
OFFICERS
- --------------------------------------------------------------------------------
Laurence A. Tisch
Chief Executive Officer,
CNA Financial Corporation
Dennis H. Chookaszian
Chairman and Chief Executive Officer,
CNA Insurance Companies
Philip L. Engel
President,
CNA Insurance Companies
William J. Adamson, Jr.
Senior Vice President,
CNA Reinsurance Group
CNA Insurance Companies
James P. Flood
Senior Vice President,
Claims
CNA Insurance Companies
Michael C. Garner
Senior Vice President,
CNA Consulting Group and Human Resources
CNA Insurance Companies
Bernard L. Hengesbaugh
Senior Vice President,
Specialty Operations
CNA Insurance Companies
Peter E. Jokiel
Senior Vice President
and Chief Financial Officer,
CNA Financial Corporation
Jonathan D. Kantor *
Senior Vice President,
Secretary and General Counsel
CNA Insurance Companies
Patricia L. Kubera
Group Vice President and Controller
CNA Financial Corporation
Donald M. Lowry
Senior Vice President, Secretary and General Counsel,
CNA Financial Corporation
Carolyn L. Murphy
Senior Vice President,
Commercial Operations
CNA Insurance Companies
William H. Sharkey, Jr.
Senior Vice President,
Marketing
CNA Insurance Companies
<PAGE>
Adrian M. Tocklin
Senior Vice President,
Diversified Operations
CNA Insurance Companies
Jae L. Wittlich
Senior Vice President,
Group Operations
CNA Insurance Companies
David W. Wroe
Senior Vice President,
Information Technology
CNA Insurance Companies
CNA INSURANCE COMPANIES
ADMINISTRATIVE OFFICES
- ---------------------------------------
CNA Plaza
Chicago, Illinois 60685
312/822-5000
TRANSFER AGENT AND REGISTRAR
- ----------------------------------------
First Chicago Trust Company of New York
- -------------------------------------
*Effective April 1, 1997
CNA FINANCIAL CORPORATION
-------------------------
84
<PAGE>
CNA FINANCIAL COPORATION
APPENDIX
OMITTED GRAPH MATERIAL AND OTHER
Exhibit 13.1 - CNA Financial Corporation Annual Report:
* Bar graphs of:
- Revenues for the period 1986 through 1996
- Assets for the period 1986 through 1996
- Stockholders' equity for the period 1986 through 1996
- Book value per common share 1986 through 1996
(See page 3 of Exhibit 13.1 for a table showing the data points used in the
above graphs.)
* The following are outquotes located in the margins from the Letter To Our
Shareholders found on pages 4 through 9 of the annual report.
Page Outquotes
4 CNA continued to strenthen its leadership in the insurance
marketplance.
5 CNA focused on a number of business expansion activities.
6 CNA is the largest U.S. writer of commercial property/casualty
insurance.
7 CNA continued to build on its proven strategy of industry
segmentation.
8 CNA had its second consecutive year of strong growth in the
individual life insurance marketplance.
9 Our challenge is to build on the legacy of the past for an even
brighter future.
Page 4 is from CNA Financial Corporation Chairman Edward J. Noha,
and pages 5 through 9 are from CNA Insurnance Companies Chairman
and Chief Executive Officer Dennis H. Chookaszian.
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<NAME> CNA FINANCIAL COPORATION
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<FISCAL-YEAR-END> DEC-31-1996
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