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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-5823
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-6169860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA PLAZA
CHICAGO, ILLINOIS 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Annual Report on Form 10-K for the year ended
December 31, 1996 filed on March 31, 1997 as set forth in the pages attached
hereto:
Part I: Item 1. Business
(To correct typographical errors on page 7
of Form 10-K)
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<PAGE>
CNA FINANCIAL CORPORATION
FORM 10-K/A ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1996
Page
Number
------
Part 1 Item 1 Business................................ 3-12
Signature Page......................................... 13
Independent Auditors' Consent.......................... 14
2
<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)
========== ========== ========== ========== ==========
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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Year Ended December 31 1996 1995(a) 1994 1993 1992
(In millions of dollars)
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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............................ 30.4 29.2 27.8 27.1 25.6
Combined ratio (before policyholder
dividends)............................... 107.2 107.8 110.0 123.5 141.9
Policyholder dividend ratio.............. 1.4 2.1 3.8 3.1 2.4
Other Data - Statutory basis (d)
Capital and surplus...................... $6,348.8 $5,695.9 $3,367.3 $3,598.4 $3,135.8
Written to surplus ratio................. 1.6 1.7 2.0 1.7 2.0
- ---------------------------------------------------------------------------------------------------------------
</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............. - - 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>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNA Financial Corporation
By S/PATRICIA L. KUBERA
-----------------------------------------------------
Patricia L. Kubera
Group Vice President and
Controller
Date: April 3, 1997
13
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-50753 of CNA Financial Corporation and subsidiaries on Form S-3 of our
reports dated February 12, 1997, appearing in and incorporated by reference in
the Annual Report on Form 10-K/A of CNA Financial Corporation and subsidiaries
for the year ended December 31, 1996.
S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
April 3, 1997
14
