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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, 1997 Commission File Number 1-5823
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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. [ ]
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, 1998, 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 $1,394 million.
DOCUMENTS INCORPORATED
BY REFERENCE:
Portions of the CNA Financial Corporation 1997 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
1998 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, 1997
Item Page
Number PART I Number
------ ----
1. Business.......................................................... 3
2. Properties........................................................ 12
3. Legal Proceedings................................................. 13
4. Submission of Matters to a Vote of Security Holders............... 13
PART II
5. Market for the Registrant's Common Stock and
Related Stockholder Matters..................................... 15
6. Selected Financial Data........................................... 15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 15
7A. Quantitative and Qualitative Disclosures about Market Risk........ 15
8. Financial Statements and Supplementary Data....................... 15
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 15
PART III
10. Directors and Executive Officers of the Registrant................ 16
11. Executive Compensation............................................ 16
12. Security Ownership of Certain Beneficial Owners and Management.... 16
13. Certain Relationships and Related Transactions.................... 16
PART IV
14. Financial Statements, Schedules, Exhibits and Reports on Form 8-K. 16
2
<PAGE>
PART I
ITEM 1. BUSINESS
CNA Financial Corporation (CNAF) 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 (the acquisition date) CNAF
acquired all the outstanding common stock of The Continental Corporation and it
became a wholly owned subsidiary of CNAF. The Continental Corporation
(Continental), 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.
CNAF is a holding company whose primary subsidiaries consist of
property/casualty and life insurance companies, collectively CNA. CNA's
property/casualty insurance operations are conducted by CCC and its affiliates
and CIC and its 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, CNA underwrites
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 competes
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 3,400 individual companies that sell
property/casualty insurance in the United States. CNAF's consolidated
property/casualty subsidiaries ranked as the third largest property/casualty
insurance organization based upon 1996 statutory net written premium.
There are approximately 1,700 companies selling life insurance in the
United States. CAC is ranked as the twenty-second largest life insurance
organization based on 1996 consolidated statutory premium volume.
DIVIDENDS BY INSURANCE SUBSIDIARIES
The payment of dividends to CNAF by its insurance affiliates without prior
approval of the affiliates' domiciliary state insurance commissioners is
limited to amounts determined by formula in accordance with the accounting
practices prescribed or permitted by the states' insurance departments. This
formula varies by state. The formula for the majority of the states is the
greater of 10% of prior year statutory surplus or prior year statutory net
income, less the aggregate of all dividends paid during the twelve months prior
to date of payment. Some states, however, have an additional stipulation that
dividends can't exceed prior year's surplus. Based upon the various state
formulas, approximately $677 million in dividends can be paid to CNAF by its
insurance affiliates in 1998 without prior approval. All dividends must be
reported to the domiciliary insurance department prior to declaration and
payment.
<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 powers relative to licensing
insurers and agents, approving policy forms, establishing reserve requirements,
fixing minimum interest rates for accumulation of surrender values and maximum
interest rates of policy loans, prescribing the form and content of statutory
financial reports, 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
3
<PAGE>
REGULATION--(CONTINUED)
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 share of these involuntary risks is mandatory
and generally a function of its respective share of the voluntary market by line
of insurance in each state.
Reform of the Nation's tort reform system is another issue facing the
insurance industry. 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 a significant number of
these reforms. Additionally, new causes of action and theories of damages are
more frequently proposed in state courts or legislatures. Continued
unpredictability 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 the methodology for financing future clean-up costs.
Although Superfund reform continues to be listed as one of Congress' 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 1997 Annual Report to Shareholders for further discussion,
incorporated by reference in Item 8, herein.
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. The RBC requirements establish a formal state
accreditation process designed to regulate for solvency more closely, minimize
the diversity of approved statutory accounting and actuarial practices, and
increase 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,
1997, all of CNAF's property/casualty and life insurance affiliates have
adjusted capital amounts in excess of Company Action Levels.
<PAGE>
REINSURANCE
Information as to the CNA's reinsurance business is set forth in Note G of
the Consolidated Financial Statements of the 1997 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
EMPLOYEE RELATIONS
CNA has approximately 24,700 full-time equivalent employees and has
experienced satisfactory labor relations. CNA has never had work stoppages due
to labor disputes.
4
<PAGE>
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. See Note I of the Consolidated
Financial Statements of the 1997 Annual Report to Shareholders for further
discussion, incorporated by reference in Item 8, herein.
BUSINESS SEGMENTS
Information as to the Company's business segments is set forth in Note M of
the Consolidated Financial Statements of the 1997 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
PROPERTY/CASUALTY BUSINESS
The property/casualty group is comprised of commercial business, personal
lines of insurance, involuntary risks and other related businesses.
Customers of the commercial business 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 lines also includes reinsurance assumed from other insurance
companies and certain group accident and health insurance coverages.
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
property/casualty commercial business are professional and specialty coverages,
general liability and commercial automobile, and workers' compensation which
accounted for 17%, 17% and 16%, respectively, of 1997 premiums earned.
The property/casualty group markets personal lines of insurance, primarily
automobile and homeowners coverages sold to individuals under monoline and
package policies.
Involuntary risks include mandatory participation in residual markets,
statutory assessments for insolvencies of other insurers, and other similar
charges. 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.
The property/casualty group also provides other related services including
loss control, policy administration and claim administration services under
service contracts for fees. Such services are provided primarily in the workers'
compensation market.
5
<PAGE>
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
The following table sets forth supplemental data on a GAAP basis, except
where indicated, for the property/casualty business:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
(In millions of dollars, except ratio
information)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial Premiums Earned (a)
Professional and specialty............... $ 1,688 $ 1,845 $ 1,558 $ 1,010 $ 799
General liability and commercial automobile 1,682 1,754 1,649 1,261 1,155
Workers' compensation.................... 1,845 1,543 1,476 1,426 1,501
Multiple peril........................... 1,058 1,047 870 389 369
Accident and health...................... 1,062 919 699 557 428
Reinsurance and other.................... 1,083 1,189 974 774 712
------- ------- ------- ------- -------
$ 8,418 $ 8,297 $ 7,226 $ 5,417 $ 4,964
======= ======= ======= ======= =======
Personal Premiums Earned (a)
Personal lines packages.................. $ 1,085 $ 1,063 $ 782 $ 563 $ 511
Monoline automobile and property coverages 440 367 325 314 343
Accident and health...................... 126 106 108 89 86
------- ------- ------- ------- -------
$ 1,651 $ 1,536 $ 1,215 $ 966 $ 940
======= ======= ======= ======= =======
Involuntary Risks Premiums Earned (a)(b)
Workers' compensation.................... $ (249) $ 198 $ 178 $ 350 $ 292
Private passenger automobile............. 66 58 80 47 23
Commercial automobile................... 25 36 20 54 50
Property and multiple peril.............. 16 2 6 5 6
------- ------- ------- ------- -------
$ (142) $ 294 $ 284 $ 456 $ 371
======= ======= ======= ======= =======
Net Investment Income and Other Income (a)
Commercial............................... $ 2,172 $ 2,074 $ 1,713 $ 1,145 $ 980
Personal................................. 209 222 231 178 156
Involuntary risks........................ 43 94 104 88 76
------- ------- ------- ------- -------
$ 2,424 $ 2,390 $ 2,048 $ 1,411 $ 1,212
======= ======= ======= ======= =======
Underwriting (Loss) Income (a)
Commercial............................... $(1,421) $ (853) $ (921) $ (946) $(1,536)
Personal................................. 124 (184) (102) (185) (100)
Involuntary risks........................ 135 (106) (99) (70) (156)
------- ------- ------- ------- -------
$(1,162) $(1,143) $(1,122) $(1,201) $(1,792)
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
(In millions of dollars, except ratio
information)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TRADE RATIOS - GAAP BASIS (C)
Loss ratio............................... 77.1% 76.4% 77.9% 81.9% 96.2%
Expense ratio............................ 31.3 30.9 29.4 28.3 27.2
Combined ratio (before policyholder 108.4 107.3 107.3 110.2 123.4
dividends).............................
Policyholder dividend ratio.............. 0.5 1.6 3.0 4.8 3.9
TRADE RATIOS - STATUTORY BASIS (C)
Loss ratio............................... 77.5% 76.8% 78.6% 82.2% 96.4%
Expense ratio............................ 30.7 30.6 29.2 27.8 27.1
Combined ratio (before policyholder 108.2 107.4 107.8 110.0 123.5
dividends).............................
Policyholder dividend ratio.............. 0.8 1.4 2.1 3.8 3.1
OTHER DATA - STATUTORY BASIS (D)
Capital and surplus...................... $ 7,123 $6,349 $ 5,696 $ 3,367 $ 3,598
Written to surplus ratio................. 1.4 1.6 1.7 2.0 1.7
- -----------------------------------------------------------------------------------------------------------------
<FN>
(a) Premiums earned, net investment income and underwriting loss includes
the results of The Continental Corporation since the acquisition date.
(b) Property/casualty involuntary risks include mandatory participation in
residual markets, statutory assessments for insolvencies of other
insurers and other similar charges.
</FN>
</TABLE>
6
<PAGE>
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
(c) GAAP trade ratios reflect the results of CCC and its property/casualty
insurance subsidiaries for the entire year, along with the results of
Continental since the acquisition date. Statutory trade ratios reflect
the results of CCC and its property/casualty insurance subsidiaries and
Continental 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 CNAF of $475 million in 1993. In
addition, dividends of $175 million, $545 million, $325 million, $175
million and $150 million were paid to CNAF by CCC in 1997, 1996, 1995,
1994 and 1993, respectively. Property/casualty insurance subsidiaries
have received, or will receive, reimbursement from CNAF for general
management and administrative expenses, unallocated loss adjustment
expenses and investment expenses of $199 million, $195 million, $197
million, $170 million and $168 million in 1997, 1996, 1995, 1994 and
1993, respectively.
The following table displays the distribution of gross written premium:
-------------------------------------------------------------------------
GROSS WRITTEN PREMIUM % OF TOTAL
------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
-------------------------------------------------------------------------
New York................................... 9.9 9.3 10.3
California................................. 8.8 8.5 9.7
Texas...................................... 6.2 6.0 6.5
Pennsylvania............................... 5.1 4.9 5.4
Florida.................................... 4.8 4.2 4.1
Illinois................................... 4.4 5.3 5.2
New Jersey................................. 4.3 4.1 4.6
All other states, countries or political
subdivisions (a)........................... 48.0 46.8 44.4
Reinsurance assumed:
Voluntary................................ 9.7 9.1 7.8
Involuntary.............................. (1.2) 1.8 2.0
------- ------- ------
100.0 100.0 100.0
=========================================================================
(a) No other state, country or political subdivision accounts for more
than 3.0% of gross written premium.
<PAGE>
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES
The following loss reserve development table 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 the Company's property/casualty insurance
subsidiaries' expanded awareness of additional facts and circumstances that
pertain to the unsettled claims. The last section compares the latest
re-estimated reserve to the reserve originally established, and indicates
whether the original reserve was adequate or inadequate to cover the estimated
costs of unsettled claims.
7
<PAGE>
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES--(CONTINUED)
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 1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996 1997(d)
(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 $29,395 $28,240
Ceded recoverable........ -- -- -- 3,440 3,297 2,867 2,491 2,705 6,089 5,660 4,995
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Net reserves
for unpaid
claim
and claim expenses.... 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 23,245
----- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------
NET PAID (CUMULATIVE) AS OF:
One year later........... 1,763 2,040 2,670 3,285 3,411 3,706 3,629 3,656 6,510 5,851 --
Two years later.......... 2,961 3,622 4,724 5,623 6,024 6,354 6,143 7,087 10,485 -- --
Three years later........ 4,031 4,977 6,294 7,490 7,946 8,121 8,764 9,195 -- -- --
Four years later......... 5,007 6,078 7,534 8,845 9,218 10,241 10,318 -- -- -- --
Five years later......... 5,801 6,960 8,485 9,726 10,950 11,461 -- -- -- -- --
Six years later.......... 6,476 7,682 9,108 11,207 11,951 -- -- -- -- -- --
Seven years later........ 7,061 8,142 10,393 12,023 -- -- -- -- -- -- --
Eight years later........ 7,426 9,303 11,086 -- -- -- -- -- -- -- --
Nine years later......... 8,522 9,924 -- -- -- -- -- -- -- -- --
Ten years later.......... 9,097 -- -- -- -- -- -- -- -- -- --
NET RESERVES RE-ESTIMATED
AS OF:
End of initial year...... 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 23,245
One year later........... 8,086 9,737 11,336 12,984 16,032 17,757 18,250 18,922 24,864 23,479 --
Two years later.......... 8,345 9,781 11,371 14,693 16,810 17,728 18,125 18,500 24,294 -- --
Three years later........ 8,424 9,796 13,098 15,737 16,944 17,823 17,868 18,008 -- -- --
Four years later......... 8,516 11,471 14,118 15,977 17,376 17,765 17,511 -- -- -- --
Five years later.........10,196 12,496 14,396 16,440 17,329 17,560 -- -- -- -- --
Six years later..........11,239 12,742 14,811 16,430 17,293 -- -- -- -- -- --
Seven years later........11,480 13,167 14,810 16,551 -- -- -- -- -- -- --
Eight years later........11,898 13,174 14,995 -- -- -- -- -- -- -- --
Nine years later.........11,925 13,396 -- -- -- -- -- -- -- -- --
Ten years later..........12,203 -- -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total net (deficiency) (4,158) (3,844) (3,728) (3,461) (2,878) (393) 810 926 661 256 --
redundancy
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Schedule of
Property/Casualty
Loss Reserve
Development
Calendar Year Ended 1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996 1997(d)
(In millions of
dollars)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reconciliation to gross
re-estimated reserves:
Net reserves
re-estimated 12,203 13,396 14,995 16,551 17,293 17,560 17,511 18,008 24,294 23,479 --
Re-estimated ceded
recoverable -- -- -- 2,939 2,672 2,085 1,904 2,405 6,560 6,108 --
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------
Total gross
re-estimated -- -- -- 19,490 19,965 19,645 19,415 20,413 30,854 29,587 --
reserves
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Net (deficiency) redundancy
related to:
Asbestos claims. (3,073) (3,017) (2,919) (2,785) (2,738) (1,049) (449) (414) (156) (105) --
Environmental claims.... (1,000) (997) (970) (960) (914) (869) (423) (243) (63) -- --
------ ------- ------- ------- ------ ------ ------- ------- ------- ------ -----
Total asbestos and
environmental (4,073) (4,014) (3,889) (3,745) (3,652) (1,918) (872) (657) (219) (105) --
Other claims............ (85) 170 161 284 774 1,525 1,682 1,583 880 361 --
------- ------ ------ ------ ------ ------ ------ ------ ------ -------------
Total net (deficiency)
redundancy.............. (4,158) (3,844) (3,728) (3,461) (2,878) (393) 810 926 661 256 --
======= ======= ======= ======= ======== ====== ====== ====== ====== ====== =====
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(a) Reflects reserves of CNA's property/casualty insurance subsidiaries,
excluding Continental reserves which were acquired on the acquisition date.
Accordingly, the reserve development (net reserves recorded at the end of the
year, as initially estimated, less net reserves re-estimated as of subsequent
years) does not include Continental.
(b) 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, on the
acquisition date, 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 the acquisition date and subsequent development
thereon.
(d) Includes gross reserves of acquired companies of $64 million.
</FN>
</TABLE>
8
<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 1997 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 1997 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 other companies on a commission
basis. Insurance products are also marketed through other distribution channels
such as banks, direct marketing and the Internet. The individual insurance
products consist primarily of term, universal life, and fixed and variable
annuity products. 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's life insurance 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 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 life insurance subsidiaries 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 position CNA properly in the evolving health care environment.
9
<PAGE>
LIFE BUSINESS--(CONTINUED)
The following table sets forth supplemental data on a GAAP basis, except
where indicated for the life insurance business:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
(In millions of dollars, except ratio information)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDIVIDUAL PREMIUM
Life and annuities................................ $ 642 $ 629 $ 497 $ 369 $ 312
Accident and health............................... 3 2 33 33 31
--------- --------- --------- --------- ---------
$ 645 $ 631 $ 530 $ 402 $ 343
========= ========= ========= ========= =========
GROUP PREMIUM
Accident and health (a)........................... $ 2,527 $ 2,548 $ 2,190 $ 2,111 $ 1,983
Life and annuities................................ 263 195 313 165 116
--------- --------- --------- --------- ---------
$ 2,790 $ 2,743 $ 2,503 $ 2,276 $ 2,099
========= ========= ========= ========= =========
NET INVESTMENT INCOME AND OTHER INCOME
Individual........................................ $ 297 $ 292 $ 247 $ 194 $ 154
Group............................................. 236 214 198 166 143
--------- --------- --------- --------- ---------
$ 533 $ 506 $ 445 $ 360 $ 297
========= ========= ========= ========= =========
OPERATING INCOME BEFORE INCOME TAX
Individual........................................ $ 88 $ 101 $ 65 $ 47 $ 14
Group............................................. 65 70 95 87 52
--------- --------- --------- --------- ---------
$ 153 $ 171 $ 160 $ 134 $ 66
========= ========= ========= ========= =========
GROSS LIFE INSURANCE IN-FORCE
Individual (b).................................... $ 239,843 $ 172,213 $ 113,901 $ 80,560 $ 76,835
Group............................................. 71,755 64,796 52,145 46,873 35,413
--------- --------- --------- --------- ---------
$ 311,598 $ 237,009 $ 166,046 $ 127,433 $ 112,248
========= ========= ========= ========= =========
OTHER DATA - STATUTORY BASIS(c)
Capital and surplus............................... $ 1,223 $ 1,163 $ 1,128 $ 1,055 $ 1,022
Capital and surplus-percent of total liabilities.. 22.4% 25.5% 28.2% 29.4% 30.1%
Participating policyholders-percent of gross life
insurance in force................................ 0.7% 0.5% 0.6% 0.9% 1.1%
- ----------------------------------------------------------------------------------------------------------------
<FN>
(a) Group accident and health premium includes contracts involving U.S. government employees and their
dependents, and amounted to approximately $2.1 billion, $2.1 billion, $1.9 billion, $1.8 billion and
$1.7 billion in 1997, 1996, 1995, 1994 and 1993, 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 6.4%, 7.2%, 9.4%, 9.7% and 9.7% in 1997, 1996, 1995, 1994
and 1993, respectively.
(c) Other data is determined on the basis of statutory accounting practices. Life insurance subsidiaries
have received reimbursement from CNAF for general management and administrative expenses and investment
expenses of $18 million, $29 million, $21 million, $25 million and $26 million in 1997, 1996, 1995, 1994,
and 1993, 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.
</FN>
</TABLE>
10
<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.
The Company manages the liquidity and interest rate risks on the guaranteed
investment contract portfolio by managing the 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 1997 1996 1995
- -------------------------------------------------------------------------------
Duration in years:
Assets....................................... 3.74 3.12 3.12
Contracts.................................... 3.63 3.16 2.98
---- ---- ----
Difference................................... 0.11 (0.04) 0.14
==== ====== ====
Weighted average investment yield............... 6.81% 7.44% 7.58%
Weighted average interest crediting rates....... 6.78% 7.32% 7.45%
Withdrawal characteristics:
With market value adjustment................. 97% 95% 92%
Non-withdrawable............................. 3 5 8
- -------------------------------------------------------------------------------
Total 100% 100% 100%
===============================================================================
As shown above, the weighted average investment yield at December 31, 1997,
1996 and 1995 was more than the weighted average interest crediting rate. During
1997, general market interest rates were lower which led to an increase in the
market value of CNA's fixed maturitiy securities. As a result of this increase,
CNA was able to realize significant capital gains on its investment portfolio.
However, the interest rates on fixed maturity securities purchased in this
market had a lower yield which led to a narrowing of the spread between
investment yields and crediting rates.
INVESTMENTS
Information as to the Company's investments is set forth in Note B of the
Consolidated Financial Statements of the 1997 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
11
<PAGE>
ITEM 2. PROPERTIES
CNA Plaza, owned by Continental Assurance Company, serves as the home
office for CNAF and its insurance subsidiaries. An adjacent building (located at
55 E. Jackson Blvd.), jointly owned by Continental Casualty Company and
Continental Assurance Company, is partially situated on grounds under leases
expiring in 2058. Approximately 28% of the adjacent building is rented to
non-affiliates. CNAF's subsidiaries lease office space in various cities
throughout the United States and in other countries. The following table sets
forth certain information with respect to the principal office buildings owned
or leased by CNAF's subsidiaries:
--------------------------------------------------------------------------
AMOUNT OF BUILDING OWNED
AND OCCUPIED OR LEASED
LOCATION BY CNA OR ITS SUBSIDIARIES PRINCIPAL USAGE
--------------------------------------------------------------------------
CNA 1,144,378 sq. ft.* Principal Executive
Plaza Offices of CNAF
333 S. Wabash
Chicago, Illinois
180 Maiden Lane 1,091,570*** Property/Casualty
New York, New York Insurance Offices
55 E. Jackson Blvd. 440,292* Principal Executive
Chicago, Illinois Offices of CNAF
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
200 S. Wacker Drive 219,285** Property/Casualty
Chicago, Illinois Insurance Offices
1111 E. Broad St. 183,019** Property/Casualty
Columbus, Ohio Insurance Offices
333 Glen Street 157,825** Property/Casualty
Glen Falls, New York Insurance Offices
1100 Cornwall Road 147,884** Property/Casualty
Monmouth Junction Insurance Offices
New Jersey
600 North Pearl Street 139,151** Property/Casualty
Dallas, Texas Insurance Offices
111 Congressional Blvd. 118,215** Property/Casualty
Indianapolis, Indiana Insurance Offices
1431 Opus Place 106,151** Property/Casualty
Downers Grove, Illinois Insurance Offices
2401 Pleasant Valley 102,376** Property/Casualty
York, Pennsylvania Insurance Offices
* Represents property owned by CNAF or its subsidiaries.
** Represents property leased by CNAF or its subsidiaries.
*** Property is owned by Continental and 46% of it is occupied by CNAF or its
subsidiaries.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Information as to CNA's legal proceedings is set forth in Note F of the
Consolidated Financial Statements of 1997 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
POSITION AND
OFFICES HELD FIRST BECAME
WITH OFFICER OF
NAME REGISTRANT AGE CNA PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
<S> <C> <C> <C> <C>
Laurence A. Tisch Chief Executive 75 * Co-Chairman of the Board and Co-Chief Executive
Officer, CNA Officer of Loews Corporation. President, Chief
Financial Executive Officer and Director of CBS, Inc. until
Corporation November 1995. Executive officer of the Registrant
since 1974.
Dennis H. Chookaszian Chairman of the 54 1975 Chairman of the Board and Chief Executive Officer of
Board and Chief CNA since September 1992. Prior thereto,
Executive Mr. Chookaszian was President and Chief Operating
Officer, CNA Officer of CNA. Executive officer of the Registrant
since 1975.
Philip L. Engel President, CNA 57 1977 President of CNA since September 1992. Prior thereto,
Mr. Engel was Executive Vice President of CNA.
Executive officer of the Registrant since 1992.
Bernard L. Executive Vice 51 1980 Executive Vice President and Chief Operating Officer
Hengesbaugh President and of CNA since February 4, 1998. Senior Vice President
Chief Operating of CNA since November 1990. Executive officer of the
Officer, CNA Registrant since 1992.
W. James MacGinnitie Senior Vice 59 1997 Senior Vice President and Chief Financial Officer of
President and CNA and of the Registrant since October 1997. From
Chief Financial 1994 through 1997, Partner at Ernst & Young LLP.
Officer Prior to that time, principal with Tillinghast.
<FN>
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
*Mr. Tisch is not an officer of CNA.
</FN>
</TABLE>
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Incorporated herein by reference from page 91 of the 1997 Annual
Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from page 2 of the 1997 Annual
Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference from pages 14 through 38 of the 1997
Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference under the heading Market Risk in the
Management Discussion and Analysis of Financial Condition and Results of
Operations of the 1997 Annual Report to Shareholders on pages 30
through 33.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheet - December 31, 1997 and 1996
Statement of Consolidated Operations - Year Ended December 3l, 1997, 1996
and 1995
Statement of Consolidated Stockholders' Equity - December 31, 1997, 1996
and 1995
Statement of Consolidated Cash Flows - Year Ended December 31, 1997, 1996
and 1995
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 40 through 90 of the 1997
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
<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
<TABLE>
<CAPTION>
Page
(a) 1. FINANCIAL STATEMENTS: Number
<S> <C>
A separate index to the Consolidated Financial Statements is presented
in Part II, Item 8..................................................................... 15
(a) 2. FINANCIAL STATEMENT SCHEDULES:
Schedule I Summary of Investments............................................. 20
Schedule II Condensed Financial Information (Parent Company)................... 21
Schedule III Supplementary Insurance Information................................ 25
Schedule V Valuation and Qualifying Accounts and Reserves..................... 26
Schedule VI Supplementary Information Concerning Property/Casualty
Insurance Operations............................................... 26
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........................................................... 27
</TABLE>
16
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(continued)
<TABLE>
<CAPTION>
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit Number
------------------------ -------
<S> <C>
(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
(Exhibit 3.2 to 1996 Form 10-K incorporated herein by reference.)........................ 3.2
(4) Instruments defining the rights of security holders, including indentures:
CNA Financial Corporation hereby agrees to furnish to the Commission
upon request copies of instruments with respect to long-term debt,
pursuant to Item 601(b) (4) (iii) of Regulation S-K..................................... -
(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
</TABLE>
17
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(continued)
<TABLE>
<CAPTION>
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit Number
------------------------ ----------
<S> <C>
(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
</TABLE>
18
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(continued)
<TABLE>
<CAPTION>
(a) 3. EXHIBITS:
Exhibit
Description of Exhibit Number
------------------------ --------
<S> <C>
(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) 1997 Annual Report...................................................................... 13.1*
(21) Subsidiaries of CNA..................................................................... 21.1*
(23) Independent Auditors' Consent........................................................... 23.1*
(27) Financial Data Schedule................................................................. 27*
*Filed herewith
(b) REPORTS ON FORM 8-K:
None
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
CNA FINANCIAL CORPORATION
SUMMARY OF INVESTMENTS
- -----------------------------------------------------------------------------------------------------------------
December 31 1997 1996
----------------------------- ---------------------------------
Fair Carrying Fair 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.... $13,798 $13,920 $13,920 $15,047 $15,045 $15,045
States, municipalities and political
subdivisions-tax exempt............. 4,534 4,724 4,724 4,860 4,951 4,951
Foreign governments and political
subdivisions........................ 998 998 998 1,200 1,214 1,214
Public utilities..................... 340 355 355 195 205 205
Convertibles and bonds with warrants
attached............................ 3 2 2 167 169 169
All other corporate.................. 9,280 9,452 9,452 6,022 6,071 6,071
Redeemable preferred stocks.............. 67 97 97 49 66 66
------ ------ ------ ------ ------ ------
Total fixed maturities
available-for-sale................. 29,020 29,548 29,548 27,540 27,721 27,721
------ ====== ------ ------ ====== ------
Equity securities available-for-sale:
Common stocks:
Public utilities..................... -- -- -- 11 15 15
Banks, trusts and insurance companies 8 7 7 132 185 185
Industrial and other................. 559 672 672 335 431 431
Non redeemable preferred stocks.......... 128 135 135 224 228 228
------ ------ ------ ------ ------ ------
Total equity securities
available-for-sale................. 695 $ 814 814 702 $ 859 859
------ ====== ------ ------ ====== ------
Mortgage loans.............................. 80 80 113 113
Real estate................................. 5 5 10 10
Policy loans................................ 177 177 174 174
Other invested assets....................... 544 695 617 681
Short-term investments...................... 4,884 4,884 5,854 5,854
- -----------------------------------------------------------------------------------------------------------------
Total investments $35,405 $36,203 $35,010 $35,412
=================================================================================================================
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
FINANCIAL POSITION
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
(In millions of dollars)
- -----------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Investments in subsidiaries....................................... $ 9,770 $ 8,099
Deferred income taxes............................................. 511 877
Notes receivable from affiliate................................... 205 205
Short-term investments............................................ 174 2
Other............................................................. 4 16
-------- -------
Total assets.............................................. $ 10,664 $ 9,199
======== =======
LIABILITIES:
Debt.............................................................. $ 1,972 $ 1,971
Federal income taxes payable...................................... 108 29
Amounts due to affiliates......................................... 106 102
Other............................................................. 169 37
-------- -------
Total liabilities......................................... 2,355 2,139
Total stockholders' equity................................ 8,309 7,060
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,664 $ 9,199
===========================================================================================================
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
(In millions of dollars)
- ----------------------------------------------------------------------------------------------------------
REVENUES:
Equity in income of subsidiaries before income tax:
Operating income ..............................................$ 956 $1,089 $ 923
Realized investment gains...................................... 742 610 453
Net investment income............................................. 12 13 9
Realized investment gains (losses)................................ (4) (5) 3
------- ------ -------
1,706 1,707 1,388
------- ------ -------
EXPENSES:
Administrative and general expenses............................... 217 223 220
Interest expense.................................................. 131 135 125
Other............................................................. - 4 1
------- ------ -------
348 362 346
------- ------ ------
Income before income tax................................... 1,358 1,345 1,042
Income tax expense................................................ 392 380 285
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 966 $ 965 $ 757
==========================================================================================================
See accompanying Notes to Condensed Financial Information.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
(continued)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
(In millions of dollars)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income........................................................... $ 966 $ 965 $ 757
---- ---- ----
Adjustments to reconcile net income to net cash flows
from operating activities:
Equity in income of unconsolidated affiliates.................... (1,441) (1,377) (1,201)
Realized losses (gains).......................................... 4 5 (3)
Changes in:
Federal income taxes............................................ 79 165 (113)
Deferred income taxes........................................... 366 93 173
Other, net...................................................... (127) (131) 87
------ ----- -----
TOTAL ADJUSTMENTS.............................................. (1,119) (1,245) (1,057)
------- ------ ------
NET CASH FLOWS FROM OPERATING ACTIVITIES....................... (153) (280) (300)
------ ----- -----
Cash flows from investing activities:
Purchase of The Continental Corporation.............................. - - (1,126)
Other acquisitions................................................... - - (13)
Purchases of fixed maturities........................................ - - (709)
Proceeds from fixed maturities:
Sales............................................................. - - 501
Maturities........................................................ - - 201
Net proceeds from the sale of equity securities...................... - - (1)
Change in short-term investments..................................... (15) (2) 1
Other................................................................ (4) (5) 7
----- ----- -----
NET CASH FLOWS FROM INVESTING ACTIVITIES....................... (19) (7) (1,139)
------ ------ ------
Cash flows from financing activities:
Dividends paid to preferred shareholders............................. (6) (6) (7)
Dividend from affiliates............................................. 175 548 326
Proceeds from issuance of long-term debt............................. - 248 1,325
Principal payments on long-term debt................................ - (500) -
Loan to The Continental Corporation.................................. - - (205)
----- ----- -----
NET CASH FLOWS FROM FINANCING ACTIVITIES....................... 169 290 1,439
----- ----- -----
NET CASH FLOWS (3) 3 -
Cash at beginning of year............................................... 3 - -
- -------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ - $ 3 $ -
===================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
(continued)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
Statement of Cash Flows - (continued)
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
(In millions of dollars)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information: Cash (paid) received:
Interest ........................................................ $ (134) $(141) $(170)
Federal income taxes............................................. (95) 15 103
===================================================================================================================
Noncash investing activities that are not reflected in the Statement of Cash Flows are listed below.
The
Continental Other
December 31, 1995 Corporation
- --------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired..................................... $15,259 $ 13
Liabilities assumed............................................... (14,133) -
------- -----
Cash paid..................................................... $ 1,126 $ 13
====================================================================================================================
<FN>
See accompanying Notes to Condensed Financial Information.
</FN>
</TABLE>
22
<PAGE>
SCHEDULE II
(continued)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL INFORMATION
a. Basis of presentation
The condensed financial information of CNA Financial Corporation
(Parent Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in the CNA Financial
Corporation Annual Report to Shareholders. Investment in subsidiaries
are accounted for using the equity method of accounting.
Certain amounts applicable to prior years have been reclassified to
conform to classifications followed in 1997.
b. Long-term debt
-------------------------------------------------------------------------
December 31 1997 1996
(In millions of dollars)
-------------------------------------------------------------------------
Variable rate debt:
Credit Facility.................................. $ 400 $ 400
Commercial Paper................................. 675 675
Senior Notes:
8 7/8 %, due March 1, 1998....................... 150 150
6 1/4%, due November 15, 2003.................... 249 248
6 3/4%, due November 15, 2006.................... 248 248
7 1/4% Debenture, due November 15, 2023............. 247 247
1.0% Urban Development Action Grant, due May 7, 2019. 3 3
--------------------------------------------------------------------------
Total $1,972 $1,971
=========================================================================
CNA Financial Corporation (CNAF)has in place a revolving credit
facility that was used to finance the acquisition of The Continental
Corporation.The interest rate on 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, 1997
and 1996, respectively was 6.16% and 5.72%.
To take advantage of favorable interest rates, CNAF
established a commercial paper program to replace borrowings
under the revolving credit facility. The commercial paper borrowings
are classified as long-term as $675 million of the committed bank
facility will support the commercial paper program. The weighted
average interest rate on commercial paper at December 31, 1997 was
6.05% compared to 5.67% at December 31, 1996.
At year end 1997, 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.
<PAGE>
SCHEDULE II
(continued)
To offset the variable rate characteristics of the facility, CNAF
entered into interest rate swap agreements with several banks having a
total notional principal amount of $950 million, which terminate from
May 2000 to December 2000. These agreements provide that CNAF pay
interest at a fixed rate, averaging 6.20% at December 31, 1997 and
1996, in exchange for the receipt of interest at the three month LIBOR
rate. The
23
<PAGE>
SCHEDULE II
(continued)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL INFORMATION--(CONTINUED)
effect of these interest rate swaps was to increase interest expense
by $4 million and $7 million for the years ended December 31, 1997 and
1996, respectively.
The weighted average interest rate (interest and facility fees) on the
variable rate acquisition debt, which includes the revolving credit
facility and commercial paper was 6.35% and 6.28% at December 31, 1997
and 1996, respectively. This rate reflects the effect of the interest
rate swaps.
On August 18, 1997, CNAF filed a Registration Statement on Form S-3
with the Securities and Exchange Commission relating to $1 billion of
senior and subordinated debt and preferred stock that became effective
on October 22, 1997. This new shelf registration incorporated $250
million of securities remaining available for issuance from a prior
shelf registration. On January 8, 1998, the Company issued $150 million
principal amount of 6.45% senior notes due January 15, 2008 and $150
million principal amount of 6.95% senior notes due January 15, 2018.
The net proceeds were used to pay down bank loans drawn under the
Company's revolving credit facility. Concurrent with the reduction in
bank debt, the Company terminated $300 million in notional amount of
interest rate swaps.
On March 2, 1998 CNAF paid at the due date $150 million of 8 7/8%
senior notes with funds drawn against the revolving credit
facility (unaudited).
c. Management and admininstrative expenses
CNAF has reimbursed, or will reimburse, its subsidiaries for general
management and administrative expenses, unallocated loss adjustment
expenses and investment expense of $217 million, $223 million and $218
million in 1997, 1996 and 1995, respectively.
d. Capital contributions
There were no contributions made by CNAF to the capital of its
insurance and other subsidiaries in 1997, 1996 or 1995.
- --------------------------------------------------------------------------------
24
<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, 1997
Property/Casualty:
<S> <C> <C> <C> <C> <C>
Commercial............ $ 804 $ 25,624 $ 91 $ 3,717 $ 150
Personal.............. 358 1,386 445 963 2
Involuntary risks..... -- 1,230 -- 20 --
Life:
Individual............ 934 114 3,593 -- 31
Group................. 46 555 700 -- 559
------- ------- ------- ------- -----
Subtotal............ 2,142 28,909 4,829 4,700 742
Other and intercompany
eliminations.......... - 318 - - -
------- ------- ------- ------- -----
$ 2,142 $ 29,227 $ 4,829 $ 4,700 $ 742
======= ======= ======= ======= =====
December 31, 1996
Property/Casualty:
Commercial............ $ 822 $ 25,887 $ 47 $ 3,591 $ 172
Personal.............. 262 1,557 326 1,044 -
Involuntary risks..... - 1,951 - 24 -
Life:
Individual............ 736 148 3,138 - 30
Group................. 34 519 670 - 544
------- ------- ------- ------- ---
Subtotal............ 1,854 30,062 4,181 4,659 746
Other and intercompany
eliminations.......... -- 333 -- -- --
------- ------- ------- ------- -----
$ 1,854 $ 30,395 $ 4,181 $ 4,659 $ 746
======= ======= ======= ======= =====
December 31, 1995
Property/Casualty:
Commercial............ $ 702 $ 27,309 $ 38 $ 3,607 $ 163
Personal.............. 258 1,427 260 869 -
Involuntary risks..... 9 2,308 - 73 -
Life:
Individual............ 505 162 2,679 - 31
Group................. 19 473 539 - 511
------- ------- ------- ------- -----
Subtotal............ 1,493 31,679 3,516 4,549 705
Other and intercompany
eliminations.......... -- 353 -- -- --
------- ------- ------- ------- -----
$ 1,493 $ 32,032 $ 3,516 $ 4,549 $ 705
======= ======= ======= ======= =====
</TABLE>
*Premiums written relates to property/casualty companies only.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
CNA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION - CONTINUED
- --------------------------------------------------------------------------------------------------------
Amortization
Insurance of
Net Net Claims and Deferred Other
Premium Investment Policyholders' Acquisition Operating Premiums
(In millions of dollars) Revenue Income Benefits Costs Expenses Written*
- ---------------------------------------------------------------------------------------------------------
December 31, 1997
Property/Casualty:
<S> <C> <C> <C> <C> <C> <C>
Commercial............ $ 8,418 $ 1,601 $ 7,369 $ 1,855 $ 1,148 $ 8,570
Personal.............. 1,651 146 991 407 191 1,803
Involuntary risks..... (142) 43 (383) -- 107 (187)
Life:
Individual............ 645 248 633 122 99 --
Group................. 2,790 171 2,643 (1) 318 --
------ ------ ------ ------ ------ ------
Subtotal............ 13,362 2,209 11,253 2,383 1,863 10,186
Other and intercompany
eliminations.......... - - - - 2 -
------ ------ ------ ------ ------ ------
$13,362 $ 2,209 $11,253 $ 2,383 $ 1,865 $10,186
====== ====== ====== ====== ====== =======
December 31, 1996
Property/Casualty:
Commercial............ $ 8,297 $ 1,623 $ 6,703 $ 1,715 $ 1,104 $ 8,593
Personal.............. 1,536 166 1,184 402 273 1,731
Involuntary risks..... 294 92 244 62 92 287
Life:
Individual............ 631 227 667 26 129 -
Group................. 2,743 173 2,579 (13) 322 -
------ ------ ------ ------ ------ ------
Subtotal............ 13,501 2,281 11,377 2,192 1,920 10,611
Other and intercompany
eliminations.......... (22) (5) (20) -- (40) --
------ ------ ------ ------ ------ ------
$13,479 $ 2,276 $11,357 $ 2,192 $ 1,880 $10,611
======= ====== ====== ====== ===== ======
December 31, 1995
Property/Casualty:
Commercial............ $ 7,226 $ 1,463 $ 5,995 $ 1,495 $ 915 $ 7,561
Personal.............. 1,215 132 892 271 229 1,254
Involuntary risks..... 284 104 234 17 146 311
Life:
Individual............ 530 214 507 71 134 -
Group................. 2,503 155 2,340 (10) 276 -
------ ------ ------ ------ ------ -------
Subtotal............ 11,758 2,068 9,968 1,844 1,700 9,126
Other and intercompany
eliminations.......... (23) 9 (24) -- (20) --
------ ------ ------ ------ ------ ------
$ 11,735 $ 2,077 $ 9,944 $ 1,844 $ 1,680 $ 9,126
======= ====== ====== ====== ===== ======
</TABLE>
25
<PAGE>
SCHEDULE V
CNA FINANCIAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
(In millions of dollars) of Period Expenses Amounts Deductions Period
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 Deducted from assets:
Allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
Receivables................................. $ 277 $ 30 $ - $ 4 $ 303
===== ===== ====== ====== =====
Year Ended December 31, 1996
Deducted from assets:
Allowance for doubtful accounts:
Receivables................................. $ 289 $ 34 $ - $ 46 $ 277
===== ===== ====== ===== =====
Year Ended December 31, 1995
Deducted from assets:
Allowance for doubtful accounts:
Receivables................................. $ 128 $ 39 $ 143* $ 21 $ 289
===== ===== ====== ====== =====
- --------------------------------------------------------------------------------------------------------------
* Includes Continental allowance at the acquisition date.
</TABLE>
SCHEDULE VI
CNA FINANCIAL CORPORATION
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Consolidated Property/
Casualty Entities
-------------------------------------
Year Ended December 31 1997 1996 1995
(In millions of dollars)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred acquisition costs.................................... $1,162 $ 1,084 $ 969
Reserves for unpaid claims and claim expenses................. 28,240 29,830 31,044
Discount deducted from claim and claim expense reserves above
(based on interest rates ranging from 3.5% to 7.5%)......... 2,409 2,459 2,449
Unearned premiums............................................. 4,700 4,659 4,549
Earned premiums............................................... 9,927 10,127 8,725
Net investment income......................................... 1,790 1,881 1,699
Claim and claim expenses related to current year.............. 7,942 7,922 6,787
Claim and claim expenses related to prior years............... (256) (91) 122
Amortization of deferred acquisition costs.................... 2,262 2,179 1,783
Paid claim and claim expenses................................. 8,376 9,200 7,057
Premiums written.............................................. 10,186 10,611 9,126
- --------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CNA Financial Corporation
We have audited the consolidated financial statements of CNA Financial
Corporation (an affiliate of Loews Corporation) and subsidiaries as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 and have issued our report thereon dated February 18, 1998. Such
consolidated financial statements and report are included in the Company's 1997
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 18, 1998
27
<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/W.JAMES MACGINNITIE
--------------------------------------------------------
W. James MacGinnitie
Senior Vice President and
Chief Financial Officer
Date: March 30, 1998
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 30, 1998
|
/S/ROBERT P. GWINN Director |
- ---------------------------------- |
Robert P. Gwinn |
|
|
/S/WALTER F. MONDALE Director |
- -------------------------------- |
Walter F. Mondale |
28
<PAGE>
SIGNATURES--(CONTINUED)
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 30, 1998
|
/S/JAMES S. TISCH Director |
- ---------------------------------- |
James S. Tisch |
|
|
/S/LAURENCE A. TISCH Chief Executive Officer|
- ---------------------------------- and Director |
Laurence A. Tisch |
|
|
/S/PRESTON R. TISCH Director |
- --------------------------------- |
Preston R. Tisch |
|
|
/S/MARVIN ZONIS Director |
- ------------------------------- |
Marvin Zonis |
|
29
<PAGE>
EXHIBIT 11.1
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
=============================================================================================
Year Ended December 31 1997 1996 1995 1994 1993
(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.........................................$ 966 $ 965 $ 757 $ 36 $ 268
Less preferred stock dividends..................... 7 7 7 5 4
------ ------ ------- ---- ------
Net income available to common stockholders........$ 959 $ 958 $ 750 $ 31 $ 264
====== ====== ====== ====== ======
Earnings per share:
Net income available to common stockholders.....$15.52 $15.51 $12.14 $ 0.51 $ 4.26
====== ====== ====== ====== ======
</TABLE>
30
<PAGE>
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
(In millions of dollars, except ratios)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income tax ........................$ 1,358 $ 1,345 $ 1,042 $(134) $ 94
Adjustments:
Interest expense.............................. 198 200 182 71 36
Interest element of operating lease rental.... 34 32 47 19 18
-------- ------- ------- ------ -----
Income before income tax, as adjusted............$ 1,590 $ 1,577 $ 1,271 $ (44) $ 148
====== ======= ======= ====== =====
Fixed charges:
Interest expense..............................$ 198 $ 200 $ 182 $ 71 $ 36
Interest element of operating lease rental.... 34 32 47 19 18
------- ------- ------- ----- -----
Total fixed charges..............................$ 232 $ 232 $ 229 $ 90 $ 54
====== ======= ======= ===== =====
Ratio of earnings to fixed charges (1)........... 6.8 6.8 5.6 (0.5) 2.7
- ---------------------------------------------------------------------------------------------
<FN>
(1) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges of consolidated companies. Fixed charges
consist of interest and that portion of operating lease rental expense
which is deemed to be an interest factor for such rentals.
</FN>
<PAGE>
</TABLE>
EXHIBIT 12.2
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF NET INCOME,
AS ADJUSTED, TO FIXED CHARGES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
(In millions of dollars, except ratios)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income................................................$ 966 $ 965 $ 757 $ 37 $ 268
Adjustments:
Interest expense, after tax............................ 129 130 119 46 24
Interest element of operating lease rental, after tax.. 22 21 30 12 12
------ ------ ----- ----- -----
Net income, as adjusted...................................$ 1,117 $ 1,116 $ 906 $ 95 $ 304
====== ====== ===== ===== =====
Fixed charges:
Interest expense, after tax............................$ 129 $ 130 119 $ 46 $ 24
Interest element of operating lease rental, after tax.. 22 21 30 12 12
------ ------- ----- ----- -----
Total fixed charges.......................................$ 151 $ 151 $ 149 $ 58 $ 36
====== ====== ===== ===== =====
Ratio of net income, as adjusted, to fixed charges (1).... 7.4 7.4 6.1 1.6 8.6
- ------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
31
<PAGE>
EXHIBIT 21.1
PRIMARY SUBSIDIARIES OF CNA
PLACE OF INCORPORATION
COMPANY
AMS Services, Inc. Delaware
Alexsis, Inc. Maryland
American Casualty Company of Reading, Pennsylvania (ACCO) Pennsylvania
Boston Old Colony Insurance Company Massachusetts
Claims Administration Corp. Maryland
CNA Casualty of California California
CNA Surety Corporation Delaware
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
32
<PAGE>
EXHIBIT 21.1 - (continued)
PRIMARY SUBSIDIARIES OF CNA--(continued)
PLACE OF INCORPORATION
COMPANY
The Buckeye Union Insurance Company Ohio
The Continental Corporation, Inc. New York
The Continental Insurance Company New Hampshire
The Continental Insurance Company of New Jersey New Jersey
Convida Holdings, Ltd. 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 Arizona
All other subsidiaries, when aggregated, are not considered significant.
33
<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 18, 1998, 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, 1997.
/S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
March 30, 1998
34
CNA FINANCIAL CORPORATION
1997 ANNUAL REPORT
CNA
<PAGE>
PROFILE
- -------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
is a holding company whose primary subsidiaries consist
of property/casualty and life insurance companies,
collectively CNA. CNA is one of the largest writers of
commercial property/casualty insurance and one of the
ten largest insurance organizations in the United States.
- --------------------------------------------------------------------------------
CNA serves businesses and individuals with a broad range of insurance and other
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 has 1997 assets of $61.3 billion and stockholders'
equity of $8.3 billion. This holding company's primary subsidiaries include
Continental Casualty Company, a commercial lines writer, Continental Assurance
Company, its primary life insurance subsidiary and The Continental Insurance
Company, primarily a personal lines and ocean marine writer.
In 1997, CNA observed 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, 1997, was approximately 84 percent owned by
Loews Corporation.
CNA FINANCIAL CORPORATION
-------------------------
<PAGE>
CNA
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
1997
2
FINANCIAL HIGHLIGHTS
4
LETTER FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOHA
6
LETTER FROM CNA CHAIRMAN
AND CEO DENNIS H. CHOOKASZIAN
13
FINANCIAL SECTION CONTENTS
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
40
FINANCIAL STATEMENTS
90
INDEPENDENT AUDITORS' REPORT
91
COMMON STOCK INFORMATION
92
CORPORATE DIRECTORY
CNA FINANCIAL CORPORATION
--------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Results of Operations and Financial Condition
- --------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995* 1994 1993
- --------------------------------------------------------------------------------
(In millions of dollars,
except per share data)
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Revenues $17,072 $16,988 $14,700 $11,000 $11,011
- --------------------------------------------------------------------------------
Income (loss) before income tax 1,358 1,345 1,042 (134) 93
- --------------------------------------------------------------------------------
Net income (loss) excluding
net realized investment
gains/losses
Property/Casualty 501 576 457 148 (267)
Life 100 110 104 87 44
Other (113) (108) (98) (48) (29)
- --------------------------------------------------------------------------------
Net operating income (loss) 488 578 463 187 (252)
Net realized investment gains (losses) 478 387 294 (151) 519
- --------------------------------------------------------------------------------
Net income $ 966 $ 965 $ 757 $ 36 $ 267
================================================================================
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Net operating income (loss) $ 7.78 $ 9.25 $ 7.37 $ 2.94 $ (4.14)
Net realized investment gains (losses) 7.74 6.26 4.77 (2.43) 8.40
- --------------------------------------------------------------------------------
Net income $ 15.52 $ 15.51 $ 12.14 $ 0.51 $ 4.26
================================================================================
FINANCIAL POSITION
- --------------------------------------------------------------------------------
Assets $61,269 $60,455 $60,360 $44,320 $41,912
Debt 2,897 2,765 3,026 914 915
Stockholders' equity 8,309 7,060 6,736 4,546 5,381
Book value per common share 132.02 111.81 106.56 71.13 84.65
Return on average common
stockholders' equity 12.6% 14.0% 13.4% 0.7% 5.3%
================================================================================
STATUTORY SURPLUS
- --------------------------------------------------------------------------------
Property/Casualty $ 7,123 $ 6,349 $ 5,696 $ 3,367 $ 3,598
Life 1,224 1,163 1,128 1,056 1,022
================================================================================
* Includes The Continental Corporation since May 10, 1995, except for Statutory
Surplus which includes The Continental Corporation since January 1, 1995.
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,stockholders' equity and book value per
common share from 1987 through 1997.
CNA FINANCIAL CORPORATION (1987-1997)
($ in billions except per share data)
|----------------------|-----------|--------|--------------|---------------|
|Measurement Period | | | Stockholders'| Book Value Per|
| (Fiscal Year Covered)| Revenues | Assets | Equity | Common Share |
|----------------------|-----------|--------|--------------|---------------|
|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 | 60.5 | 7.1 | 111.81 |
|FYE 12/31/97..........| 17.1 | 61.3 | 8.3 | 132.02 |
|--------------------------------------------------------------------------|
CNA FINANCIAL CORPORATION
-------------------------
3
<PAGE>
A LETTER TO OUR SHAREHOLDERS
------------------------------------------------------------------------------
1997
FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOHA
CNA Financial Corporation reported strong earnings in 1997. Net income was $966
million, or $15.52 per share, compared with net income of $965 million, or
$15.51 per share, in 1996.
Net realized investment gains for 1997 were $478 million, or $7.74 per share,
compared with net realized gains of $387 million, or $6.26 per share, for 1996.
Net income for 1997, exclusive of net realized gains and losses, was $488
million, or $7.78 per share, compared with $578 million, or $9.25 per share.
While down from the prior year, our operating earnings reflect a solid
performance in an intensely competitive insurance marketplace.
Consolidated revenues for 1997 were approximately $17.1 billion, compared with
approximately $17.0 billion in 1996.
Along with these strong financial results, CNA marked an important milestone in
1997--its 100th anniversary. CNA was founded in 1897 operating out of a two-room
office in Detroit. Today, CNA is one of the largest U.S. insurance organizations
with leadership positions in many of its businesses.
As CNA looks to its second century, we see an insurance environment of rapid
change with major opportunities for forward-looking companies.
Consolidation, specialization and globalization are transforming the
property/casualty marketplace. We see these trends in the intense competition
that continues to hold down prices in CNA's bread-and-butter commercial lines
business.
The life insurance industry is being transformed by the entry of banks,
brokerage firms and other efficient, aggressive competitors. The good news is
that the graying of America is increasing demand for products and services that
address the need for death protection and wealth accumulation. We see this trend
in rapid growth of term insurance, annuities and assets invested in retirement
plans.
In health insurance, managed care has changed the requirements for success from
centralized, highly-efficient claims processing capabilities to the ability to
manage provider networks and health care information. This is evident in the
trend toward professional practice management organizations and the assumption
of risk by provider organizations for the total cost of care.
Meanwhile, all segments of insurance are being affected by legislative and
regulatory changes that are blurring the lines between insurance, banking and
CNA FINANCIAL CORPORATION
-------------------------
4
<PAGE>
- -------------------------------------------------------------------------------
1997
securities and opening the door to a more competitive financial services
marketplace.
Within this rapidly changing environment, CNA is on course to build on the
opportunities of change and increase the value of the enterprise.
CNA is one of the only major U.S. multiline insurance organizations with a
significant presence in property/casualty, life and health insurance. As a
multiline company, CNA's challenge is to be competitive in each of our
businesses with competitors that focus on a single business. Along with the
challenge, however, are tremendous opportunities for operating efficiencies,
cross-marketing and long-term growth of enterprise value. In addition, the
multiline strategy diversifies CNA's business risks. We saw this advantage
clearly in 1997, when results from our personal insurance business partially
offset the market impact on our commercial property/casualty businesses.
CNA continues to build on a solid financial foundation. We strive to maintain
conservative loss reserves. We take a similar approach with our investment
portfolio, which is weighted heavily toward high-quality bonds. In addition, at
year end 1997, the statutory surplus of our property/casualty companies was
approximately $7.1 billion, one of the largest in the industry. The surplus of
our life companies was approximately $1.2 billion, also substantial.
CNA remains committed to managing its investment portfolio to maximize the total
return, including capital gains. This approach provides CNA the flexibility to
take advantage of favorable market conditions, as we saw in 1997.
Finally, CNA continues to focus on building the long-term economic value of the
Company. We believe this is the right approach, because insurance is a business
of long-term commitments to customers. As a result, we manage CNA for long-term
stability, growth and overall return.
In summary, CNA marked its Centennial year with strong financial results and
continued progress toward our goal of building long-term value. Looking to the
future, we believe that CNA's history and traditions combined with the
dedication of our employees and business partners will be the springboard to an
even more successful second century.
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
-------------------------
5
<PAGE>
A LETTER TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
1997
FROM CNA CHAIRMAN AND CHIEF EXECUTIVE
OFFICER DENNIS H. CHOOKASZIAN
CNA continued as a profitable market leader under some of the most competitive
conditions ever seen in the commercial insurance market-place. We maintained
market share, produced a solid profit, strengthened our financial base and
launched several important initiatives that position CNA for profitable growth
and continued success.
Several factors contributed to CNA's 1997 results. Heavy competition in the
commercial property/ casualty marketplace adversely affected results in this
part of our business. Meanwhile, our life, personal insurance and reinsurance
businesses benefited from strong demand and a lower level of catastrophe losses
as compared to recent historical amounts. In addition, we realized substantial
capital gains on our investment portfolio.
In addition to strong financial results, 1997 was a year of several important
corporate initiatives. CNA spun off its surety business through a merger with
Capsure Holdings Corp. The result of the merger is the formation of CNA Surety
Corporation, a new, publicly traded company in which CNA has an approximate 62%
interest. CNA Surety Corporation is currently the largest U.S. surety operation
with the broadest product line and largest distribution force.
The stock market has responded very positively to the transaction. CNA's
pre-merger interest in the business was valued at about $298 million. At year
end 1997, based on the stock price of the new company, the value of CNA's
interest was $418 million, an increase in value of $120 million. CNA expects to
use a similar approach to unlock the value of more of its businesses over the
next several years.
Another significant development was the launch of CNA UniSource, a professional
employer organization, or PEO. PEOs are in the business of handling the
administrative functions of employment, payroll, employee benefits and risk
management. PEOs are a growth industry because they relieve small employers of
major administrative burdens. They also enable their customers to provide their
employees with benefits comparable to those offered by large companies. As the
first major insurance organization to launch a PEO, CNA is well positioned for
the opportunities of this high-growth business.
Also in 1997, CNA launched Hedge Financial Products to pursue opportunities in
the business of insurance securitization. In this business, insurance risk is
converted into financial instruments that can be traded by investors. Over time,
insurance securitization will create an important new bridge between insurance
and the capital markets. The staff of Hedge Financial is uniquely suited to
launching this business successfully. Several of them played leading roles in
the development of the catastrophe options traded on the Chicago Board of Trade.
As in any organization of CNA's size, we experienced changes in some leadership
positions during the past year. During 1997 several of our senior officers
announced their retirements from CNA. We are grateful to Donald M. Lowry, senior
CNA FINANCIAL CORPORATION
-------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
1997
vice president, secretary and general counsel, Carolyn L. Murphy, senior vice
president Commercial Operations, and Adrian M. Tocklin, senior vice president
Diversified Operations for their years of committed service. Their leadership
and expertise will be missed, but we have ensured an orderly transition of their
responsibilities.
On February 4, 1998, we announced the appointment of Bernard L. Hengesbaugh to
the newly created position of executive vice president and chief operating
officer. Hengesbaugh will have responsibility for overall operating performance
of the Company's eight operating departments and 30 strategic business units.
CNA celebrated its 100th anniversary in 1997 with Centennial activities designed
to strengthen business relationships and reinforce the CNA values of financial
strength, stability and commitment. In one of these activities, more than 700
CNA officers came together and built a playground at a Chicago public school in
a neighborhood that had not had a safe place for children to play for many
years.
The experience was so positive that CNA decided to sponsor the KaBOOM! LET US
PLAY campaign. Over the next three years, CNA employees will have an opportunity
to build 50 playgrounds nationwide. By bringing new playgrounds to our
communities, CNA will be supporting "America's Promise -- The Alliance for
Youth", the campaign chaired by General Colin Powell to help at-risk children
and teens.
Beyond these initiatives, CNA continued to move ahead with strategies for
leadership in a broad range of insurance and risk management businesses.
PROPERTY/CASUALTY
CNA is the premier provider of commercial insurance for small and medium size
businesses in the United States. In 1997, we enhanced our leadership position by
applying a proven strategy of industry segmentation and knowledge of the
customer workplace.
We identified profitable growth opportunities in both new and existing industry
segments. Nine new Commercial Affiliation Marketing (CAM) programs were launched
for targeted segments, while several current offerings were significantly
enhanced.
Many new programs were designed to meet a broader spectrum of insurance needs in
such areas as surety, professional liability, warranty and international. This
approach continued our emphasis on total customer satisfaction through
collaboration among CNA business units and marketing across the full portfolio
of CNA products and services.
In addition, investments in automation strengthened our processing and marketing
capabilities. New direct billing systems were introduced, small account
processing was enhanced, and multiple Internet sites were established for
marketing purposes. We also completed the groundwork for a state-of-the-art
processing system that will improve service and efficiency.
CNA FINANCIAL CORPORATION
-------------------------
7
<PAGE>
A LETTER TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
1997
In the risk management marketplace for large commercial accounts, CNA
differentiates itself on the basis of customized programs that lower the
customer's total cost of risk. We are unique in our ability to tailor programs
for customers who want a package of insurance and services, as well as those who
prefer to buy services on an unbundled, a la carte basis.
In the very competitive risk management marketplace of 1997, CNA increased its
market share of Fortune 100 customers and enhanced its reputation for serving
the most demanding buyers of risk management products and services.
Meanwhile, CNA is working to address a broader range of needs for large,
multinational businesses. Our new, excess insurance product makes us a
one-stop-shopping solution for covering very large liability risks. We are
developing capabilities to insure and service large, complex property risks, as
well as the international risks of U.S.-based companies. With these new
capabilities, CNA's large commercial business will be well positioned for the
global marketplace.
CNA's strength in the commercial insurance marketplace extends to professional
and specialty coverages. These businesses include liability insurance for
healthcare providers, architects & engineers, lawyers, accountants, corporate
officers and other professionals. CNA also is a major presence in excess and
surplus lines insurance, fidelity, surety, marine insurance, credit, warranty
and aviation insurance.
CNA has developed leadership positions in many of these businesses by focusing
on select customer groups, developing exceptional knowledge of their risks, and
aligning its resources around their coverage needs. In several of these
businesses, we have developed valuable marketing and processing advantages
through partnerships with managing general underwriters, such as Victor O.
Schinnerer, Aon Corporation and Poe & Brown.
In 1997, CNA's professional and specialty businesses faced increasing
competitive pressure. We strengthened this business through the purchase of
Caronia Corporation, a leading third-party administrator for liability claims
against health care organizations. In early 1998, we formed a fee-for-service
risk management consulting business for the health care industry. These
initiatives enable CNA to serve customers in whatever way they choose to manage
their health-related liability risks.
We also strengthened our capabilities in warranty, a rapidly growing field of
insurance. Under a five-year agreement with Pre-Paid Legal Services Inc., CNA
will market legal service insurance to employers, associations and other groups.
In early 1998, we formed a joint venture with Specialty Underwriters, Inc., to
develop business in commercial equipment maintenance programs.
In the international insurance arena, CNA continued to make progress in building
a strong, flexible franchise. We acquired majority control of Omega Aseguradora
de Riesgo de Trabajo (ART), one of the largest
CNA FINANCIAL CORPORATION
-------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
1997
workers' compensation carriers in Argentina. CNA takes a conservative approach
to international investment opportunities, and we focus our efforts on countries
and markets where CNA's expertise responds to growing insurance needs. Our
investment in Omega ART exemplifies this approach. CNA's leadership in workers'
compensation insurance can add real value in Argentina's emerging workers'
compensation system.
CNA plans to introduce specialty products throughout the European Community
through its London-based subsidiary, CNA Insurance Europe Ltd. In addition, we
launched a global service facility to serve CNA's U.S.-based customers with
international insurance needs.
In reinsurance, CNA continued to grow its operations and add capabilities. A
major area of progress was in facultative reinsurance, which provides clients
with coverage for individual risks, rather than for entire classes of risks.
After launching a facultative operation last year, we formed a global management
structure in 1997 that will allow CNA to unify worldwide operations, increase
communication and take advantage of the globalization trends of our customers.
Facultative branches were established in seven U.S. locations, and property
facultative capabilities were added in the United States and Latin America.
Internationally, the reinsurance operations established offices in Toronto and
Singapore. In the London market, we launched the Lloyd's Syndicate 1229, which
will write short-tail direct insurance and facultative reinsurance.
In addition, we continued to develop capabilities for providing more value to
our reinsurance clients and business partners worldwide. A new client services
unit in the United States will deliver these services, and we are moving ahead
with plans to develop similar consulting capabilities in Europe.
CNA's property/casualty operations also include individual long-term care
insurance and personal lines, such as automobile and homeowners insurance. More
than one million customers count on CNA for protection of their automobiles,
homes and valuable personal possessions.
In 1997, CNA had one of its best years ever in personal lines. Contributing
factors included favorable loss reserve development, improvement in the area of
expense management, greater ease of doing business for our agents and customers
and lower than historical catastrophe losses. We continued to focus on a
long-term strategy of building a major presence in personal insurance. Key
elements of the strategy include internal growth, acquisitions and strategic
partnerships to expand distribution channels and achieve economies of scale.
Sales of long-term care insurance climbed 38 percent with $63 million of
first-year paid premium. CNA introduced long-term care plans that meet the new
federal definitions for tax-qualified long-term care insurance. In addition, we
entered into an agreement with Vencor, the nation's largest full-service
long-term care provider, which will maximize the value of insurance benefits
for policyholders who select network facilities or services.
CNA FINANCIAL CORPORATION
-------------------------
9
<PAGE>
A LETTER TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
1997
INDIVIDUAL LIFE
In 1997, CNA restructured its individual life business around core product areas
in life insurance and retirement services.
CNA's track record of growth in individual life continued for the fourth year in
a row, as life applications rose to 295,000 in 1997 from 235,000 in 1996.
First-year premiums of $150 million for term insurance products were among the
highest achieved by any insurer in the term marketplace. New products in 1997
included a unique series of term life products. We also enhanced our universal
life products.
These positive results reflect CNA's continued focus on product leadership,
strong distribution relationships, expert underwriting approaches and the
support of our reinsurers.
Sales of individual annuities dropped off slightly in 1997. We are strengthening
this business by revamping products and building distribution outlets to
wholesale in the variable annuity markets.
Our life reinsurance business had a good year, with sales up by more than 50
percent and solid profits. We capitalized on our expertise in group reinsurance
as we shifted our focus to serving managed care and health care providers, while
still being a major force in stop-loss coverage for self-insured employers.
CNA's individual life businesses also include Viaticus, the leading U.S.
viatical settlement company, and Convida, a Chilean life and annuity operation.
CNA's viatical settlement business enables individuals with life-threatening
diseases to tap the value of their life insurance benefits. Viaticus expanded
its market outreach by contracting with employers, unions, and associations.
Through the new contracts, Viaticus now has marketing access to 10 million
lives. Meanwhile, Convida, the fourth largest annuity company in Chile, has
built its asset base to more than $200 million.
GROUP LIFE AND HEALTH
CNA customers in the group life and health marketplace include employers,
associations and other group purchasers of medical benefits, life and accident &
disability insurance. We offer life and health reinsurance to insurance
companies writing group coverages. In addition, CNA is active in the pension
marketplace with guaranteed investment contracts, annuities and other wealth
accumulation products.
In 1997, we reorganized the group businesses to make it easier for customers to
do business with CNA and to improve our ability to respond quickly and
profitably to changing customer needs. A combined sales organization will
maximize opportunities for cross-selling of CNA products.
New sales of our non-medical products increased by more than 25 percent and
profits continued to improve. In addition, CNA continued to build its market
leadership position in insurance programs for associations and other affinity
groups.
CNA FINANCIAL CORPORATION
-------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
1997
The $2 billion Federal Employees Health Benefits Program moved ahead with plans
to regionalize its operations for more responsive and efficient services to
government employees and their dependents. In addition, our investments in
technology are streamlining customer service and enabling us to guide customers
in using medical services more effectively.
In private medical benefits, a new claim system has enhanced our ability to
implement managed care features. We also implemented a data ware-house, an
important tool for analyzing claims costs and identifying opportunities for cost
saving. While operating results were disappointing in 1997, the new tools have
sharpened our focus on strategies for improvement.
CNA Health Partners took advantage of CNA's multiline capabilities by
collaborating with our commercial insurance operations, to launch a product for
employers who want combined coverage for workers' compensation and
nonoccupational medical benefits.
We sharpened our focus on pensions and other investment-oriented products by
consolidating the management of CNA's group pension and individual annuity
businesses. This reorganization concentrates our expertise in this class of
products into a single management structure. In addition, CNA Trust, which
provides pension services to small and medium-sized employers, is capitalizing
on opportunities in one of the fastest growing segments of the pension
marketplace.
In summary, CNA performed well in its Centennial year. We produced solid
earnings and positioned the Company for the future. Thanks to our business
partners and the dedication of our employees, CNA continued its 100-year record
of strength, stability and commitment.
Looking ahead, 1998 will be a year of continued competitive pressure and rapid
change in the insurance marketplace. CNA will intensify its emphasis on
excellence in the operating performance of all its businesses. Taking advantage
of our multiline capabilities will be another key priority. As we build an
insurance organization for the future, 1998 will be the start of an even more
successful second century.
Sincerely,
S/DENNIS H. CHOOKASZIAN
Dennis H. Chookaszian
Chairman and Chief Executive Officer
CNA
CNA FINANCIAL CORPORATION
-------------------------
11
<PAGE>
CNA
<PAGE>
FINANCIAL SECTION CONTENTS
- --------------------------------------------------------------------------------
1997
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
40
CONSOLIDATED BALANCE SHEET
42
STATEMENT OF CONSOLIDATED OPERATIONS
43
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
44
STATEMENT OF CONSOLIDATED CASH FLOWS
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
90
INDEPENDENT AUDITORS' REPORT
91
COMMON STOCK INFORMATION
92
CORPORATE DIRECTORY
CNA FINANCIAL CORPORATION
-------------------------
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Consolidated Results
Consolidated Results
CNA is one of the largest insurers in the United States; the third largest
property/casualty company and the twenty-second largest life insurance company
in the country, based on 1996 net written premium.
Based on 1996 market share estimates, CNA ranks first among domestic insurers in
commercial affiliation marketing, commercial auto, commercial multiple peril,
ocean marine, personal packages, and surety; second in general liability,
medical malpractice, federal employees health benefit plans, term-life
insurance; third in automobile warranty, directors & officers, individual
long-term care and workers' compensation and fifth in reinsurance in the United
States. In addition, CNA ranks first or second for various errors & omissions
coverages for architects and engineers, accountants, lawyers and other
professionals.
CNA's focus is to create long-term enterprise value by pursuing a strategy of
growth in market segments which will enhance that value.
CNA will concentrate resources on businesses in which it has a proven expertise,
providing insurance and risk management services. The Company will continue to
enhance its leadership position by focusing on market segments and businesses in
which CNA is the market leader or where it believes it can effectively compete.
CNA actively manages its investment portfolios on a total return basis
(investment income and capital gains) while maintaining the quality of its
investment portfolio.
In 1997, CNA's focus enabled the Company to produce solid results and maintain
its leadership position in one of the most competitive market environments in
recent history. CNA's results, as discussed in the following pages, reflect the
effects of the current market environment.
Total revenues, which consist of premium, net investment income, realized gains
and other revenues, were $17.1 billion, up 0.5% from 1996 and up 16.1% from
1995. For 1997, revenues reflect a decrease of $117 million (0.9%) in earned
premium resulting from reductions in involuntary markets premium and very
competitive conditions in the commercial lines marketplace. Revenues in 1997
also reflect an increase in realized investment gains of $134 million (21.7%),
which was the result of CNA taking advantage of favorable market conditions.
Also impacting revenue was a decline of $67 million (2.9%) in net investment
income as a result of lower yields compared to last year and reduction in the
investment base reflecting signifi-cant claim payments related to Fibreboard
(see Note F of the Consolidated Financial Statements). Other revenues increased
by $134 million (21.8%) due primarily to growth in insurance related
operations. Insurance related operations include claim adjusting services,
auto-warranty sales, insurance agency software and the viatical settlement
business.
For 1997, CNA reported net operating income (which excludes net realized
investment gains/losses) of $488 million, or $7.78 per share, compared to $578
million, or $9.25 per share, for 1996 and $463 million, or $7.37 per share, for
1995.
Realized investment gains, net of tax, amounted to $478 million, or $7.74 per
share in 1997 compared to $387 million, or $6.26 per share in 1996 and $294
million, or $4.77 per share, in 1995. These net realized gains represent 49.5%,
40.1% and 38.8% of net income for the last three years and, based on CNA's total
return investment philosophy, are an integral part of CNA's investment results.
<PAGE>
Net income for 1997 was $966 million, or $15.52 per share, compared to $965
million, or $15.51 per share, for 1996 and $757 million, or $12.14 per share in
1995.
CNA FINANCIAL CORPORATION
-------------------------
14
<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 1997 1996 1995*
- ------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
OPERATING REVENUE (excluding realized investment
gains/losses)
Premiums $13,362 $13,479 $11,735
Net investment income 2,209 2,276 2,077
Other 748 614 424
- ------------------------------------------------------------------------------
Total operating revenue
(excluding realized investment gains/losses) 16,319 16,369 14,236
Benefits and expenses 15,699 15,628 13,650
- ------------------------------------------------------------------------------
Operating income before income tax 620 741 586
Income tax expense 132 163 123
- ------------------------------------------------------------------------------
Net operating income
(excluding realized investment gains/losses) 488 578 463
Realized investment gains, net of tax 478 387 294
- ------------------------------------------------------------------------------
Net income $ 966 $ 965 $ 757
==============================================================================
SUPPLEMENTAL FINANCIAL DATA:
Net operating income (loss) by group:
Property/Casualty $ 501 $ 576 $ 457
Life 100 110 104
Other, primarily interest expense (113) (108) (98)
- -------------------------------------------------------------------------------
Net operating income 488 578 463
- -------------------------------------------------------------------------------
Net realized investment gains (losses) by group:
Property/Casualty 384 303 208
Life 96 96 85
Other (2) (12) 1
- ------------------------------------------------------------------------------
Realized investment gains, net of tax 478 387 294
- ------------------------------------------------------------------------------
Net income (loss) by group:
Property/Casualty 885 879 665
Life 196 206 189
Other, primarily interest expense (115) (120) (97)
==============================================================================
Net income $ 966 $ 965 $ 757
==============================================================================
*Includes the results of The Continental Corporation since the acquistion date.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ----------------------------------------------------------------------------
Property/Casualty Operations
Property/Casualty Operations
<TABLE>
<CAPTION>
PROPERTY/CASUALTY GROUP
- ------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- ------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Operating Revenue (excluding realized
investment gains/losses)
Premiums $ 9,927 $10,127 $ 8,724
Net investment income 1,790 1,881 1,699
Other 634 509 348
- ------------------------------------------------------------------------------
12,351 12,517 10,771
Benefits and expenses 11,723 11,779 10,193
- ------------------------------------------------------------------------------
Operating income before income tax 628 738 578
Income tax expense 127 162 121
- ------------------------------------------------------------------------------
Net operating income
(excluding realized investment gains/losses) 501 576 457
Realized investment gains, net of tax 384 303 208
- -------------------------------------------------------------------------------
Net income $ 885 $ 879 $ 665
===============================================================================
*Includes the results of The Continental Corporation since the acquisition date.
</TABLE>
The property/casualty group is comprised of commercial business, personal lines
of insurance, involuntary risk and other related business.
Customers of the commercial business 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 the 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 lines also includes reinsurance assumed from other insurance
companies and certain group accident and health insurance coverages.
The property/casualty group markets personal lines of insurance, primarily
automobile and homeowners coverages sold to individuals under monoline and
package policies.
Involuntary risks include mandatory participation in residual markets, statutory
assessments for insolvencies of other insurers, and other similar charges.
The property/casualty group also provides other related services including loss
control, policy admin-istration and claim administration services under service
contracts for fees. Such services are provided primarily in the workers'
compensation market.
<PAGE>
Property/casualty revenues, excluding net realized investment gains/losses were
$12.4 billion, down approximately 1.3% from $12.5 billion in 1996 and up from
$10.8 billion in 1995. Revenues include the results of The Continental
Corporation subsequent to May 10, 1995 (see Note N to the Consolidated Financial
Statements).
CNA FINANCIAL CORPORATION
-------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Property/Casualty Operations (cont.)
Property/casualty earned premiums were $9.9 billion in 1997, down approximately
2.0% from the $10.1 billion earned in 1996 and up from $8.7 billion in 1995.
Pre-tax operating income for property/casualty was $628 million in 1997 compared
to $738 million and $579 million in 1996 and 1995, respectively. Underwriting
results, which include insurance and insurance-related operations, deteriorated
by 1.7%, primarily the result of an extremely competitive commercial market
place exerting pressure on pricing. The underwriting loss for 1997 was $1,162
million, compared to $1,143 million and $1,122 million in 1996 and 1995,
respectively.
Catastrophe losses for 1997 on a pretax basis were approximately $92 million,
compared with $315 million in 1996 and $149 million in 1995. CNA's 1997 and 1996
catastrophe losses were primarily weather related, including winter storms,
tornadoes and flooding. CNA's 1995 catastrophe losses related primarily to
tropical storms and hail storms in Texas.
Property/casualty investment income for 1997 was $1.8 billion, down
approximately 4.8% from the $1.9 billion in 1996 and up from $1.7 billion in
1995. Investment income was down from 1996 levels reflecting overall lower
yields in the bond market and a lower investment base due to reduced operating
cashflows. The bond segment of the investment portfolio yielded 6.5% in 1997
compared with 6.8% and 6.9% in 1996 and 1995, respectively.
Net operating income excluding net realized investment gains/losses was $501
million for 1997 compared to $576 million and $457 million in 1996 and 1995,
respectively.
Net realized investment gains for 1997 were $384 million compared to $303
million and $208 million in 1996 and 1995, respectively. The increase in net
realized investment gains in 1997 largely offset the decline in net investment
income and reflects CNA's continued practice of managing its investment
portfolio to maximize total after-tax return.
CNA FINANCIAL CORPORATION
--------------------------
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------
Property/Casualty Operations (cont.)
The following table shows the underwriting results for commercial lines:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - COMMERCIAL
- -----------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- -----------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Premiums Earned:
Professional and specialty $1,688 $1,845 $1,558
General liability and commercial automobile 1,682 1,754 1,649
Workers' compensation 1,845 1,543 1,476
Multiple peril 1,058 1,047 870
Accident and health 1,062 919 699
Reinsurance and other 1,083 1,189 974
- ------------------------------------------------------------------------------
8,418 8,297 7,226
Losses and expenses 9,839 9,150 8,147
- ------------------------------------------------------------------------------
Net underwriting losses before investment income $(1,421) $ (853) $ (921)
==============================================================================
*Includes the results of The Continental Corporation since the acquisition date.
</TABLE>
Premiums for the property/casualty commercial segment increased 1.5% to $8.4
billion in 1997, up from $8.3 billion in 1996 and up from $7.2 billion in 1995.
Professional and specialty earned premium decreased approximately 8.5% to $1.7
billion in 1997, down from $1.8 billion in 1996 and up from $1.6 billion in
1995. The 1997 premium decrease was attributable to a decline in financial
insurance premium of approximately $90 million, as well as a decrease in
agricultural insurance of approximately $85 million offset by small increases in
various other lines.
General liability and commercial automobile earned premium was approximately
$1.7 billion in 1997, down approximately 4.1% from the $1.8 billion earned in
1996 and up from the $1.6 billion in 1995. The decrease in 1997 was the result
of the soft market which made profitable premium growth difficult to achieve.
Earned premium from workers' compensation increased approximately 19.6% to $1.8
billion in 1997, up from $1.5 billion in 1996 and 1995, respectively. The
increase in workers' compensation earned premium resulted from a willingness on
the part of the Company to write, in its voluntary book of business, business
that would have otherwise been written by the involuntary market. This
willingness was precipitated by improved loss experience trends in the
involuntary market.
Multiple peril earned premium was essentially level, increasing approximately
$11 million to $1.1 billion in 1997, from $1.0 billion in 1996 and $0.9 billion
in 1995.
Accident and health earned premium was approximately $1.1 billion in 1997,
increasing approximately 15.6% from the $0.9 billion earned in 1996 and up from
the $0.7 billion in 1995. Accident and health premium increased primarily due to
increases in mass market association premium.
CNA FINANCIAL CORPORATION
-------------------------
18
<PAGE>
- -------------------------------------------------------------------------------
Property/Casualty Operations (cont.)
Earned premium from reinsurance and other decreased approximately 8.9% at $1.1
billion in 1997 from $1.2 billion in 1996, and up from the $1.0 billion earned
in 1995. The decline in 1997 is attributable to lower premium from CNA's London
business.
Underwriting results in commercial lines in 1997 were a loss of $1.4 billion, a
decline of approximately 66.6% from the $853 million loss in 1996 and 54.4% from
the $921 million in 1995. This deterioration is primarily the result of the
highly competitive commercial insurance market exerting pressure on pricing,
unfavorable loss reserve development and increased operating expenses, partially
offset by improved catastrophe loss experience and favorable premium
development. Increased operating expenses stemmed from technology and system
upgrades and consulting costs.
The following table shows the underwriting results for personal lines:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - PERSONAL
- -----------------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- -----------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Premiums Earned:
Personal lines packages $1,085 $1,063 $ 782
Monoline automobile and property coverages 440 367 325
Accident and health 126 106 108
- -----------------------------------------------------------------------
1,651 1,536 1,215
Losses and expenses 1,527 1,720 1,317
- ------------------------------------------------------------------------
Net underwriting income (loss)
before investment income $ 124 $ (184) $ (102)
=========================================================================
*Includes the results of The Continental Corporation since the acquisition date.
</TABLE>
Personal lines earned premium increased 7.5% to $1.7 billion from the $1.5
billion earned in 1996 and up from the $1.2 billion earned in 1995. The increase
in personal lines premium resulted primarily from an increase in private
passenger automobile business and individual long-term care.
Personal lines posted net underwriting income of $124 million in 1997 compared
to underwriting losses of $184 million and $102 million in 1996 and 1995,
respectively. The change from 1996 to 1997 was primarily due to favorable loss
reserve development of approximately $200 million primarily in personal auto
coverages, as well as improved catastrophe loss experience of $79 million. Also
contributing to the improvement were reduced claim adjustment expenses.
CNA FINANCIAL CORPORATION
-------------------------
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
Property/Casualty Operations (cont.)
The following table shows the underwriting results for involuntary risks:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - INVOLUNTARY RISKS
- -----------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- -----------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Premiums Earned:
Workers' compensation $(249) $ 198 $ 178
Private passenger automobile 66 58 80
Commercial automobile 25 36 20
Property and multiple peril 16 2 6
- -----------------------------------------------------------------
(142) 294 284
Losses and expenses (277) 400 383
- -----------------------------------------------------------------
Net underwriting income (loss)
before investment income $ 135 $(106) $ (99)
=================================================================
*Includes the results of The Continental Corporation since the acquisition date.
</TABLE>
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.
Involuntary risk earned premium decreased substantially in 1997, primarily in
the workers' compensation line of business, as estimates of premiums for prior
years were reduced by approximately $340 million. The decrease in involuntary
risk premium stems from a greater willingness on the part of the voluntary
market, including CNA, to write these types of risks.
Involuntary risk underwriting income reflects favorable loss reserve development
of approximately $540 million, which was partially offset by $340 million of
premium development, as noted above. This favorable loss reserve development is
attributable to improved claim experience in the workers' compensation and
private passenger automobile lines.
CNA FINANCIAL CORPORATION
-------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
Property/Casualty Operations (cont.)
Reserves
CNA's property/casualty results of operations are significantly impacted by
actuarial estimates of claim and claim expense reserves. These reserves
represent an accumulation of the amounts the Company believes are necessary to
settle all outstanding claims, including incurred but not reported claims.
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 adjust-ments becomes apparent.
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
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, the ultimate exposure to
CNA for environmental pollution claims may vary substantially from the amounts
currently recorded.
The following table reflects the component effects of management's ongoing
evaluation of reserve levels:
RESERVE DEVELOPMENT - (adverse)/favorable)
- -------------------------------------------------------
Year Ended 1997 1996 1995
December 31
- -------------------------------------------------------
(In millions of dollars)
Asbestos $(105) $(51) $(274)
Environmental
Pollution -- (65) (226)
Other lines 361 207 378
- -------------------------------------------------------
Total $ 256 $ 91 $(122)
=======================================================
The 1997 favorable loss reserve development of $256 million noted in the table
above was offset in part by unfavorable premium development of $170 million.
Unfavorable 1997 asbestos reserve development of $105 million results from CNA's
on-going monitoring of current payment and settlement patterns, current pending
cases and potential future claims.
<PAGE>
Other lines' favorable loss and loss adjustment expense reserve development for
1997 of $361 million was due to favorable loss development of $540 million in
involuntary risks, primarily in workers' compensation, and $200 million of
favorable loss development in personal lines. These favorable developments were
offset in part by unfavorable development in commercial lines of $379 million.
The favorable loss development in involuntary risks is attributable to
better than expected results in workers'
CNA FINANCIAL CORPORATION
-------------------------
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Property/Casualty Operations (cont.)
compensation and private passenger automobile lines stemming from improved
frequency and severity in these lines. This favorable loss development was
offset in part by unfavorable premium development of $340 million as estimates
of premiums for prior years were similarly reduced.
The favorable loss development in personal lines was attributable to improved
trends particularly in personal auto lines.
The unfavorable development in commercial lines was attributable to
approximately $240 million in general liability lines, $130 million in
commercial multiperil, and $215 million in loss adjustment expense reserves,
offset in part by favorable development of $206 million primarily in workers'
compensation and reinsurance lines. This unfavorable loss development in
commercial lines was offset in part by favorable premium development of $170
million related to experience-rated contracts.
Other lines' 1996 and 1995 favorable reserve development which aggregated $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.
CNA utilizes reinsurance arrangements to limit its maximum loss while providing
greater diversification of risks and minimizing exposures on larger risks. The
types of reinsurance coverages are tailored to the specific type of risk
underwritten with the amount retained by CNA varying by type of coverage. These
reinsurance arrangements do not discharge the primary liability of the Company
to the original insureds.
To minimize the Company's exposure that a reinsurer may not be able to
reimburse the Company under the terms of the reinsurance agreement, CNA places
reinsurance with other insurance companies after a thorough assessment of the
reinsurer's credit quality and claim settlement performance. Additionally, for
reinsurers that are not authorized reinsurers, CNA receives collateral primarily
in the form of bank letters of credit.
CNA's reinsurance recoverable on paid and unpaid claim and claim expenses was
approximately $5.4 billion at December 31, 1997 and approximately $6.3 billion
at December 31, 1996.
CNA FINANCIAL CORPORATION
-------------------------
22
<PAGE>
- ------------------------------------------------------------------------------
Life Operations (cont.)
Life Operations
<TABLE>
<CAPTION>
LIFE GROUP
- ---------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ---------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Operating Revenue (excluding realized
investment gains/losses)
Group Premium
Accident and health $2,527 $2,548 $2,190
Life and annuity 263 195 313
- ----------------------------------------------------------------------
Total group 2,790 2,743 2,503
- ----------------------------------------------------------------------
Individual Premium
Life and annuity 642 629 497
Accident and health 3 2 33
- ----------------------------------------------------------------------
Total individual 645 631 530
- ----------------------------------------------------------------------
Total premiums 3,435 3,374 3,033
Net investment income 419 400 369
Other 114 106 76
- ----------------------------------------------------------------------
Total operating revenues 3,968 3,880 3,478
Total benefits and expenses 3,815 3,709 3,318
- ----------------------------------------------------------------------
Operating income before income tax 153 171 160
Income tax expense 53 61 56
- ----------------------------------------------------------------------
Net operating income (excluding realized
investment gains/losses) 100 110 104
Realized investment gains, net of tax 96 96 85
=======================================================================
Net income $ 196 $ 206 $ 189
========================================================================
</TABLE>
During 1997, CNA's life operations experienced continued growth, building on the
momentum from the past two years.
CNA sells a variety of individual and group insurance products. The individual
insurance products consist primarily of term, universal life, and fixed and
variable annuity products. 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.
Life insurance revenues, excluding net realized investment gains, were up 2.3%
to $4.0 billion for 1997 as compared to $3.9 billion for 1996 and up from $3.5
billion for 1995.
Life premium for 1997 was up 1.8% or $61 million from $3.4 billion in 1996 and
up from 1995 premiums of $3.0 billion.
<PAGE>
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 group accident and health, CNA
CNA FINANCIAL CORPORATION
-------------------------
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
Life Operations (cont.)
underwrites the Federal Employees Health Benefits Program FEHBP) which had
revenues of $2.1 billion, $2.1 billion and $1.9 billion in 1997, 1996 and 1995,
respectively.
Group life and annuity business increased $68 million, or approximately 35% to
$263 million in 1997. This increase is primarily due to a $45 million increase
in single premium guaranteed annuity business.
Traditional guaranteed investment contract sales were lower by approximately 41%
due to the strong performance of the equity market which caused customers to
transfer 401(k) investments to stock mutual funds and away from the stable value
of guaranteed funds.
Individual life premium continues to increase as demand for CNA's Viaterm
product remains strong, with premium increasing approximately $55 million over
1996's level. This increase was tempered by a drop in CNA's foreign operations
of approximately $41 million due to an increasingly competitive market. Total
individual premium increased approximately $14 million, or 2.2%, over 1996, and
$115 million, or 21.7%, over 1995.
Individual policies in-force increased 26% in 1997 to 1,010,000 policies from
799,000 policies in 1996. Individual accident and health premium remained low
due to CNA selling its individual disability income business in late 1995.
Life investment income increased by approximately 4.8% due to a larger asset
base generated from the increased cashflows resulting from premium growth. The
bond segment of the life investment portfolio yielded 6.4% in 1997 compared with
6.5% and 6.9% in 1996 and 1995, respectively.
CNA's life insurance net operating income, excluding net realized investment
gains, was $100 million for 1997, compared to $110 million and $104 million for
1996 and 1995, respectively. The decline in net operating income is primarily
due to poor experience in certain group accident and health contracts and
increased expenses related to new business initiatives.
CNA FINANCIAL CORPORATION
--------------------------
24
<PAGE>
- -------------------------------------------------------------------------------
Investments
Investments:
The following table summarizes CNA's general account investments at cost or
amortized cost for each of the last five years.
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS - GENERAL ACCOUNT
- --------------------------------------------------------------------------------------
December 31 1997 % 1996 % 1995 % 1994 % 1993 %
- --------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Taxable $24,419 69% $22,631 65% $25,832 75% $17,484 63% $11,933 48%
Tax-exempt 4,534 13 4,860 14 3,453 10 3,717 13 4,725 19
Redeemable
preferred stocks 67 -- 49 -- 100 -- 423 2 445 2
Equity securities:
Common stocks 567 2 478 1 734 2 729 3 433 2
Non-redeemable
preferred stocks 128 -- 224 1 3 -- 8 -- -- --
Mortgage loans and
real estate 85 -- 123 -- 122 -- 47 -- 62 --
Policy loans 177 -- 174 -- 177 1 176 1 174 1
Other invested
assets 544 2 617 2 483 1 103 -- 69 --
Short-term
investments 4,884 14 5,854 17 3,725 11 5,036 18 6,944 28
- --------------------------------------------------------------------------------------
Investments $35,405 100% $35,010 100% $34,629 100% $27,723 100% $24,785 100%
======================================================================================
Investments at
Carrying Value* $36,203 $35,412 $35,886 $26,943 $25,363
======================================================================================
*As reported in the Consolidated Balance Sheet
</TABLE>
CNA FINANCIAL CORPORATION
--------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Investments (cont.)
The following table summarizes CNA's general and separate account investments at
carrying value, by group, as of December 31, 1997.
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS
- -------------------------------------------------------------------------------
Property/ Life Other Separate
Casualty Group % Group % Group % Accounts %
- -------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Taxable $19,015 65% $ 5,712 89% $ -- -- $4,769 83%
Tax-exempt 4,724 16 -- -- -- -- -- --
Redeemable
preferred stocks 97 -- -- -- -- -- -- --
Equity securities: -- --
Common stocks 657 2 22 -- 1 1 181 3
Non-redeemable preferred 134 1 -- -- -- -- 25 1
stocks
Mortgage loans and
real estate 60 -- 25 -- -- -- -- --
Policy loans -- -- 177 3 -- -- -- --
Other invested assets 687 2 6 -- 2 1 117 2
Short-term investments 4,224 14 478 8 182 98 629 11
- -------------------------------------------------------------------------------
Investments at
Carrying Value $29,598 100% $ 6,420 100% $185 100% $5,721 100%
================================================================================
</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.
The Company's general account investment portfolio consists primarily of
publicly traded government bonds, asset backed securities, mortgage backed
securities, municipal bonds, and corporate bonds.
The Company's investment policies emphasize high credit quality and
diversification by industry, issue and issuer. Assets supporting interest rate
sensitive liabilities are segmented within the general account to facilitate
asset/liability duration management.
At December 31, 1997, total Separate Account cash and investments amounted to
$5.7 billion with taxable fixed maturities representing approximately 83.4% of
the total. Approximately 73.8%of Separate Account 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>
One Separate Account product is an indexed group annuity contract for
institutional investors which guarantees the Standard and Poor's (S&P) 500 rate
of return plus 25 basis points annually. Deposits are taken for a three
year period with no payout until the end of the period. CNA mitigates the risk
associated with the contract liability by a combination of purchasing S&P
500 futures contracts in a notional amount equal to the original customer
deposit and investing the remaining cash primarily in high quality
investments.
CNA FINANCIAL CORPORATION
-----------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
Investments (cont.)
The number of contracts is adjusted regularly to approximate the future
liability to the contractholder. The gross notional amounts of these instruments
totaled $860 million and $394 million at December 31, 1997 and 1996,
respectively.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. In addition, CNA's investment in mortgage loans and real
estate as a percentage of total assets, is substantially below the industry
average.
The general account portfolio consists primarily of high quality (BBB or higher)
marketable fixed maturities, 95.0% and 94.2% of which are rated as investment
grade at December 31, 1997 and 1996, respectively.
The following table summarizes the ratings of CNA's general account fixed
maturity bond portfolio at carrying value (market):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31 1997 % 1996 % 1995 %
- -------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated
securities $13,679 46.4% $11,623 42.0% $18,905 62.3%
Other AAA rated 8,801 29.9 9,277 33.5 4,625 15.3
AA and A rated 3,796 12.9 3,786 13.7 3,512 11.6
BBB rated 1,695 5.8 1,387 5.0 1,424 4.7
Below investment grade 1,480 5.0 1,582 5.8 1,862 6.1
- -------------------------------------------------------------------------------
Total $29,451 100% $27,655 100% $30,328 100%
- -------------------------------------------------------------------------------
</TABLE>
The following table summarizes the ratings of CNA's guaranteed investment
contract separate account fixed maturity bond portfolio at carrying value
(market):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31 1997 % 1996 % 1995 %
- -------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
U.S. government and affiliated
securities $ 148 3.9% $ 192 5.0% $ 1,743 36.4%
Other AAA rated 2,401 62.6 2,279 59.0 828 17.3
AA and A rated 569 14.8 723 18.7 914 19.1
BBB rated 406 10.6 345 8.9 361 7.5
Below investment grade 310 8.1 324 8.4 944 19.7
- -------------------------------------------------------------------------------
Total $ 3,834 100% $3,863 100% $ 4,790 100%
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
At year end 1997, 1996 and 1995, respectively, 89.8%, 92.0% and 93.0% of
the general account portfolio and 82.1%, 85.7% and 95.0% of the guaranteed
investment contract portfolio, in the table above, were rated by major
independent rating agencies. High yield securities are bonds rated as below
investment grade by bond rating agencies and other unrated securities
which, in the opinion of management, are below investment grade (below
BBB). High yield securities generally involve a
CNA FINANCIAL CORPORATION
-------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Investments (cont.)
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. CNA's concentration in high yield bonds including Separate
Account business was approximately 3.2% of total assets as of December 31,
1997 and 1996, respectively.
Included in CNA's fixed maturity securities at December 31, 1997 (general and
guaranteed investment contract portfolios) are $7.2 billion of asset-backed
securities, consisting of approximately 11.2% in U.S. government agency issued
pass-through certificates, 40.0% in collateralized mortgage obligations (CMOs),
29.8% in corporate asset-backed obligations and 19.0% in corporate
mortgage-backed pass-through certificates. The majority of CMOs held are
actively traded in liquid markets and are priced by broker-dealers.
CMOs are subject to prepayment risks that tend to vary with changes in interest
rates. During periods of declining interest rates, CMOs generally prepay faster
as the underlying mortgages are prepaid and refinanced by the borrowers in order
to take advantage of the lower rates. Conversely, during periods of rising
interest rates, prepayments generally slow which may result in a decrease in
yield or a loss as a result of the slower prepayments. 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, 1997, the fair
value of asset-backed securities was greater than the amortized cost by
approximately $114 million, compared to net unrealized losses of approximately
$5 million at December 31, 1996.
At December 31, 1997 and 1996, 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 1997 1996
- -----------------------------------------------
(In millions of dollars)
Commercial paper $1,850 $3,207
U.S. Treasuries in escrow* 1,065 1,062
Money markets 624 746
U.S. Treasuries 558 56
Security repurchase collateral 154 101
Other 633 682
- -----------------------------------------------
Total short-term investments $4,884 $5,854
===============================================
*See Note A to the Consolidated Financial Statements
CNA invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk (principally interest rate,
equity price and foreign currency risk). CNA also uses derivatives to mitigate
the risk associated with its indexed group annuity contract by purchasing S&P
500 futures contracts in a notional amount equal to the original customer
deposit.
<PAGE>
CNA considers its derivatives as being held for purposes other than trading.
Derivative securities, except for interest rate swaps associated with certain
corporate borrowings, are recorded at fair value at the reporting date with
changes in market value reflected in realized gains and losses. The interest
rate swaps on corporate borrowings are accounted for using accrual accounting
with the related income or expense recorded as an adjustment to interest
expense; the changes in fair value are not recorded. See Note C of the
Consolidated Financial Statements for further information regarding derivatives.
CNA FINANCIAL CORPORATION
-------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
Investments (cont.)
CNA's general account investments in bonds and redeemable preferred stocks were
carried at their fair value of $29.5 billion at December 31, 1997, compared with
$27.7 billion at December 31, 1996. At December 31, 1997 and 1996, net
unrealized gains on fixed maturity securities amounted to approximately $528
million and $181 million, respectively. The gross unrealized gains and losses
for the fixed maturity securities portfolio at December 31, 1997 were $644
million and $116 million, respectively, compared to $444 million and $263
million, respectively, at December 31, 1996.
Net unrealized gains on general account bonds include net unrealized losses on
high yield securities of $2 million and gains of $34 million, at December 31,
1997 and 1996, respectively. Carrying values of high yield securities in the
general account were $1.5 billion and $1.6 billion at December 31, 1997 and
1996, respectively.
At December 31, 1997, fixed maturity securities in the guaranteed
investment contract portfolio are carried at fair value and amounted to $3.8
billion. At December 31, 1997, net unrealized gains on fixed maturity
securities in these Separate Accounts amounted to approximately $71 million.
This compares to $1 million in net unrealized losses at December 31, 1996. The
gross unrealized gains and losses for the fixed maturity securities portfolio at
December 31, 1997, were $87 million and $16 million, respectively, compared to
$55 million and $56 million, respectively, at December 31, 1996.
At December 31, 1997, high yield securities in the guaranteed investment
contract portfolio which are carried at fair value amounted to $310 million,
compared to $324 million at December 31, 1996. Net unrealized losses on high
yield securities held in such Separate Accounts were $1 million and $8 million
at December 31, 1997 and 1996, respectively.
CNA FINANCIAL CORPORATION
--------------------------
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
Market Risk
Market Risk:
- ------------
The Securities and Exchange Commission (SEC) issued new disclosure rules related
to economic exposure to market risk from financial instruments.
Market risk is a broad term related to economic losses due to adverse changes in
the fair value of a financial instrument. Market risk is inherent to all
financial instruments, and accordingly, the Company's risk management policies
and procedures include all market risk sensitive financial instruments.
The SEC's market risk rule focuses on only one element of market risk--price
risk. Price risk relates to changes in the level of prices due to changes in
interest rates, equity prices, foreign exchange rates or other factors that
relate to market volatility of the rate, index, or price underlying the
financial instrument. The Company's primary market risk exposures are to changes
in interest rates, although the Company has certain exposures to changes in
equity prices and foreign currency exchange rates.
Active management of market risk is integral to the Company's operations. The
Company may use the following tools to manage its exposure to market risk within
defined tolerance ranges: 1) change the character of future investments
purchased or sold, 2) use derivatives to offset the market behavior of existing
assets and liabilities or assets expected to be purchased and liabilities to be
incurred, or 3) rebalance its existing asset and liability portfolios.
For purposes of this disclosure market risk sensitive instruments are divided
into two categories: instruments entered into for trading purposes and
instruments entered into for purposes other than trading. The Company's market
risk sensitive instruments presented in the tables on pages 32 and 33 are
classified as held for purposes other than trading. The Company does not
generally hold or issue derivatives for trading purposes.
Interest Rate Risk
The Company has exposure to economic losses due to interest rate risk arising
from changes in the level or volatility of interest rates. The Company attempts
to mitigate its exposure to interest rate risk through active portfolio
management. The Company may also reduce this risk by utilizing instruments such
as interest rate swaps, interest rate caps, commitments to purchase securities,
options, futures and forwards. This exposure is also mitigated by the Company's
asset/liability matching strategy.
Equity Price Risk
The Company is exposed to equity price risk as a result of its investment in
equity securities and equity derivatives. Equity price risk results from changes
in the level or volatility of equity prices which affect the value of equity
securities or instruments which derive their value from such securities or
indexes. CNA attempts to mitigate its exposure to such risks by limiting its
investment in any one security or index.
<PAGE>
Foreign Exchange Risk
Foreign exchange risk arises from the possibility that changes in foreign
currency exchange rates will impact the value of financial instruments. The
Company has foreign exchange exposure when it buys or sells foreign currencies
or financial instruments denominated in a foreign currency. The Company's
foreign transactions are primarily denominated in Canadian Dollars, British
Pounds, Deutsche Marks, and Japanese Yen. This exposure is mitigated by the
Company's asset/liability matching strategy and through the use of fowards for
those instruments which are not matched.
CNA FINANCIAL CORPORATION
-------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
Market Risk (cont.)
Sensitivity Analysis
CNA monitors its sensitivity to interest rate risk by evaluating the change in
its financial assets and liabilities relative to fluctuations in interest rates.
The evaluation is made using an instantaneous change in interest rates of
varying magnitudes on a static balance sheet to determine the effect such a
change in rates would have on the Company's market value at risk and the
resulting effect on stockholders' equity. The analysis presents the sensitivity
of the market value of the Company's financial instruments to selected changes
in market rates and prices. The range of changes chosen reflects the Company's
view of changes which are reasonably possible over a one-year period. The
selection of the range of values chosen to represent changes in interest rates
should not be construed as the Company's prediction of future market events,
but rather an illustration of the impact of such events.
The analysis assumes that the composition of the Company's interest rate
sensitive assets and liabilities existing at the beginning of the period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the time to maturity. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Accordingly the analysis may not be indicative of, is not intended to
provide, and does not provide a precise forecast of the effect of changes of
market interest rates on the Company's income or stockholders' equity. Further,
the computations do not contemplate any actions CNA would undertake in response
to changes in interest rates.
The sensitivity analysis assumes an instantaneous shift in market interest
rates, with scenarios of interest rates increasing and decreasing 100 and 150
basis points from their levels at December 31, 1997 with all other variables
held constant. A 100 and 150 basis point increase in market interest rates would
result in a pre-tax decrease in the net financial instrument position of $1.6
billion and $2.4 billion, respectively. Similarly, a 100 and 150 basis point
decrease in market interest rates would result in a pre-tax increase in the net
financial instrument position of $1.6 billion and $2.4 billion, respectively.
The Company's long-term debt, including certain related interest rate swap
agreements, as of December 31, 1997, is denominated in U.S. dollars.
Approximately 91% of the Company's long-term debt has been issued at or
effectively converted to fixed rates, and as such, interest expense would not be
impacted by interest rate shifts. The impact of a 100 and 150 basis point
increase in interest rates on the fixed rate debt would result in a decrease in
the market value of the debt by $117 million and $176 million, respectively.
The impact of a 100 and 150 basis point increase in interest rates on the
variable rate debt would result in an additional $3 million and $4 million,
respectively, in interest expense per year. A 100 and 150 basis point decrease
in interest rates would lower interest expense by $3 million and $4 million,
respectively, per year.
Equity price risk was measured assuming an instantaneous 10% and 25% change in
the Standard & Poor's 500 Index (the Index) from its level of December 31, 1997,
with all other variables held constant. The Company's equity holdings were
assumed to be perfectly correlated with this Index. A 10% and 25% decrease in
the Index would result in a $179 million and $448 million decrease,
respectively, in the net financial instrument position. Of these amounts, $66
million and $166 million, respectively would be offset by decreases in
liabilities to customers under variable annuity contracts. Similarly, increases
CNA FINANCIAL CORPORATION
-------------------------
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Market Risk (cont.)
in the Index would result in like increases in the net financial instrument
position and increases in liabilities to customers variable annuity contracts.
The sensitivity analysis also assumes an instantaneous 10% and 20% change in
the foreign currency exchange rates versus the U.S. dollar from their levels at
December 31, 1997, with all other variables held constant. A 10% and 20%
strengthening of the U.S. dollar versus other currencies would result in
decreases of $48 million and $96 million, respectively, in the net financial
instrument position. Weakening of the U.S. dollar versus all other currencies
would result in like increases in the net financial instrument position.
The following table reflects the estimated effects on the market value of the
Company's financial instruments due to an increase in interest rates of 100
basis points, a 10% decline in the S&P 500 index, and a decline of 10% in
foreign currency exchange rates.
HELD FOR OTHER THAN TRADING PURPOSES
- -------------------------------------------------------------------------------
December 31, 1997 Market Interest Currency Equity
Value Rate Risk Risk Risk
- -------------------------------------------------------------------------------
(In millions of dollars)
General Account:
Fixed maturity securities $29,548 $(1,409) $(20) $(10)
Equity securities 814 - (7) (81)
Short term investments 4,884 (11) (21) -
Interest rate swaps (4) 20 - -
- ------------------------------------------------------------------------------
Total general account 35,242 (1,400) (48) (91)
- ------------------------------------------------------------------------------
Separate Accounts
Fixed maturity securities 4,769 (190) - (1)
Equity securities 206 - - (21)
Short term investments 629 (1) - -
Equity index futures - 1 - (66)
Other derivative securities - (3) - -
- ------------------------------------------------------------------------------
Total separate accounts 5,604 (193) - (88)
==============================================================================
Total all securities $40,846 $(1,593) $(48) $(179)
==============================================================================
Long term debt $(2,897) $ 117 $ - $ -
==============================================================================
CNA FINANCIAL CORPORATION
-------------------------
32
<PAGE>
- -------------------------------------------------------------------------------
Market Risk (cont.)
The following table reflects the estimated effects on the market value of the
Company's financial instruments due to an increase in interest rates of 150
basis points, a 25% decline in the S&P 500 index, and a decline of 20% in
foreign currency exchange rates.
HELD FOR OTHER THAN TRADING PURPOSES
- ------------------------------------------------------------------------------
Market Interest Currency Equity
Value Rate Risk Risk Risk
- ------------------------------------------------------------------------------
(In millions of dollars)
General Account
Fixed maturity securities $29,548 $(2,113) $ (39) $ (24)
Equity securities 814 - (14) (204)
Short term investments 4,884 (17) (43) -
Interest rate swaps (4) 30 - -
- ------------------------------------------------------------------------------
Total general account 35,242 (2,100) (96) (228)
- ------------------------------------------------------------------------------
Separate Accounts
Fixed maturity securities 4,769 (285) - (3)
Equity securities 206 - - (51)
Short term investments 629 (1) - -
Equity index futures - 2 - (166)
Other derivative securities - (5) - -
- -----------------------------------------------------------------------------
Total separate accounts 5,604 (289) - (220)
==============================================================================
Total all securities $40,846 $(2,389) $ (96) $ (448)
==============================================================================
Long term debt $(2,897) $ 176 $ - $ -
==============================================================================
CNA FINANCIAL CORPORATION
-------------------------
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
Risks and Uncertainties
Risks and Uncertainties:
- ------------------------
The following section discusses other risks and uncertainties to which the
Company is subject.
Credit Risk
Credit risk arises from the potential inability of counterparties to perform on
an obligation in accordance with the terms of a contract. CNA is exposed to
credit risk in its capacity as a counterparty in financial and insurance
contracts, reinsurance arrangements, and as a holder of securities. The company
accepts risk whenever a counterparty is obligated to perform under a contract.
As a holder of securities, CNA is exposed to default by the issuer or to the
possibility of market price deterioration. As a purchaser of reinsurance, CNA
has exposure that a reinsurer may not be able to reimburse the Company under the
terms of a reinsurance agreement. CNA has established policies and procedures
to manage credit risk, including collateral requirements, and master "netting
arrangements".
Legal/Regulatory Risk
Legal/regulatory risk is the risk that changes in the legal or regulatory
environment in which the Company operates will create additional expenses not
anticipated by the Company in pricing its products. Regulatory initiatives, tax
law changes, new legal theories or insurance company insolvencies, through
guaranty fund assessments, may create costs for the insurer beyond those
currently recorded in the consolidated financial statements. CNA mitigates this
risk by offering a wide range of products and by operating throughout the United
States, thus reducing its exposure to any single product or region, and also by
employing underwriting practices which identify and minimize the adverse impact
of this risk.
Impact of Year 2000
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates after 1999. Such malfunctions could lead
to business delays and disruptions. The Company is in the process of replacing
many of its legacy systems and is upgrading its systems to accommodate business
for the year 2000 and beyond. The Company believes that it is on plan to resolve
the year 2000 issue in a timely manner. Based upon its current assessment, the
Company estimates that the incremental cost to replace and upgrade its systems
to accommodate year 2000 processing will be approximately $50 million. However,
due to the interdependent nature of computer systems, the Company may be
adversely impacted depending upon whether it or other entities not affiliated
with the Company (vendors and business partners) address this issue
successfully. To mitigate this impact, the Company is communicating with its
vendors and business partners to coordinate the year 2000 conversion.
In addition, property/casualty insurance companies may have an underwriting
exposure related to year 2000. Although the Company has not received any claims
for coverage from its policyholders based on losses resulting from year 2000
issues, there can be no assurance that policyholders will not suffer losses of
this type and seek compensation under the Company's insurance policies. If any
claims are made, coverage, if any, will depend on the facts and circumstances of
the claim and the provisions of the policy. At this time, the Company is unable
to determine whether the adverse impact, if any, in connection with the
foregoing circumstances would be material to the Company.
CNA FINANCIAL CORPORATION
-------------------------
34
<PAGE>
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources:
- -------------------------------
The liquidity requirements of CNA have been met by funds generated from
operating, investing and financing activities. In early 1998, CNA was able to
take advantage of favorable market conditions to refinance, on a fixed rate
basis, a portion of its existing debt under the Company's revolving credit
facility. Additionally, CNA expects to take advantage of the current low
interest rate environment to raise additional capital to support new business
initiatives in 1998.
The principal 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, 1997, CNA's operating cash flows were a negative
$193 million, compared to positive $620 million in 1996, and $875 million in
1995.
As discussed previously, the Company had substantially lower operating cash
flow, primarily due to claim payments made resulting from the settlement of the
Fibreboard litigation. The cash flow impact of such claim payments was
approximately $1 billion in 1997 (see Note F of the Consolidated Financial
Statements).
To finance the acquisition of The Continental Corporation (Continental),
including the refinancing of $205 million of Continental debt, CNA entered into
a $1.325 billion revolving credit facility which expires in May 2001. 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 6.16% and 5.72% at December 31, 1997 and 1996,
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.
In 1997, CNA filed a Registration Statement on Form S-3 with the Securities and
Exchange Commission relating to $1 billion in senior and subordinated debt and
preferred stock that became effective on October 22, 1997. This new shelf
registration incorporated $250 million of securities remaining available for
issuance from a prior shelf registration. On January 8, 1998, the Company issued
$150 million principal amount of 6.45% senior notes due January 15, 2008 and
$150 million principal amount of 6.95% senior notes due January 15, 2018. The
net proceeds were used to pay down bank loans drawn under the Company's
revolving credit facility. Concurrent with the reduction in bank debt, the
Company terminated $300 million notional amount of interest rate swaps. As a
result of this additional debt issuance, the borrowing capacity under the
revolving credit facility was reduced.
On March 2, 1998 CNA paid at the due date $150 million of 8 7/8% senior notes
with funds drawn against the revolving credit facility. 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.
CNA FINANCIAL CORPORATION
-------------------------
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
Liquidity and Capital Resources (cont.)
As a result of this debt issuance, the borrowing capacity under the revolving
credit facility was reduced by $250 million to $1.075 billion.
On March 1, 1996, CNA paid at the due date $250 million of 8 5/8% senior notes.
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% at December 31, 1997 and 1996.
The effect of these interest rate swaps was to increase interest expense by
approximately $4 million, $7 million and $2 million for the years ended December
31, 1997, 1996 and 1995, respectively.
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, 1997 and 1996, the commercial paper
program borrowing totaled $675 million. The weighted-average interest rate on
commercial paper was 6.05% and 5.67% at December 31, 1997 and 1996,
respectively. The commercial paper borrowings are classified as long-term, as
borrowing capacity under the revolving credit 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
6.35% and 6.28% at December 31, 1997 and 1996, respectively.
As of December 31, 1997, 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 CNA and Continental and CNA's preferred stock.
<TABLE>
<CAPTION>
|-----------------|=====================||---------------------------------------|
| | INSURANCE RATINGS || DEBT AND STOCK RATINGS |
| |=====================||---------------------------------------|
| | Financial Strength|| | CNA | |Continental|
---------------------------------------------------------------
| | CAC | CAC | CIC ||Senior|Commercial|Preferred| Senior |
| | | | || Debt | Paper | Stock | Debt |
| |-----|--------|------||------|----------|---------|-----------|
<S> <C> <C> <C> <C> <C> <C> <C>
|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
-------------------------
36
<PAGE>
- -------------------------------------------------------------------------------
Accounting Standards
Accounting Standards:
- --------------------
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 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 has not and will not
have a significant impact on CNA.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes accounting standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997. This
Statement is not expected to result in a significant change in CNA's
disclosures.
Disclosures About Segments of An Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information about operating segments in
interim and annual financial statements. It requires that those enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items, and segment assets, and that the enterprises reconcile the total of those
amounts to the general-purpose financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997. CNA is currently evaluating the
effect of this statement on its business segment disclosure.
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
In December 1997, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", which provides guidance on accounting by entities that are subject
to insurance-related assessments. It requires that entities recognize
liabilities for insurance-related assessments when all of the following
criteria have been met: an assessment has been imposed or a probable assessment
will be imposed; the event obligating an entity to pay an imposed or probable
assessment has occurred on or before the date of the financial statements; and
the amount of the assessment can be reasonably estimated. This SOP is effective
CNA FINANCIAL CORPORATION
-------------------------
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Accounting Standards (cont.)
for financial statements for fiscal years beginning after December 15, 1998. CNA
is currently evaluating the effects of this SOP on its accounting for
insurance-related assessments.
Employers' Disclosures about Pensions and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits", which standardizes disclosure
requirements for pension and other postretirement benefits to the extent
practicable and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. The Statement also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The Statement changes
disclosure only and does not address measurement or recognition. It is
effective for fiscal years beginning after December 15, 1997. CNA is currently
evaluating the effects of this Statement on its benefit plan disclosures.
CNA FINANCIAL CORPORATION
--------------------------
38
<PAGE>
- -------------------------------------------------------------------------------
Forward-Looking Statements
Forward-Looking Statements:
- ---------------------------
When included in management's discussion and analysis, the words "believes",
"expects", "intends", "anticipates", "estimates", and analogous expressions are
intended to identify forward-looking statements. Such statements inherently are
subject to a variety of risks and uncertainties that could cause actual results
to differ materially from those projected. Such risks and uncertainties include,
among others, general economic and business conditions, competition, changes in
financial markets (interest rate, credit, currency, commodities and stocks),
changes in foreign, political, social and economic conditions, regulatory
initiatives and compliance with governmental regulations, judicial decisions and
rulings, and various other matters, many of which are beyond the Company's
control. See the Company's discussions elsewhere in this report on how these
various risks may affect CNA. 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
state-ment 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
-------------------------
39
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
- --------------------------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------------------------
(In millions of dollars)
Investments:
<S> <C> <C>
Fixed maturities available for sale
(cost: $29,020 and $27,540) $29,548 $27,721
Equity securities available for sale
(cost: $695 and $702) 814 859
Mortgage loans and real estate (less accumulated
depreciation: $1 and $4) 85 123
Policy loans 177 174
Other invested assets 695 681
Short-term investments 4,884 5,854
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 36,203 35,412
- --------------------------------------------------------------------------------------------------
Cash 383 257
Receivables:
Reinsurance 5,726 6,530
Insurance 6,086 5,888
Other trade 248 192
Less allowance for doubtful accounts (303) (277)
Deferred acquisition costs 2,142 1,854
Accrued investment income 389 508
Receivables for securities sold 744 264
Federal income taxes recoverable (includes $26
and $151 due from Loews) 18 134
Deferred income taxes 1,070 1,347
Property and equipment at cost
(less accumulated depreciation: $553 and $436) 747 645
Prepaid reinsurance premiums 202 295
Intangibles 620 418
Other assets 1,182 867
Separate Account business 5,812 6,121
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $61,269 $60,455
==================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET (cont.)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C>
Liabilities:
Insurance reserves:
Claim and claim expense $29,227 $30,395
Unearned premiums 4,700 4,659
Future policy benefits 4,829 4,181
Policyholders' funds 742 746
Securities sold under repurchase agreements 153 100
Payables for securities purchased 648 405
Participating policyholders' equity 132 119
Long-term debt 2,897 2,765
Other liabilities 3,820 3,904
Separate Account business 5,812 6,121
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 52,960 53,395
- --------------------------------------------------------------------------------------------------
Commitments and contingent liabilities-Notes E, F and G
Stockholders'equity:
Common stock $2.50 par value;
Authorized - 200,000,000 shares;
Issued - 61,841,969 shares;
Outstanding - 61,798,262 shares; 155 155
Money market cumulative preferred stock 150 150
Additional paid-in capital 435 435
Retained earnings 6,983 6,024
Net unrealized investment gains 589 299
Treasury stock, at cost (3) (3)
- --------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,309 7,060
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $61,269 $60,455
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
41
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended December 31 1997 199+ 1995
- --------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
<S> <C> <C> <C>
Revenues:
Premiums $13,362 $13,479 $11,735
Net investment income 2,209 2,276 2,077
Realized investment gains 753 619 464
Other 748 614 424
- --------------------------------------------------------------------------------------------------
17,072 16,988 14,700
- --------------------------------------------------------------------------------------------------
Benefits and expenses:
Insurance claims and
policyholders' benefits 11,268 11,371 9,952
Amortization of deferred acquisition costs 2,383 2,192 1,844
Other operating expenses 1,865 1,880 1,680
Interest expense 198 200 182
- --------------------------------------------------------------------------------------------------
15,714 15,643 13,658
- --------------------------------------------------------------------------------------------------
Income before income tax 1,358 1,345 1,042
Income tax expense 392 380 285
- --------------------------------------------------------------------------------------------------
NET INCOME $ 966 $ 965 $ 757
- --------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 15.52 $ 15.51 $ 12.14
==================================================================================================
WEIGHTED AVERAGE OUTSTANDING SHARES
OF COMMON STOCK 61.8 61.8 61.8
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
42
<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,
January 1, 1995 $155 $150 $(3) $435 $4,316 $ (507) $4,546
Net income - - - - 757 - 757
Change in net unrealized
gains/(losses) - - - - - 1,440 1,440
Preferred dividends - - - - (7) - (7)
- ----------------------------------------------------------------------------------------------------------
Balance
December 31, 1995 $155 $150 $(3) $435 $5,066 $ 933 $6,736
Net income - - - - 965 - 965
Change in net unrealized
gains/(losses) - - - - - (634) (634)
Preferred dividends - - - - (7) - (7)
- ----------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 $155 $150 $(3) $435 $6,024 $ 299 $7,060
Net income - - - - 966 - 966
Change in net unrealized
gains/(losses) - - - - - 290 290
Preferred dividends - - - - (7) - (7)
- ----------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1997 $155 $150 $(3) $435 $6,983 $ 589 $8,309
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
43
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income $ 966 $ 965 $ 757
----------------------------------
Adjustments to reconcile net income to
net cash flows from operating activities:
Net realized investment gains, pre-tax (753) (619) (464)
Amortization of intangibles 30 25 19
Amortization of bond discount (100) (178) (143)
Depreciation 158 138 101
Changes in:
Receivables, net 576 84 (803)
Deferred acquisition costs (288) (361) (161)
Accrued investment income 119 38 (30)
Federal income taxes 116 (1) (39)
Deferred income taxes 146 353 221
Prepaid reinsurance premiums 93 200 130
Insurance reserves (464) (358) 427
Other liabilites (566) 790 974
Other, net (226) (456) (114)
- ------------------------------------------------------------------------------------------------
Total adjustments (1,159) (345) 118
- ------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM
OPERATING ACTIVITIES $ (193) $ 620 $ 875
- ------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
Statement of Consolidated Cash Flows (Cont.)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
- --------------------------------------
Purchases of fixed maturities $(42,492) $(34,312) $(29,255)
Proceeds from fixed maturities:
Sales 38,429 34,864 24,065
Maturities, calls and redemptions 2,997 1,796 2,855
Purchases of equity securities (1,319) (972) (1,094)
Proceeds from sale of equity securities 1,406 1,077 1,317
Change in short-term investments 1,112 (2,029) 2,942
Purchases of property and equipment (280) (205) (126)
Change in securities sold under repurchase agreements 53 (674) (1,705)
Change in other investments 421 146 158
Purchase of The Continental Corporation, net of cash acquired - - (961)
Other acquisitions, net (108) - (72)
Other, net (7) 21 (39)
- ------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES 212 (288) (1,915)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Dividends paid to preferred shareholders (6) (6) (7)
Receipts from investment contracts credited
to policyholder account balances 7 11 23
Return of policyholder account
balances on investment contracts (26) (41) (34)
Change in short-term debt - (257) 3
Principal payments on long-term debt (5) (254) (208)
Proceeds from issuance of long-term debt 137 250 1,337
- ------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 107 (297) 1,114
- ------------------------------------------------------------------------------------------------
NET CASH FLOWS 126 35 74
Cash at beginning of period 257 222 148
- ------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 383 $ 257 $ 222
================================================================================================
</TABLE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Statement of Consolidated Cash Flows (cont.)
<TABLE>
<CAPTION>
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)
<S> <C> <C>
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.
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
45
<PAGE>
NOTES CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note A -- Significant Accounting Policies (cont.)
Note A -- Significant Accounting Policies
- -----------------------------------------
BASIS OF PRESENTATION
- -------------------------------------------------------------------------------
The Consolidated Financial Statements include CNA Financial Corporation and its
subsidiaries (CNA or the Company) which include 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.
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 1997. All 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.
BUSINESS
- ------------------------------------------------------------------------------
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 customers, including small, medium and large
businesses; associations; professionals; groups and individuals with a broad
range of insurance and other 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.
INSURANCE
- -------------------------------------------------------------------------------
Premium Revenue
Insurance premiums on property/casualty and accident and health insurance
contracts are earned ratably over the terms of the policies after provision
for estimated adjustments on retrospectively rated policies and
deductions for ceded insurance. Revenues on universal life-type contracts are
comprised of contract charges and fees which are recognized over the coverage
period. Other life insurance premiums and annu-ities are recognized as revenue
when due after deductions for ceded insurance.
<PAGE>
Claim and claim expense reserves
Claim and claim expense reserves, except reserves for structured settlements,
workers' compensation lifetime claims and disability claims, are not discounted
and are based on (a) case basis estimates for losses reported on direct
business, adjusted in the aggregate for ultimate loss expectations,(b)
estimates of unreported losses, (c) estimates of losses on assumed insurance,
and (d)
CNA FINANCIAL CORPORATION
-------------------------
46
<PAGE>
- ------------------------------------------------------------------------------
Note A - Significant Accounting Policies (cont.)
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. The effects of
inflation, which can be significant, are implicitly considered in the reserving
process and are part of the recorded reserve balance.
Claim and claim expense reserves represent management's estimates of ultimate
liabilities based on currently available facts and case law and the ultimate
liability may vary significantly from such estimates. CNA regularly reviews its
reserves, and any adjustments to the previously established reserves are
reflected in operating income in the period the need for such adjustments
becomes apparent.
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 reflected as part of future policy benefits reserves.
Obligations for structured settlements not funded by annuities are included in
claim and claim expense reserves and carried at the present values determined
using interest rates ranging from 6.25% to 7.50%. At December 31, 1997 and 1996,
the total of these unfunded structured settlements was $913 million and $924
million, respectively (reflecting a discount of $1,527 million and $1,556
million, respectively).
Workers' compensation lifetime claim reserves and disability claim reserves are
discounted at interest rates allowed by insurance regulators that range from
3.5% to 6.0% with mortality and morbidity assumptions reflecting the Company's
and current industry experience. At December 31, 1997 and 1996, such reserves
totaled $2,196 million and $2,165 million, respectively (reflecting a discount
of $882 million and $903 million, respectively).
Future policy benefits reserves
Reserves for traditional life insurance products (whole and term life 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. Expense assumptions
include the estimated effects of inflation and expenses beyond the premium
paying period. Reserves for universal life-type contracts are equal to the
account balances that accrue to the benefit of the policyholders. Interest
crediting rates ranged from 6.78% to 7.45% for the three years ended December
31, 1997.
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. Accruals for such assessments have not been practical as the
availability of information, in sufficient detail, regarding industry
insolvences and related assessments has been limited.
CNA FINANCIAL CORPORATION
-------------------------
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note A - Significant Accounting Policies (cont.)
Reinsurance
CNA assumes and cedes insurance with other insurers and reinsurers and members
of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposures on larger risks. The reinsurance
coverages are tailored to the specific risk characteristics of each product line
with CNA's retained amount varying by type of coverage. Generally, reinsurance
coverage for property 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. CNA's life reinsurance includes quota share, yearly renewable
term and facultative programs. 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 traditional 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 cumulatively adjusted as
appropriate.
Participating business
Participating business represented 0.7%, 0.5% and 0.6% of gross life insurance
in force and 0.7%, 0.7% and 0.8% of life insurance premium income for 1997,
1996, and 1995, 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. 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 and Valley Forge Life Insurance Company write
certain investment and annuity contracts. The supporting assets and liabilities
of these contracts are legally segregated and reflected as assets and
liabilities of Separate Account business. Continental Assurance Company
guarantees principal and a specified return to the contract holders on
approximately 74% of the Separate Account business. Substantially all assets of
the Separate Account business are carried at fair value. Separate account
liabilities are carried at contract values.
CNA FINANCIAL CORPORATION
-------------------------
48
<PAGE>
- -------------------------------------------------------------------------------
Note A - Significant Accounting Policies (cont.)
INVESTMENTS
- -------------------------------------------------------------------------------
Valuation of investments
CNA classifies its fixed maturity securities (bonds and redeemable preferred
stocks) and its equity securities as available-for-sale, and as such, they are
carried at fair value. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion are included in investment income.
CNA accounts for its derivative securities under the fair value method, except
for interest rate swaps associated with certain corporate borrowings. Under
this method the derivative securities are recorded at fair value at the
reporting date with changes in fair value reflected in realized investment gains
and losses. For interest rate swaps associated with certain corporate
borrowings, amounts due to or payable under these swaps are recorded as an
adjustment to interest expense and changes in the fair value of the swaps are
not reflected in the Company's financial statements.
Mortgage loans are carried at unpaid principal balances, including unamortized
premium or discount. Real estate is carried at depreciated cost. Policy loans
are carried at unpaid balances. Short-term investments are carried at amortized
cost which approximates fair value.
Other invested assets include joint ventures, limited partnerships, and other
investments. The joint ventures and limited partnerships are carried at cost
plus CNA's equity interest in changes in the investee's net assets. CNA's equity
interest in such changes are reflected in investment income, realized investment
gains/losses and unrealized investment gains/losses, as appropriate.
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 securities and equity
securities are reflected as part of stockholders' equity, net of applicable
deferred income taxes and participating policyholders' interest.
Equity affiliates
CNA uses the equity method of accounting for investments in companies in which
its ownership interest is as least twenty percent but not greater than fifty
percent and upon which it cannot assert significant control. Equity in
operating income of these affiliates is reflected in other income. Equity in
investment gains/losses is included in realized investment gains/losses
or unrealized investment gains/losses as appropriate.
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
CNA FINANCIAL CORPORATION
-------------------------
49
<PAGE>
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 $987 million in an escrow account,
pursuant to the Fiberboard Global Settlement Agreement, as discussed in Note
F. The majority of the funds are included in short-term investments and
are invested primarily in U.S. Treasury securities. The escrow account
amounted to $1,098 million and $1,071 million at December 31, 1997 and 1996,
respectively.
ADDITIONAL CASH FLOW STATEMENT INFORMATION
- --------------------------------------------------------------------------------
The Company's supplemental disclosure of cash
flow information:
- -----------------------------------------------------
Year Ended
December 31 1997 1996 1995
- -----------------------------------------------------
(In millions of dollars)
Cash (paid) received:
Interest $(201) $(211) $(170)
Federal income
taxes (95) 16 (103)
======================================================
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. Temporary differences primarily relate
to insurance reserves (principally claim reserve discounting), unearned premium
reserves, net unrealized investment gains/losses, deferred acquisition costs and
net operating loss carry forwards, net of valuation allowances.
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 $11 million, $15 million and $11 million in 1997, 1996
and 1995, respectively.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Earnings per share applicable to common stock is based on weighted average
outstanding shares of common stock of 61,798,000 in 1997, 1996 and 1995,
respectively. The Company has no stock options or warrants, as such, basic and
diluted earnings per share are the same.
CNA FINANCIAL CORPORATION
-------------------------
50
<PAGE>
- -----------------------------------------------------------------------------
Note B -- Investments
Note B -- Investments:
- ----------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
(In millions of dollars)
Fixed maturities:
Bonds:
Taxable $1,522 $1,716 $1,512
Tax-exempt 288 273 263
Redeemable preferred stocks 7 2 4
Equity securities 37 25 47
Mortgage loans and Real estate 10 11 14
Policy loans 6 12 12
Short-term investments 321 231 215
Security repurchase transactions-income 90 77 167
Other 56 45 46
- ------------------------------------------------------------------------------
2,337 2,392 2,280
Investment expense (47) (43) (46)
Security repurchase transactions-expenses and fees (81) (73) (157)
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME $2,209 $2,276 $2,077
===============================================================================
CNA FINANCIAL CORPORATION
-------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note B -- Investments (cont.)
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- ----------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------
(In millions of dollars)
Realized investment gains and (losses):
Fixed maturities $ 452 $ 293 $ 222
Equity securities 103 216 140
Derivative securities (7) 18 19
Other, including Separate Account business 205* 92 83
- ----------------------------------------------------------------------------
753 619 464
Allocated to participating policyholders (15) (14) (8)
Income tax expense (260) (218) (162)
- ----------------------------------------------------------------------------
Net realized investment gains 478 387 294
- ----------------------------------------------------------------------------
Change in net unrealized investment gains and (losses):
Fixed maturities 347 (875) 1,855
Equity securities (38) (26) 163
Other, including Separate Account business 122 (45) 323
- ----------------------------------------------------------------------------
431 (946) 2,341
Allocated to participating policyholders (4) 18 (44)
Income tax (expense) benefit (137) 294 (857)
- ----------------------------------------------------------------------------
Change in net unrealized investment gains (losses) 290 (634) 1,440
- ----------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
INVESTMENT GAINS (LOSSES) $ 768 $(247) $1,734
============================================================================
*(Includes $95 million related to CNA surety transaction)
<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- --------------------------
Fixed Equity Fixed Equity Fixed Equity
Year Ended December 31 Maturities Securities Maturities Securities Maturities Securities
- -----------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales $ 38,429 $ 1,406 $ 34,864 $ 1,077 $ 24,065 $ 1,317
=================================================================================================================
Gross realized gains $ 651 $ 137 $ 412 $ 241 $ 412 $ 199
Gross realized losses $ (199) (34) (119) (25) (190) (59)
- -----------------------------------------------------------------------------------------------------------------
Net realized gains
on sales $ 452 $ 103 $ 293 $ 216 $ 222 $ 140
=================================================================================================================
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
52
<PAGE>
------------------------------------------------------------------------------
Note B - Investments
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
1997 1996
---------------------- -----------------------
December 31 GAINS LOSSES NET Gains Losses Net
- -------------------------------------------------------------------------------
(In millions of dollars)
Fixed maturities $ 644 $ (116) $ 528 $ 444 $(263) $ 181
Equity securities 190 (71) 119 254 (97) 157
Other, including Separate
Account business 334 (110) 224 171 (69) 102
------------------------------------------------------
$1,168 $ (297) 871 $ 869 $(429) 440
======= ======== ====== =======
Allocated to participating
policyholders (4) --
Deferred income tax
expense (278) (141)
- -------------------------------------------------------------------------------
NET UNREALIZED
INVESTMENT GAINS $ 589 $ 299
===============================================================================
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1997 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
(In millions of dollars)
United States Treasury securities and
obligations of government agencies $12,883 $119 $ 22 $12,980
Asset-backed securities 4,716 98 10 4,804
States, municipalities and political
subdivisions - tax-exempt 4,534 194 4 4,724
Corporate securities 5,253 142 49 5,346
Other debt securities 1,567 61 31 1,597
Redeemable preferred stocks 67 30 - 97
- -------------------------------------------------------------------------------
Total fixed maturities 29,020 644 116 29,548
Equity securities 695 190 71 814
- -------------------------------------------------------------------------------
TOTAL $29,715 $834 $187 $30,362
===============================================================================
CNA FINANCIAL CORPORATION
-------------------------
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note B - Investments (cont.)
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)
United States Treasury securities and
obligations of government agencies $ 9,855 $ 72 $ 92 $ 9,835
Asset-backed securities 6,298 53 59 6,292
States, municipalities and political
subdivisions - tax-exempt 4,860 121 30 4,951
Corporate securities 4,730 121 63 4,788
Other debt securities 1,748 60 19 1,789
Redeemable preferred stocks 49 17 - 66
- -------------------------------------------------------------------------------
Total fixed maturities 27,540 444 263 27,721
Equity securities 702 254 97 859
- -------------------------------------------------------------------------------
Total $28,242 $ 698 $ 360 $ 28,580
===============================================================================
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
BY CONTRACTUAL MATURITY
- -------------------------------------------------------------------------------
1997 1996
------------------- --------------------
AMORTIZED MARKET Amortized Market
December 31 COST VALUE Cost Value
- -------------------------------------------------------------------------------
(In millions of dollars)
Due in one year or less $ 2,058 $ 2,077 $ 2,494 $ 2,506
Due after one year through five years 11,520 11,525 8,377 8,295
Due after five years through ten years 3,323 3,373 4,811 4,829
Due after ten years 7,403 7,769 5,560 5,799
Asset-backed securities not due
at a single maturity date 4,716 4,804 6,298 6,292
- -------------------------------------------------------------------------------
TOTAL $29,020 $29,548 $27,540 $27,721
===============================================================================
Actual maturities may differ form contractual maturities because securities may
be called or prepaid with our without call or prepayment penalties.
The carrying value of investments (other than equity securities) that have not
produced income for last twelve months is $35 million at December 31, 1997. At
December 31, 1997, there were no investments in a single issuer, other than the
U.S. government, that when aggregated, exceeded 10% of stockholders' equity.
CNA FINANCIAL CORPORATION
--------------------------
54
<PAGE>
- -------------------------------------------------------------------------------
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 consolidated balance sheet approximate
fair value for cash, short-term investments, other trade receivables, accrued
investment income, receivables for securities sold, securities sold under
repurchase agreements, payables for securities purchased, 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
-------------------------
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
Note C - Financial Statements (cont.)
FINANCIAL ASSETS
- ---------------------------------------------------------------------------
1997 1996
----------------------- -------------------
CARRYING ESTIMATED Carrying Estimated
December 31 AMOUNT FAIR VALUE Amount Fair Value
- ----------------------------------------------------------------------------
(In millions of dollars)
Investments:
Fixed maturities $29,548 $29,548 $27,721 $27,721
Equity securities 814 814 859 859
Mortgage loans 80 83 113 115
Policy loans 177 172 174 163
Other invested assets 695 695 681 681
Separate Account business:
Fixed maturities 4,769 4,769 4,608 4,608
Equity securities 206 206 169 169
Other 117 117 437 437
- ------------------------------------------------------------------------------
The following methods and assumptions were used by CNA in estimating the fair
value 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 analysis 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 CORPORAITON
-------------------------
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note C -- Financial Instruments (cont.)
FINANCIAL LIABILITIES
- -------------------------------------------------------------------------------
1997 1996
-----------------------------------------------
CARRYING ESTIMATED Carrying Estimated
December 31 AMOUNT FAIR VALUE Amount Fair Value
- --------------------------------------------------------------------------------
(In millions of dollars)
Premium deposits and annuity contracts $1,194 $1,145 $1,065 $1,018
Long-term debt 2,897 2,928 2,765 2,762
Financial guarantee contracts 382 373 382 378
Separate Account business:
Guaranteed investment contracts 3,414 3,448 3,990 4,012
Deferred annuities 73 90 73 84
Variable separate accounts 997 997 569 569
Other 614 614 896 896
- ------------------------------------------------------------------------------
Premium deposits and annuity contracts are valued based on cash surrender values
and the outstanding fund balances.
CNA's Senior Notes and debentures are valued based on quoted market prices. The
fair value for other long-term debt is estimated using discounted cash flow
analysis, 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.
The fair values 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 their carrying value.
CNA FINANCIAL CORPORATION
-------------------------
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note C - Financial Instruments (cont.)
DERIVATIVE FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------------------
CNA invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk (principally interest rate,
equity stock price and foreign currency risk). Financial instruments used for
such purposes include interest rate swaps, interest rate caps, put and call
options, commitments to purchase securities, futures and forwards. The Company
generally does not hold or issue these instruments for trading purposes. CNA
also uses derivatives to mitigate the risk associated with its indexed group
annuity contracts by purchasing S&P 500 futures contracts in a notional amount
equal to the original customer deposit.
The gross notional principal or contractual amounts of derivative financial
instruments in the general account at December 31, 1997 and 1996, totaled $1,567
million and $1,730 million, respectively. The gross notional principal or
contractual amounts of derivative financial instruments in the Separate Accounts
totaled $860 million and $394 million at December 31, 1997 and 1996,
respectively. The contract or notional amounts are used to calculate the
exchange of contractual payments under the agreements and are not representative
of the potential for gain or loss on these agreements.
The fair values associated with derivative financial instruments are generally
affected by interest rates, equity prices and foreign exchange rates. The credit
exposure associated with these instruments is generally limited to the
unrealized fair value of the instruments and will vary based on the
creditworthiness of the counterparties. Although the Company is exposed to the
aforementioned credit risk, it does not expect any counterparty to fail to
perform as contracted based on the creditworthiness of the counterparties. 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
-------------------------
58
<PAGE>
------------------------------------------------------------------------------
Note C - Financial Instruments (cont.)
A summary of the aggregate notional or contractual amounts and estimated fair
values of these instruments at December 31, 1997 and 1996, are presented below.
- --------------------------------------------------------------------------------
CONTRACTUAL/ ASSET/(LIABILITY)
NOTIONAL AMOUNT FAIR VALUE GAIN(LOSS)
December 31, 1997
- --------------------------------------------------------------------------------
(In millions of dollars)
General Account
Interest rate swaps-corporate borrowings $ 950 $ (4) $ --
Futures (21) -- (1)
Forwards 11 -- 7
Interest rate swaps 59 (8) (8)
Commitments to
purchase government
and municipal securities -- -- 1
Options purchased 51 2 (5)
Options written 1 -- --
Other options 16 -- --
Interest rate caps 500 4 (1)
- -------------------------------------------------------------------------------
TOTAL $1,567 $ (6) $ (7)
===============================================================================
Separate Accounts
Futures $ 615 $ -- $ 112*
Forwards 1 -- --
Commitments to purchase government
and municipal securities 80 -- 1
Options purchased 91 -- (1)
Options written 73 -- 2
- -------------------------------------------------------------------------------
TOTAL $ 860 $ -- $ 114
===============================================================================
* This amount is offset by an increase in the liability to participants.
CNA FINANANCIAL CORPORATION
---------------------------
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note C - Financial Instruments (cont.)
- -------------------------------------------------------------------------------
Contractual/ Asset/(Liability) Recognized
Notional Amount Fair Value Gain (Loss)
December 31, 1996
- -------------------------------------------------------------------------------
(In millions of dollars)
General Account
Interest rate swaps-corporate $ 950 $ 3 $ (5)
borrowings
Futures 38 1 (1)
Forwards 194 (2) (13)
Interest rate swaps 85 -- 29
Commitments to purchase government
and municipal securities 406 (1) --
Options purchased 57 2 7
Options written -- -- 1
- -------------------------------------------------------------------------------
Total $ 1,730 $ 3 $ 18
===============================================================================
Separate Accounts
Futures $ 319 $ (6) $ 29*
Forwards 7 -- --
Commitments to purchase government
and municipal securities 17 -- --
Options purchased 26 -- --
Options written 25 -- 1
- -------------------------------------------------------------------------------
Total $ 394 $ (6) $ 30
================================================================================
* This amount is offset by an increase in the liability to participants.
CNA FINANCIAL CORPORATION
-------------------------
60
<PAGE>
------------------------------------------------------------------------------
Note C - Financial Instruments (cont.)
An interest rate swap is an agreement in which two parties agree to exchange, at
specified intervals, interest payment streams calculated on an agreed-upon
notional principal amount with at least one stream based upon a specified
floating rate index. CNA has entered into interest rate swap agreements to
convert the variable rate of the borrowing under the revolving credit facility
and the commercial paper program to a fixed rate. At December 31, 1997, CNA had
outstanding interest rate swap agreements with several banks having a total
notional principal amount of $950 million. Those agreements, which terminate
from May 2000 to December 2000, effectively fix the Company's interest rate
exposure on $950 million of variable rate debt.
CNA also has outstanding trading interest rate swaps which primarily represent
an exchange of the 90-day treasury bill rate for the total change in the Goldman
Sachs Commodities Index.
Futures are contracts to buy or sell a standard quantity and quality of a
commodity, financial instrument, or index at a specified future date and
price.
Forwards are contracts between two parties to purchase and sell a specific
quantity of a commodity, government security, foreign currency, or other
financial instrument at a price specified at contact inception, with delivery
and settlement at a specified future date.
Commitments to purchase government and municipal securities are a commitment to
purchase securities in the future at a predetermined price.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial
instrument at a specified price within a specified period of time.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
CNA FINANCIAL CORPORATION
-------------------------
61
<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 1997 and 1996, the inclusion of the CNA Tax Group in the consolidated
Federal income tax return of Loews has resulted in an increased Federal income
tax liability for Loews. Accordingly, CNA has paid or will pay to Loews
approximately $210 million for 1997 and has paid $99 million for 1996. In 1995,
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.
At December 31, 1997, CNA had net operating loss carryforwards of approximately
$870 million for income tax purposes that expire in years 2000 through 2017. The
loss carryforwards are related to acquisitions.
CNA FINANCIAL CORPORATION
-------------------------
62
<PAGE>
- ------------------------------------------------------------------------------
Note D -- Income Taxes (cont.)
Significant components of CNA's deferred tax assets and liabilities as of
December 31, 1997 and 1996 are shown in the table below.
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
- -----------------------------------------------------------------------
December 31 1997 1996
- -----------------------------------------------------------------------
(In millions of dollars)
Insurance reserves:
Property/casualty claim reserves $1,101 $1,145
Unearned premium reserves 283 268
Life reserves 157 141
Other insurance reserves 22 31
Deferred acquisition costs (667) (570)
Investment valuation 30 32
Postretirement benefits other than pensions 149 143
Net unrealized gains (278) (141)
Net operating loss carryforwards 305 280
Other, net 226 268
- ----------------------------------------------------------------------
Total deferred tax assets and liabilities 1,328 1,597
Valuation allowance (258) (250)
- ----------------------------------------------------------------------
NET DEFERRED TAX ASSETS $1,070 $1,347
======================================================================
At December 31, 1997, gross deferred tax assets and liabilities amounted to
approximately $2.7 billion and $1.6 billion, respectively. At December 31, 1996,
gross deferred tax assets and liabilities amounted to approximately $2.6 billion
and $1.3 billion, respectively.
Based upon anticipated future taxable income, Company management believes it is
more likely than not that the net deferred tax asset will be realized. A
valuation allowance is maintained due to the uncertainty regarding the
realizability of certain deferred tax assets.
CNA FINANCIAL CORPORATION
-------------------------
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note D - Income Taxes (cont.)
The components of income tax expense are as follows:
- --------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------
(In millions of dollars)
Current tax expense $248 $ 28 $ 64
Deferred tax expense 144 352 221
- --------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $392 $380 $285
==========================================================================
The components of total income tax expense are allocated between operating
income and realized capital gains and losses in the following table.
- ---------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------
(In millions of dollars)
Income tax expense on:
Operating income $132 $163 $123
Realized capital gains and losses 260 217 162
===========================================================================
TOTAL INCOME TAX EXPENSE $392 $380 $285
===========================================================================
A reconciliation of the statutory federal income tax rate on income is as
follows:
- ------------------------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Year Ended December 31 1997 Income 1996 Income 1995 Income
- ------------------------------------------------------------------------------
(In millions of dollars)
Income taxes at statutory rate $475 35.0% $471 35.0% $365 35.0%
Tax exempt income and dividend
received deduction (91) (6.7) (86) (6.4) (79) (7.6)
Other 8 .6 (5) (.3) - -
- -------------------------------------------------------------------------------
INCOME TAXES AT EFFECTIVE RATE $392 28.9% $380 28.3% $286 27.4%
===============================================================================
CNA FINANCIAL CORPORATION
-------------------------
64
<PAGE>
- --------------------------------------------------------------------------------
NOTE E - Liability for Unpaid Claims and Claim Adjustment Expenses
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
- -------------------------------------------------------------------------------
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.
Establishing loss reserves is an estimation process. Many factors can ultimately
affect the final settlement of a claim and, therefore, the reserve that is
needed. Changes in the law, results of litigation, medical costs, the cost of
repair materials and labor rates can all 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
--------------------------
65
<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 1997, 1996 and 1995.
CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIMS AND CLAIM EXPENSES
- -----------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------
(In millions of dollars)
Reserves at beginning of year:
Gross $29,395 $31,044 $21,639
Ceded reinsurance 5,660 6,089 2,705
- -----------------------------------------------------------------------------
Net reserves at beginning of year 23,735 24,955 18,934
Reserves of acquired insurance company 57 --- 6,063
- -----------------------------------------------------------------------------
Total net reserves 23,792 24,955 24,997
- -----------------------------------------------------------------------------
Net incurred claims and claim expenses:
Provision for insured events of current year 7,942 7,922 6,787
Increase (decrease) in provision
for insured events of prior years (256) (91) 122
Amortization of discount 143 149 106
- -----------------------------------------------------------------------------
Total net incurred 7,829 7,980 7,015
- -----------------------------------------------------------------------------
Net payments attributable to:
Current year events 2,514 2,676 2,000
Prior year events 5,862 6,524 5,057
- -----------------------------------------------------------------------------
Total net payments 8,376 9,200 7,057
- -----------------------------------------------------------------------------
Net reserves at end of year 23,245 23,735 24,955
Ceded reinsurance at end of year 4,995 5,660 6,089
- -----------------------------------------------------------------------------
GROSS RESERVES AT END OF YEAR* $28,240 $29,395 $31,044
=============================================================================
* Excludes life claim and claim expense reserves and intercompany eliminations
of $987 million, $1 billion and $988 million as of December 31, 1997, 1996 and
1995, respectively, included in the Consolidated Balance Sheet.
<PAGE>
Reserve development is comprised of the following components:
RESERVE DEVELOPMENT - (adverse)/favorable)
- --------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------
(In millions of dollars)
Asbestos $(105) $ (51) $(274)
Environmental pollution -- (65) (226)
Other 361 207 378
- ---------------------------------------------------------------
TOTAL $ 256 $ 91 $(122)
===============================================================
CNA FINANCIAL CORPORATION
-------------------------
66
<PAGE>
- -------------------------------------------------------------------------------
Note E -- Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
ENVIRONMENTAL AND ASBESTOS RESERVES
- --------------------------------------------------------------------------------
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
(PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for
clean-up of waste sites if PRPs fail to do so, and to assign liability to PRPs.
The extent of liability to be allocated to a PRP is dependent on a variety of
factors. Further, the number of waste sites subject to 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 (NPL). The
addition of new clean-up sites to the NPL has slowed in recent years.
Many clean-up sites have been designated by state authorities as well.
Many policyholders have made claims against various CNA insurance subsidiaries
for defense costs and indemnification in connection with environmental
pollution matters. CNA and the insurance industry are disputing coverage for
many such claims. Key coverage issues include whether clean-up costs are
considered damages under the policies, trigger of coverage, applicability of
pollution exclusions and owned property exclusions, the potential for joint and
several liability and definition of an occurrence. To date, courts have been
inconsistent in their rulings on these issues.
A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress in 1997 and it is unclear 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 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 liability of CNA for
environmental pollution claims may vary substantially from the amount currently
recorded.
As of December 31, 1997 and 1996, CNA carried approximately $773 million and
$908 million, respectively, of claim and claim expense reserves, net of
reinsurance recoverables, 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.
CNA FINANCIAL CORPORATION
-------------------------
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
CNA's insurance subsidiaries have 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 involves many of the same limitations discussed above
for environmental pollution claims such as inconsistency of court decisions,
specific policy provisions, allocation of liability among insurers, missing
policies and proof of coverage. As of December 31, 1997 and 1996, CNA carried
approximately $1,400 million and $1,506 million, respectively, of claim and
claim expense reserves, net of reinsurance recoverables, for reported and
unreported asbestos-related claims.
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 these liabilities and make further adjustments as
warranted.
CNA FINANCIAL CORPORATION
-------------------------
68
<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.
RESERVE SUMMARY
- -------------------------------------------------------------------------------
December 31 1997 1996
------------------------ ----------------------
ENVIRONMENTAL Environmental
POLLUTION ASBESTOS Pollution Asbestos
- ----------------------------------------- ------------------ ------------------
(In millions of dollars)
Reported claims:
Gross reserves $ 279 $ 1,384 $ 289 $ 1,551
Less reinsurance recoverable (36) (117) (95) (139)
---------------------------------------------
Net reported claims 243 1,267 194 1,412
Net unreported claims 530 133 714 94
- -------------------------------------------------------------------------------
NET RESERVES $ 773 $ 1,400 $ 908 $ 1,506
===============================================================================
ENVIRONMENTAL POLLUTION CHANGES IN RESERVES
- ------------------------------------------------------------------------
1997 1996 1995
Year Ended December 31
- ------------------------------------------------------------------------
(In millions of dollars)
Net reserves at beginning of year $ 908 $1,063 $ 949*
Reserve strengthening -- 65 226
Less: Gross payments 258 304 183
Reinsurance recoveries (123) (84) (71)
------------------------------------
Net payments 135 220 112
- ------------------------------------------------------------------------
NET RESERVES AT END OF YEAR $ 773 $ 908 $1,063
========================================================================
* Includes Continental net reserves of $443 million at acquisition date.
<PAGE>
ASBESTOS CHANGES IN RESERVES
- ------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------
(In millions of dollars)
Net reserves at beginning of year $1,506 $2,191 $2,109**
Reserve strengthening 105 50 274
Less: Gross payments 268 787 268
Reinsurance recoveries (57) (52) (76)
-------------------------------------------
Net payments 211 735 192
- ------------------------------------------------------------------------------
NET RESERVES AT END OF YEAR $1,400 $1,506 $2,191
==============================================================================
** Includes Continental net reserves of $170 million at acquisition date.
CNA FINANCIAL CORPORATION
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)
OTHER PROPERTY AND CASUALTY RESERVES
- --------------------------------------------------------------------------------
Other lines favorable loss and loss adjustment expense reserve development for
1997 of $361 million was due to favorable loss develop-ment of $540 million in
involuntary risks, primarily in workers' compensation, and $200 million of
favorable loss development in personal lines, offset in part by unfavorable
devel-opment in commercial lines of $379 million.
The favorable loss development in involuntary risks is attributable to better
than expected results in workers' compensation and private passenger automobile
lines stemming from improved frequency and severity in these lines. This
favor-able loss development was offset in part by unfavorable premium
development of $340 million as estimates of premiums for prior years were
similarly reduced.
The favorable loss development in personal lines was attributable to improved
trends particularly in personal auto lines.
The unfavorable development in commercial lines was attributable to
approximately $240 million in general liability lines, $130 million in
commercial multiperil, and $215 million in loss adjustment expense reserves
offset in part by favorable development of $206 million primarily in workers'
compensation and reinsurance lines. This unfavorable loss development in
commercial lines was offset in part by favorable premium development of $170
million related to experi-ence- rated contracts.
The other lines favorable development during 1996 and 1995 of $207 million and
$378 million, respectively, was principally due to favorable experience in the
workers' compensation line of business.
CNA FINANCIAL CORPORATION
-------------------------
70
<PAGE>
----------------------------------------------------------------------------
Note F -- Legal Proceedings and Contingent Liabilities
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") which is subject to
court approval, to resolve all future asbestos-related bodily injury claims
involving Fibreboard.
Casualty, Fibreboard and Pacific Indemnity have also reached an agreement (the
"Trilateral Agreement"), on a settlement to resolve the coverage litigation and
provide funding for Fibreboard's asbestos claims in the event the Global
Settlement does not obtain final court approval.
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 as respects the Global Settlement
Agreement. On June 27, 1997, the Supreme Court granted these petitions, vacated
the Fifth Circuit's judgment as respects the Global Settlement Agreement, and
remanded the matter to the Fifth Circuit for reconsideration in light of the
Supreme Court's decision in Amchem Products Co. v. Windsor.
On January 27, 1998, a panel of the United States Fifth Circuit Court of Appeals
again approved the Global Settlement Agreement by a 2-1 vote. Objectors have
ninety days after the judgment is entered by the Fifth Circuit to file a
Petition for Certiorari to 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 $1.5 billion to a trust fund for a class of all
future asbestos claimants, defined generally as those
CNA FINANCIAL CORPORATION
--------------------------
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note F - Legal Proceedings and Contingent Liabilities (cont.)
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 may be sought.
There is limited precedent with settlements which determine the rights of
future claimants to seek relief.
Through December 31, 1997, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 135,400 claims, for an
esti-mated settlement amount of approximately $1.6 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under these settlements. Approximately $1.6 billion (including interest of
$130 million) was paid through December 31, 1997. 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.
Final court approval of the Trilateral Agreement and its implementation has
resolved Casualty's exposure with respect to Fibreboard asbestos claims.
Casualty does not anticipate further material exposure with respect to the
Fibreboard matter, and subsequent adverse reserve adjustments, if any, are not
expected to materially affect the equity of CNA.
TOBACCO LITIGATION
- -------------------------------------------------------------------------------
CNA's primary property/casualty subsidiaries have been named as defendants as
part of a direct action lawsuit, Richard P. Ieyoub v. The American Tobacco
Company, et al., filed by the Attorney General for the State of Louisiana, in
state court,Calcasieu Parish, Louisiana. In that suit, filed against certain
tobacco manufacturers and distributors (the "Tobacco Defendants") and over 100
insurance companies, the State of Louisiana seeks to recover medical expenses
allegedly incurred by the State as a result of tobacco-related illnesses.
The original suit was filed on March 13, 1996, against the Tobacco Defendants
only. The insurance companies were added to the suit in March 1997 under a
direct action statute in Louisiana. Under the direct action statute, the
Louisiana Attorney General is pursuing liability claims against the Tobacco
Defendants and their insurers in the same suit, even though none of the Tobacco
Defendants has made a claim for insurance coverage.
Recently, the United States District Court for the Western District of
Louisiana, Lake Charles Division, granted a petition to remove this litigation
to the federal district court. The District Court's decision is currently on
appeal to the United States Fifth Circuit Court of Appeals. During the pending
appeal, all proceedings in state court and in the federal district court are
stayed. Because of the uncertainties inherent in assessing the risk of liability
at this very early stage of the litigation, management is unable to make a
meaningful estimate of the amount or range of any loss that could result from an
unfavorable outcome of the pending litigation. However, management believes
that the ultimate outcome of the pending litigation should not materially affect
the results of operations or 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
-------------------------
72
<PAGE>
- -------------------------------------------------------------------------------
Note G - Reinsurance
Note G -- Reinsurance:
- ---------------------
The ceding of insurance does not discharge the primary liability of the original
insurer. CNA places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. Further, for carriers that are not
authorized reinsurers in CNA's states of domicile, CNA receives collateral,
primarily in the form of bank letters of credit. Such collateral totaled
approximately $857 million and $801 million at December 31, 1997 and 1996,
respectively.
CNA's largest recoverable from a single reinsurer, including prepaid reinsurance
premiums, is with Lloyds of London and approximated $451 million and $440
million at December 31, 1997 and 1996, respectively.
Insurance claims and policyholder benefits are net of reinsurance recoveries of
$1,309 million, $1,220 million and $935 million for 1997, 1996 and 1995,
respectively.
In the tables below, life premium revenue is from long duration contracts,
property/casualty premium revenue is from short duration contracts, and
approximately 75% of accident and health premium revenue is from short duration
contracts.
The effects of reinsurance on earned premiums are shown in the following
schedules:
- -------------------------------------------------------------------------------
Earned Assumed/
Premiums Net
-------------------------------------------------
Year Ended December 31 Direct Assumed Ceded Net %
- -------------------------------------------------------------------------------
(In millions of dollars)
1997
Property/casualty $ 8,408 $ 1,101 $ 612 $ 8,897 12.4%
Accident and health 3,603 111 154 3,560 3.1
Life 908 128 131 905 14.1
- -------------------------------------------------------------------------------
TOTAL PREMIUMS $12,919 $ 1,340 $ 897 $13,362 10.0%
===============================================================================
1996
Property/casualty $ 8,957 $ 1,123 $ 989 $ 9,091 12.4%
Accident and health 3,575 187 176 3,586 5.2
Life 736 121 55 802 15.1
- -------------------------------------------------------------------------------
Total premiums $13,268 $ 1,431 $ 1,220 $13,479 10.6%
===============================================================================
1995
Property/casualty $ 7,868 $ 1,335 $ 1,293 $ 7,910 16.9%
Accident and health 3,017 125 106 3,036 4.1
Life 701 109 21 789 13.8%
- -------------------------------------------------------------------------------
Total premiums $11,586 $ 1,569 $ 1,420 $11,735 13.4%
===============================================================================
CNA FINANCIAL CORPORATION
-------------------------
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note G -- Reinsurance (cont.)
The effects of reinsurance on written premiums are shown in the following
schedules:
- ------------------------------------------------------------------------------
Written Premiums
----------------------------------------------------
Assumed/
Year Ended December 31 Direct Assumed Ceded Net Net %
- ------------------------------------------------------------------------------
(In millions of dollars)
1997
Property/casualty $ 8,456 $ 1,262 $ 693 $ 9,025 14.0%
Accident and health 3,592 133 155 3,570 3.7
Life 908 128 131 905 14.1
- ------------------------------------------------------------------------------
TOTAL PREMIUMS $12,956 $ 1,523 $ 979 $13,500 11.3%
==============================================================================
1996
Property/casualty $ 9,032 $ 1,197 $ 852 $ 9,377 12.8%
Accident and health 3,708 188 183 3,713 5.1
Life 736 121 55 802 15.1
- ------------------------------------------------------------------------------
Total premiums $13,476 $ 1,506 $ 1,090 $13,892 10.8%
==============================================================================
1995
Property/casualty $ 9,421 $ 1,408 $ 1,814 $ 9,015 15.6%
Accident and health 3,159 126 137 3,148 4.0
Life 701 109 21 789 13.8
- ------------------------------------------------------------------------------
Total premiums $13,281 $ 1,643 $ 1,972 $12,952 12.7%
==============================================================================
The impact of reinsurance on life insurance in-force is shown in the following
schedule:
- ------------------------------------------------------------------------
Life Insurance In-Force Assumed/
------------------------------------
(In millions of dollars) Direct Assumed Ceded Net Net%
- --------------------------------------------------------------------------
December 31, 1997 $235,468 $ 76,130 $ 74,262 $237,336 32.1%
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
===========================================================================
CNA FINANCIAL CORPORATION
-------------------------
74
<PAGE>
- ---------------------------------------------------------------------------
Note H -- Debt
Note H -- Debt:
- ---------------
Long-term borrowings consisted of the following:
LONG-TERM DEBT
- ---------------------------------------------------------------------------
December 31 1997 1996
- ---------------------------------------------------------------------------
(In millions of dollars)
Variable Rate Debt:
Credit Facility $ 400 $ 400
Commercial Paper 675 675
Credit Facility - CNA Surety 118 -
Senior Notes:
87/8%, due March 1, 1998 150 150
81/4%, due April 15, 1999 102 102
71/4%, due March 1, 2003 146 146
61/4%, due November 15, 2003 249 248
63/4%, due November 15, 2006 248 248
83/8%, due August 15, 2012 98 98
71/4% Debenture, due November 15, 2023 247 247
11% Secured Mortgage Notes, due June 30, 2013 389 387
6.9% - 16.29% Secured Capital Leases, due through
December 31, 2011 47 47
Other debt, due 1998 through 2019 (rates of 1% to 12.71%) 28 17
- ----------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 2,897 $2,765
============================================================================
The Company has in place a revolving credit facility that was used to finance
the acquisition of Continental. The interest rate on 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, 1997 and 1996, respectively
was 6.16% and 5.72%.
To take advantage of favorable interest rates, CNA established a commercial
paper program to replace borrowings under the revolving credit facility. The
commercial paper borrowings are classified as long-term as $675 million of the
committed bank facility will support the commercial paper program. The weighted
average interest rate on commercial paper at December 31, 1997 was 6.05%
compared to 5.67% at December 31, 1996.
At year end 1997, 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.
To offset the variable rate characteristics of the facility, CNA entered into
interest rate swap agreements with several banks having a total notional
principal amount of $950 million, which terminate from May 2000 to December
2000. These agreements provide that CNA pay interest at a fixed rate, averaging
6.20% at December 31, 1997 and 1996, in exchange for the receipt of interest at
the three month LIBOR rate. The effect of these interest rate swaps was to
increase interest expense by $4 million and $7 million for the years ended
December 31, 1997 and 1996, respectively.
CNA FINANCIAL CORPORATION
-------------------------
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note H - Debt (cont.)
The weighted average interest rate (interest and facility fees) on the variable
rate acquisition debt, which includes the revolving credit facility and
commercial paper was 6.35% and 6.28% at December 31, 1997 and 1996,
respectively. This rate reflects the effect of the interest rate swaps.
On August 18, 1997, CNA filed a Registration Statement on form S-3 with the
Securities and Exchange Commission relating to $1 billion of senior and
subordinated debt and preferred stock that became effective on October 22, 1997.
This new shelf registration incorporated $250 million of securities remaining
available for issuance from a prior shelf registration. On January 8, 1998, the
Company issued $150 million principal amount of 6.45% senior notes due January
15, 2008 and $150 million principal amount of 6.95% senior notes due January 15,
2018. The net proceeds were used to pay down bank loans drawn under the
Company's revolving credit facility. Concurrent with the reduction in bank debt,
the Company terminated $300 million in notional amount of interest rate swaps.
On September 30, 1997, CNA Surety, a 62% owned subsidiary of CNA, entered into a
$130 million, 5 year revolving credit facility. The interest rate on facility
borrowings is based on LIBOR plus 20 basis points. Additionally there is a
facility fee of 10 basis points annually. At year end 1997, the outstanding
borrowings under this facility were $118 million and the weighted average
interest rate was 6.17%. The following table shows the future aggregate minimum
principal payments on debt and capitalized lease obligations:
On March 2, 1998 CNA paid at the due date $150 million of 8 7/8% senior notes
with funds drawn against the revolving credit facility (unaudited).
- ------------------------------------------------------
Future Aggregate Minimum Principal Payments
- ------------------------------------------------------
(In millions of dollars)
1998 $ 155
1999 106
2000 6
2001 1,083
2002 126
Thereafter 1,431
Less: discount (10)
- ------------------------------------------------------
TOTAL $ 2,897
======================================================
CNA FINANCIAL CORPORATION
-------------------------
76
<PAGE>
- -------------------------------------------------------------------------------
Note I -- Benefit Plans
Note I -- Benefit Plans:
- ------------------------
PENSION PLANS
- --------------------------------------------------------------------------------
CNA has noncontributory pension plans covering all full-time employees age 21 or
over who have completed at least one year of service. While the benefits for the
plans vary, they are generally based on years of credited service and the
employee's highest sixty consecutive months of compensation. Effective December
31, 1997, The Continental Corporation retirement plans were merged into the CNA
Employees' Retirement Plan.
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.
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 million.
The funded status is determined using assumptions at the end of the year.
Underfunded plans are those plans for which the accumulated benefit obligation
is in excess of plan assets. Overfunded plans are those plans for which plan
assets exceed the accumulated benefit obligations. Pension cost is determined
using assumptions at the beginning of the year.
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT OBLIGATION
- ---------------------------------------------------------------------------------------
December 31 1997 1996* 1995*
- ---------------------------------------------------------------------------------------
Underfunded Overfunded Underfunded Overfunded Underfunded
Plans Plans Plans Plans Plans
- ---------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Actuarial present value
of accumulated
plan benefits:
Vested $1,340 $517 $623 $491 $646
Nonvested 77 38 32 28 14
- ---------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION $1,417 $555 $655 $519 $660
=======================================================================================
</TABLE>
CNA FINANCIAL CORPORATION
-------------------------
77
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Note I - Benefit Plans (cont.)
NET PENSIONS ASSET (LIABILITY)
- --------------------------------------------------------------------------------------------
December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------
Underfunded Overfunded Underfunded Overfunded Underfunded
Plans Plans Plans Plans Plans
- --------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Projected benefit obligation $1,780 $778 $ 788 $ 770 $ 809
Plan assets at fair value 1,313 702 503 630 496
- --------------------------------------------------------------------------------------------
Plan assets less than
projected benefit
obligation (467) (76) (285) (140) (313)
Unrecognized net asset at
January 1, 1986
being recognized over 12 years (2) (7) -- (12) --
Unrecognized prior service costs 88 19 78 21 104
Unrecognized net loss/(gain) 218 122 (12) 165 13
- --------------------------------------------------------------------------------------------
NET PENSION ASSET (LIABILITY) $ (163) $ 58 $ (219) $ 34 $ (196)
============================================================================================
</TABLE>
<TABLE>
NET PERIODIC PENSION COST
- --------------------------------------------------------------------------------------------
December 31 1997 1996 1995*
- --------------------------------------------------------------------------------------------
Underfunded Overfunded Underfunded Overfunded Underfunded
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 $54 $36 $19 $32 $12
Interest cost on projected
benefit 119 54 57 51 33
obligation
Actual return on plan assets (103) (31) (29) (115) (43)
Net amortization and deferral 17 (16) (6) 72 19
- --------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 87 $43 $41 $40 $21
============================================================================================
* The 1995 data includes The Continental Corporation Retirement Plans from
acquisition date.
</TABLE>
<PAGE>
Actuarial assumptions are set forth in the following table.
Assumptions
- -------------------------------------------------------------------------------
December 31 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Discount rate 7.25% 7.50% 7.25% 8.50%
Rate of increase in compensation levels* 2.75 2.75 2.75 4.00
Expected long-term rate of return on plan assets7.50 7.75-8.50 7.50-8.50 8.75
- -------------------------------------------------------------------------------
*Excludes age/service related merit and productivity increases.
CNA FINANCIAL CORPORATION
-------------------------
78
<PAGE>
- -------------------------------------------------------------------------------
Note I -- Benefit Plans (cont.)
POSTRETIREMENT HEALTH CARE AND LIFE
INSURANCE BENEFITS
- -------------------------------------------------------------------------------
CNA provides certain health care benefits for eligible retirees, through age 64,
and provides life insurance and reimbursement of Medicare Part B premiums for
all eligible retired persons.
Additionally, in conjunction with the Continental merger, CNA is administering a
separate plan for the postretirement health care and life insurance benefits for
Continental employees who retired prior to January 1, 1996. CNA funds benefit
costs principally on the basis of current benefit payments.
ACCRUED POSTRETIREMENT BENEFIT COST
- ------------------------------------------------------------------------------
December 31 1997 1996 1995
- ------------------------------------------------------------------------------
(In millions of dollars)
Accumulated postretirement benefit obligation:
Retirees $202 $172 $186
Fully eligible, active plan participants 72 89 59
Other active plan participants 87 88 63
- ------------------------------------------------------------------------------
Total accumulated postretirement
benefit obligation 361 349 308
Unrecognized net (gain) loss (8) (12) 7
- -------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $353 $337 $315
===============================================================================
NET PERIODIC POSTRETIREMENT BENEFIT COST
- ------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- ------------------------------------------------------------------------------
(In millions of dollars)
Net periodic postretirement benefit cost:
Service cost - benefits attributed to employee
service during the year $10 $12 $ 6
Interest cost on accumulated postretirement
benefit obligation 25 24 18
Amortization -- -- (1)
- -------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $35 $36 $23
===============================================================================
*The 1995 data includes The Continental Corporation Retirement Plans from the
acquisition date.
CNA FINANCIAL CORPORATION
-------------------------
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note I - Benefit Plans (cont.)
ASSUMPTIONS
- ---------------------------------------------------------------------------
December 31 1997 1996 1995
- ----------------------------------------------------------------------------
Discount rate:
Assumptions used in determining
net periodic benefit cost: 7.50% 7.25% 8.50%
Assumptions used in determining
projected benefit obligation (liability) 7.25 7.50 7.25
- ---------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9% in 1997, declining 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,
1997 by $24 million and the aggregate net periodic postretirement benefit cost
for 1997 by $3 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 million, $24 million
and $22 million in 1997, 1996 and 1995, respectively.
CNA FINANCIAL CORPORATION
-------------------------
80
<PAGE>
- ------------------------------------------------------------------------------
Note J -- Leases
Note J -- Leases:
- -----------------
CNA occupies facilities under lease agreements that expire at various dates
throughout 2013. CNA's home office is partially situated on grounds under leases
expiring in 2058. In addition, data processing, office and transportation
equipment are 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. Lease expense, net of sublease
income, for the years ended December 31, 1997, 1996 and 1995 was $100 million,
$85 million and $92 million, respectively.
The table below shows the future minimum lease payments to be made under
noncancelable leases at December 31, 1997.
Future Minimum Lease Payments
- --------------------------------------------
(in millions of dollars)
1998 $141
1999 117
2000 95
2001 82
2002 58
Thereafter 99
- -------------------------------------------
TOTAL $592
===========================================
CNA FINANCIAL CORPORATION
-------------------------
81
<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 1997 1996
- ---------------------------------------------------------------------------
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
-------------------------
82
<PAGE>
------------------------------------------------------------------------------
Note K - Stockholders' Equity and Statutory Financial Information (cont.)
STATUTORY ACCOUNTING PRACTICES
- -------------------------------------------------------------------------------
CNA Financial Corporation's insurance affiliates are domiciled in various
jurisdictions. These affiliates prepare statutory financial statements in
accordance with accounting practices prescribed or otherwise permitted by their
respective jurisdiction's insurance regulator. 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 Financial Corporation's ability to pay dividends to its stockholders is
affected, in part, by receipt of dividends from its affiliates. The payment of
current year dividends to CNA Financial Corporation by its insurance affiliates
without prior approval of the insurance department of each affiliate's
domiciliary jurisdic-tion is limited to prior year formula amounts. As of
December 31, 1997, approximately $677 million of dividend payments were not
subject to prior insurance department approval for 1998 dividend payments.
Statutory capital and surplus and net income, determined in accordance with
accounting practices prescribed by the regulation and statute of various
insurance regulators, for property/casualty and life insurance subsidiaries are
as follows:
- ------------------------------------------------------------------------------
Statutory Capital and Surplus Statutory Net Income
----------------------------- ----------------------
December 31 Year Ended December 31
- ------------------------------------------------------------------------------
1997 1996 1997 1996 1995
- ------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty
Insurance Subsidiaries $7,123 $6,349 $1,043 $1,208 $1,208
Life Insurance Subsidiaries 1,224 1,163 43 58 30
- -------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
-------------------------
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note L -- Discontinued Operations
Note L -- Discontinued Operations:
- ----------------------------------
Certain discontinued operations were acquired as part of the Continental merger.
Operating results of the discontinued operations were as follows:
- -------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
(In millions of dollars)
Revenues:
Premiums $13 $ 2 $ 5
Net investment income 63 47 26
Realized investment gains 3 6 1
Other 1 4 --
- -------------------------------------------------------------------------------
Total revenues 80 59 32
Benefits and expenses 80 59 32
- -------------------------------------------------------------------------------
Income (loss) before income
taxes -- -- --
Income taxes -- -- --
- -------------------------------------------------------------------------------
Income (loss) from
discontinued operations $-- $-- $--
===============================================================================
Net assets of discontinued operations are included in Other Assets, net of
intercompany eliminations, and are as follows:
- -------------------------------------------------------------------------
December 31 1997 1996
- -------------------------------------------------------------------------
(In millions of dollars)
Assets:
Investments $ 726 $ 669
Cash 54 22
Insurance receivables (net) 363 408
Other 156 234
- -------------------------------------------------------------------------
Total assets 1,299 1,333
- -------------------------------------------------------------------------
Liabilities:
Claim and claim expenses 751 847
Other 325 272
- -------------------------------------------------------------------------
Total liabilities 1,076 1,119
- -------------------------------------------------------------------------
Net assets $ 223 $ 214
=========================================================================
CNA FINANCIAL CORPORATION
-------------------------
84
<PAGE>
------------------------------------------------------------------------------
Note M -- Business Segments
Note M -- Business Segments:
- ----------------------------
REVENUES
- ------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- ------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty-commercial $10,590 $10,371 $ 8,939
Property/Casualty-personal 1,860 1,758 1,445
Property/Casualty-involuntary risks (99) 388 388
Life-individual 943 923 777
Life-group 3,025 2,957 2,701
------------------------------
16,319 16,397 14,250
Other and intercompany eliminations -- (28) (14)
- -------------------------------------------------------------------------------
Revenues excluding realized
investment gains (losses) 16,319 16,369 14,236
- -------------------------------------------------------------------------------
Realized investment gains (losses):
Property/Casualty 593 474 321
Life 164 164 139
Other (4) (19) 4
- -------------------------------------------------------------------------------
Total realized investment gains (losses) 753 619 464
- -------------------------------------------------------------------------------
TOTAL REVENUES $17,072 $16,988 $14,700
===============================================================================
*Includes the results of Continental since the acquisition date.
<PAGE>
INCOME (LOSS) BEFORE INCOME TAX
- -----------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- -----------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty-commercial $ 180 $ 770 $ 556
Property/Casualty-personal 271 (18) 25
Property/Casualty-involuntary risks 177 (14) (2)
Life-individual 88 101 65
Life-group 65 70 95
-----------------------------
CNA Insurance 781 909 739
Interest, other and intercompany eliminations (161) (168) (153)
- ----------------------------------------------------------------------------
Income excluding realized
investment gains (losses) 620 741 586
- -----------------------------------------------------------------------------
Realized investment gains (losses)
net of policyholder's interest:
Property/Casualty 593 474 321
Life 149 149 131
Other (4) (19) 4
- ------------------------------------------------------------------------------
Total realized investment gains (losses)
net of policyholders' interest 738 604 456
- ------------------------------------------------------------------------------
TOTAL INCOME BEFORE INCOME TAX $1,358 $1,345 $1,042
==============================================================================
*Includes the results of Continental since the acquisition date.
CNA FINANCIAL CORPORATION
-------------------------
85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note M - Business Segments (cont.)
NET INCOME (LOSS)
- -------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995*
- -------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty-commercial $ 200 $ 586 $ 431
Property/Casualty-personal 184 (6) 22
Property/Casualty-involuntary risks 117 (4) 4
Life-individual 58 66 43
Life-group 42 44 61
--------------------------
601 686 561
Interest, other and intercompany eliminations (113) (108) (98)
- -------------------------------------------------------------------------------
Net income excluding net realized
investment gains (losses) 488 578 463
- -------------------------------------------------------------------------------
Net realized investment gains (losses):
Property/Casualty 384 303 208
Life 96 96 85
Other (2) (12) 1
- --------------------------------------------------------------------------------
Total net realized investment gains (losses) 478 387 294
- -------------------------------------------------------------------------------
TOTAL NET INCOME $ 966 $ 965 $ 757
===============================================================================
*Includes the results of Continental since acquisition date.
ASSETS
- -------------------------------------------------------------------------------
December 31 1997 1996 1995
- -------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty-commercial $39,952 $40,082 $40,622
Property/Casualty-personal 4,282 4,230 4,590
Property/Casualty-involuntary risks 1,955 2,407 2,446
Life-individual 5,206 4,740 3,997
Life-group 9,534 9,274 9,004
---------------------------
60,929 60,733 60,659
Other and intercompany eliminations 340 (278) (299)
- -----------------------------------------------------------------------------
TOTAL ASSETS $61,269 $60,455 $60,360
=============================================================================
CNA FINANCIAL CORPORATION
-------------------------
86
<PAGE>
- ----------------------------------------------------------------------------
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 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, 1997 and 1996, gross exposure of financial guarantee insurance
contracts amounted to $181 million and $582 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 54% and 47% of the
risks were ceded to reinsurers at December 31, 1997 and 1996. Total exposure,
net of reinsurance, amounted to $83 million and $311 million at December 31,
1997 and 1996, respectively. At December 31, 1997 and 1996, collateral
consisting of letters of credit and debt service reserves amounted to $22
million and $28 million, respectively.
Gross unearned premium reserves for financial guarantee contracts were $5
million and $11 million at December 31, 1997 and 1996, respectively. Gross claim
and claim expense reserves totaled $377 million and $371 million at December 31,
1997 and 1996, respectively.
Life revenues include $2.1 billion, $2.1 billion and $1.9 billion in 1997, 1996
and 1995, respectively, under contracts covering U.S. government employees and
their dependents (FEHBP).
CNA FINANCIAL CORPORATION
-------------------------
87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
Note N -- Acquisitions
Note N -- Acquisitions:
- -----------------------
CONTINENTAL ACQUISITION
- -------------------------------------------------------------------------------
On December 6, 1994, CNA entered into a merger agreement to acquire all the
outstanding common stock of The Continental Corporation (Continental) for a
total purchase price of $1.1 billion. The merger was consummated on May 10,
1995. The acquisition of Continental has been accounted for as a purchase;
therefore, Continental's operations were 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.
MERGER WITH CAPSURE HOLDINGS CORP.
- -------------------------------------------------------------------------------
In the fourth quarter of 1996, CNA entered into a merger agreement with Capsure
Holdings Corp. (Capsure) to merge CNA's surety business with the business of
Capsure and form a new stock company, CNA Surety Corporation, in which CNA has
an approximate 62% interest. The transaction closed on September 30, 1997. The
transaction was accounted for as a sale of approximately 38% of CNA's previous
surety business and a purchase of 62% of Capsure. In conjunction with the
closing of the surety transaction, CNA realized an investment gain of $95
million. CNA Surety's results of operations have been included in CNA's
consolidated results of operations, net of minority interest subsequent to
September 30, 1997. At December 31, 1997, total assets of CNA Surety Corporation
were $727 million. CNA Surety's revenues and net income for the three months
ended December 31, 1997 were approximately $71 million and $11 million,
respectively.
CNA FINANCIAL CORPORATION
-------------------------
88
<PAGE>
- -----------------------------------------------------------------------------
Note O -- Unaudited Quarterly Financial Data
Note O -- Unaudited Quarterly Financial Data:
- ---------------------------------------------
- -------------------------------------------------------------------------------
First Second Third Fourth Year
- -------------------------------------------------------------------------------
(In millions of dollars, except per share data)
1997 QUARTERS
Revenues $4,132 $4,243 $4,309 $4,388 $17,072
Net operating income 136 126 121 105 488
Net realized investment gains 42 109 153 174 478
------ ------ ------ ----- ------
Net income 178 235 274 279 966
------ ------ ------ ----- ------
Earnings per share 2.85 3.78 4.41 4.48 15.52
1996 Quarters
Revenues $4,315 $4,095 $4,256 $4,322 $16,988
Net operating income 145 152 161 120 578
Net realized investment gains 184 50 78 75 387
------ ------ ------ ------ ------
Net income 329 202 239 195 965
------ ------ ------ ------ ------
Earnings per share 5.30 3.25 3.83 3.13 15.51
1995 Quarters
Revenues $3,053 $3,659 $4,001 $3,987 $14,700
Net operating income 132 127 103 101 463
Net realized investment gains 21 130 63 80 294
------ ------ ------ ------ -----
Net income 153 257 166 181 757
Earnings per share 2.44 4.12 2.66 2.91 12.14
- -------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION
-------------------------
89
<PAGE>
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
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, 1997 and
1996, and the related statements of consolidated operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
S/DELOITTE & TOUCHE LLP
Chicago, Illinois
February 18, 1998
CNA FINANCIAL CORPORATION
-------------------------
90
<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 2, 1998, was 2,816. As of
March 2, 1998, 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
- -------------------------------------------------------------------
1997 1996
-----------------------------------------------
Quarter HIGH LOW High Low
- -------------------------------------------------------------------
Fourth 131 3/4 119 1/8 108 5/8 95 7/8
Third 130 107 7/8 104 1/2 95 7/8
Second 105 7/16 96 7/8 112 95 3/4
First 114 3/4 103 117 1/2 109 1/2
- ---------------------------------------------------------------------
INVITATION TO THE ANNUAL MEETING
- -------------------------------------------------------------------------------
Shareholders are cordially invited to attend the annual meeting at 10 a.m.
Wednesday, May 6, 1998, 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:
Jonathan D. Kantor
Senior Vice President,
Secretary and General Counsel
CNA Financial Corporation
CNA Plaza, 43 South
Chicago, Illinois 60685
CNA FINANCIAL CORPORATION
-------------------------
91
<PAGE>
CORPORATE DIRECTORY
- -------------------------------------------------------------------------------
DIRECTORS
- -------------------------------------------------------------------------------
Antoinette Cook Bush
Partner; Skadden, Arps, Slate, Meagher & Flom,
Chairperson, Incentive Compensation Committee
Dennis H. Chookaszian Chairman
and Chief Executive Officer,
CNA
Philip L. Engel
President,
CNA
Robert P. Gwinn
Retired Chairman and Chief Executive Officer,
Encyclopaedia 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
Chairperson, Audit Committee;
Retired Chairman of the Board,
First Chicago NBD Corporation and
The First National Bank of Chicago
James S. Tisch
Chairperson, Finance Committee;
President and Chief Operating Officer,
Loews Corporation
Laurence A. Tisch
Chief Executive Officer of CNA Financial Corporation;
Co-Chairman of the Board and
Co-Chief Executive Officer,
Loews Corporation
Preston R. Tisch
Chairperson, 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
-------------------------
92
<PAGE>
OFFICERS
- -------------------------------------------------------------------------------
Laurence A. Tisch
Chief Executive Officer,
CNA Financial Corporation
Dennis H. Chookaszian
Chairman and Chief Executive Officer,
CNA
Philip L. Engel
President,
CNA
William J. Adamson, Jr.
Senior Vice President,
Reinsurance,
CNA
Peter P. Conway, Jr.
Senior Vice President,
Risk Management,
CNA
James P. Flood
Senior Vice President,
Claims,
CNA
Michael C. Garner
Senior Vice President,
CNA Consulting Group and Human Resources,
CNA
Bernard L. Hengesbaugh
Executive Vice President and
Chief Operating Officer,*
CNA
Peter E. Jokiel
Senior Vice President,
Life Operations,
CNA
Jonathan D. Kantor
Senior Vice President,
Secretary and General Counsel,***
CNA Financial Corporation
Patricia L. Kubera
Group Vice President and Controller,
CNA Financial Corporation
Donald M. Lowry****
Senior Vice President,
Secretary and General Counsel,
CNA Financial Corporation
W. James MacGinnitie
Senior Vice President and
Chief Financial Officer,
CNA Financial Corporation
<PAGE>
Michael McGavick
Senior Vice President,
Commercial Operations,
CNA
Carolyn L. Murphy**
Senior Vice President,
Commercial Operations,
CNA
William H. Sharkey, Jr.
Senior Vice President,
Marketing,
CNA
Thomas F. Taylor
Senior Vice President,*
Specialty Operations,
CNA
Adrian M. Tocklin**
Senior Vice President,
Diversified Operations,
CNA
Robert T. Van Gieson
Senior Vice President,
Global Operations,
CNA
Jae L. Wittlich
Senior Vice President,
Group Operations,
CNA
David W. Wroe
Senior Vice President,
Information Technology,
CNA
- ---------------------------
*Effective February 4, 1998
**Retires effective April 1, 1998
***Effective March 6, 1998
****Retired effective March 6, 1998
CNA FINANCIAL CORPORATION
--------------------------
93
<PAGE>
CORPORATE DIRECTORY
- -------------------------------------------------------------------------------
CNA ADMINISTRATIVE OFFICES
- ----------------------------------------------
CNA Plaza
Chicago, Illinois 60685
312/822-5000
TRANSFER AGENT AND REGISTRAR
- -----------------------------------------------
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NY 07303-2500
INDEPENDENT AUDITORS
- ------------------------------------------------
Deloitte & Touche LLP
180 North Stetson Avenue
Chicago, Illinois 60601
CNA FINANCIAL CORPORATION
-------------------------
94
<PAGE>
CNA FINANCIAL CORPORATION
APPENDIX
OMITTED GRAPH MATERIAL AND OTHER
Exhibit 13.1 - CNA Financial Corporation Annual Report:
* Bar graphs of:
- Revenues for the period 1987 through 1997.
- Assets for the period 1987 through 1997.
- Stockholders' equity for the period 1987 through 1997.
- Book value per common share 1987 through 1997.
(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 "Letters to Our
Shareholders", found on pages 4 through 9 of the annual report.
Page Outquotes
4 We see an insurance environment of rapid change with major
opportunities...
5 CNA is on course to build on the opportunities of change and
increase the value of the enterprise.
6 CNA continued as a profitable market leader under some of the
most competitive conditions ever seen in the commercial insurance
marketplace.
7 CNA is the premier provider of commercial insurance for small
and medium size businesses in the United States.
8 CNA's strength in the commercial insurance marketplace extends to
professional and speciality coverages.
9 We continued to develop capabilities for providing more value to
our reinsurance clients and business partners worldwide.
10 CNA's track record of growth in individual life continued for
the fourth year in a row.
11 As we build an insurance organization for the future, 1998 will
be the start of an even more successful second century.
Pages 4 and 5 are quotes from CNA Financial Chairman Edward J.
Noha, and pages 6 through 11 are quotes from CNA Chairman
and Chief Executive Officer Dennis H. Chookaszian
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<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 29,548
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 814
<MORTGAGE> 80
<REAL-ESTATE> 5
<TOTAL-INVEST> 36,203
<CASH> 383
<RECOVER-REINSURE> 5,726
<DEFERRED-ACQUISITION> 2,142
<TOTAL-ASSETS> 61,269
<POLICY-LOSSES> 34,056
<UNEARNED-PREMIUMS> 4,700
<POLICY-OTHER> 132
<POLICY-HOLDER-FUNDS> 742
<NOTES-PAYABLE> 2,897
0
150
<COMMON> 155
<OTHER-SE> 8,004
<TOTAL-LIABILITY-AND-EQUITY> 61,269
13,362
<INVESTMENT-INCOME> 2,209
<INVESTMENT-GAINS> 753
<OTHER-INCOME> 748
<BENEFITS> 11,268
<UNDERWRITING-AMORTIZATION> 2,383
<UNDERWRITING-OTHER> 1,865
<INCOME-PRETAX> 1,358
<INCOME-TAX> 392
<INCOME-CONTINUING> 966
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 966
<EPS-PRIMARY> 15.52
<EPS-DILUTED> 15.52
<RESERVE-OPEN> 23,792
<PROVISION-CURRENT> 7,942
<PROVISION-PRIOR> (113)
<PAYMENTS-CURRENT> 2,514
<PAYMENTS-PRIOR> 5,862
<RESERVE-CLOSE> 23,245
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