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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
AMENDMENT NO.1 TO FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999 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:
THE REGISTRANT HEREBY AMENDS THE FOLLOWING ITEMS, FINANCIAL STATEMENTS,
EXHIBITS OR OTHER PORTIONS OF ITS ANNUAL REPORT ON FORM 10-K, AS AMENDED
FOR THE YEAR ENDED DECEMBER 31, 1999 AS SET FORTH IN THE PAGES ATTACHED
HERETO.
PART I: ITEM 1. BUSINESS.
(TO CORRECT SCHEDULE OF PROPERTY/CASUALTY LOSS RESERVE
DEVELOPMENT ON PAGE 8)
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CNA FINANCIAL CORPORATION
INDEX TO AMENDMENT NO. 1
ANNUAL REPORT ON FORM 10-K/A FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1999
Item Page
Number PART I Number
------ ------
1. Business................................................... 3
Signature.................................................. 10
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PART I
ITEM 1. BUSINESS
CNA Financial Corporation (CNAF or the Company) was incorporated in 1967
and is an insurance holding company whose primary subsidiaries consist of
property/casualty and life insurance companies. Collectively CNAF and its
subsidiaries are referred to as CNA. CNA's property/casualty insurance
operations are conducted by Continental Casualty Company (CCC), incorporated
1897, and its affiliates, and The Continental Insurance Company (CIC), organized
1853, and its affiliates. Life insurance operations are conducted by Continental
Assurance Company (CAC), incorporated 1911, and its life insurance affiliates.
CIC became an affiliate of the Company in 1995 as a result of the acquisition of
The Continental Corporation (Continental). The principal business of Continental
is the ownership of a group of property and casualty insurance companies. CNA
serves 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 pensions products
and annuities. CNA services include risk management, information services,
healthcare management and claims administration. CNA products are marketed
through agents, brokers, managing general agents and direct sales. CNA's
principal market is the United States.
CNA conducts its operations through seven operating segments: Agency Market
Operations, Specialty Operations, CNA Re, Global Operations, Risk Management,
Group Operations and Life Operations. Discussions of each segment including the
products offered, the customers served and the distribution channels used is set
forth in the Management's Discussion and Analysis section of the 1999 Annual
Report to Shareholders, incorporated by reference in Item 7, herein.
On March 20, 2000 CCC proposed to CNA Surety Corporation (CNA Surety) that
CCC make a cash tender offer at $13.00 per share for all shares of CNA Surety
common stock not already owned by CCC and its affiliates. CCC and its affiliates
owned approximately 63 percent of the outstanding shares of CNA Surety common
stock on March 20, 2000. CCC intends to condition the tender offer upon
receiving enough shares so that its ownership reaches at least 90 percent. If
this ownership threshold is achieved, CCC would then acquire the remaining
outstanding shares of CNA Surety common stock not tendered to CCC through a
statutory "short-form" merger process. Stockholders who do not tender their
shares to CCC during the tender offer would also receive $13.00 per share in
cash for their stock in the short-form merger.
COMPETITION
Due to market pressures, the insurance environment remains intensely
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 its 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 5th largest property/casualty
insurance organization based upon 1998 statutory net written premiums.
There are approximately 1,500 companies selling life insurance in the
United States. CAC is ranked as the 35th largest life insurance organization
based on 1998 consolidated statutory premium volume.
DIVIDENDS BY INSURANCE SUBSIDIARIES
The payment of dividends to CNAF by its insurance subsidiaries without
prior approval of the affiliates' domiciliary state insurance commissioners is
limited by formula. This formula varies by state. The formula used by the
majority of the states provides that the greater of 10% of prior year statutory
surplus or prior year statutory net income, less the aggregate of all dividends
paid during the twelve months prior to date of payment is available to be paid
as a dividend to the parent company. Some states, however, have an additional
stipulation that dividends cannot exceed prior year's surplus. Based upon the
formulae applied by the respective domiciliary states of CNAF's
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insurance subsidiaries, approximately $887 million in dividends can be paid to
CNAF by those subsidiaries in 2000 without prior approval. However, all
dividends must be reported to the domiciliary insurance department prior to
declaration and payment.
REGULATION
The insurance industry is subject to comprehensive and detailed regulation
and supervision throughout the United States. Each state has established
supervisory agencies with broad administrative powers relative to licensing
insurers and agents, approving policy forms, establishing reserve requirements,
fixing minimum interest rates for accumulation of surrender values and maximum
interest rates of policy loans, prescribing the form and content of statutory
financial reports, and regulating solvency and the type and amount of
investments permitted. Such regulatory powers also extend to premium rate
regulations which require that rates not be excessive, inadequate or unfairly
discriminatory. In addition to regulation of dividends by insurance subsidiaries
discussed above, intercompany transfers of assets may be subject to prior notice
or approval by the state insurance regulator, depending on the size of such
transfers and payments in relation to the financial position of the insurance
affiliates making the transfer.
Insurers are also required by the states to provide coverage to insureds
who would not otherwise be considered eligible by the insurers. Each state
dictates the types of insurance and the level of coverage 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 U.S. tort liability 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, a number of state courts have modified or overturned these
reforms. Additionally, new causes of action and theories of damages continue to
be proposed in state court actions or by legislatures. Continued
unpredictability in the law means that insurance underwriting and rating is
expected to be difficult in commercial lines, professional liability and some
specialty coverages.
Although the federal government and its regulatory agencies do not directly
regulate the business of insurance, federal legislative and regulatory
initiatives can impact the insurance business in a variety of ways. These
initiatives and legislation include tort reform proposals; proposals to overhaul
the Superfund hazardous waste removal and liability statute; financial services
modernization legislation, which includes provisions to remove barriers that
prevent banks from engaging in the insurance business; and various tax proposals
affecting insurance companies.
In the mid 1990's the National Association of Insurance Commissioners
(NAIC) adopted risk based capital (RBC) requirements for both life insurance
companies and property/casualty insurance companies. The requirements are to be
utilized by state insurance departments as a minimum capital requirement
identifying companies that merit further regulatory action. The formulae were
not developed to differentiate adequately capitalized companies that operate
with capital levels higher than the RBC requirements. Therefore, it is
inappropriate and inadvisable to use the formulae to rate or rank insurers. At
December 31, 1999 and 1998, all of the Company's life and property & casualty
companies had adjusted capital in excess of amounts requiring any regulatory
action.
REINSURANCE
Information as to CNA's reinsurance activities is set forth in Note G of
the Consolidated Financial Statements of the 1999 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
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EMPLOYEE RELATIONS
As of December 31, 1999, CNA had approximately 19,600 full-time equivalent
employees and has experienced satisfactory labor relations. CNA has never had
work stoppages due to labor disputes.
CNA has comprehensive benefit plans for substantially all of its employees,
including retirement plans, savings plans, disability programs, group life
programs and group health care programs. See Note I of the Consolidated
Financial Statements of the 1999 Annual Report to Shareholders for further
discussion, incorporated by reference in Item 8, herein.
GOVERNMENT CONTRACTS
CNA's premium revenue include premiums under contracts involving U.S.
government employees and their dependents. Such premiums were approximately $2.1
billion, $2.0 billion and $2.1 billion in 1999, 1998 and 1997, respectively.
BUSINESS SEGMENTS
Information as to CNA's business segments is set forth in Note M of the
Consolidated Financial Statements of the 1999 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
Additional information as to CNA's business segments is set forth in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the 1999 Annual Report to Shareholders, incorporated by
reference in Item 7, herein.
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SUPPLEMENTARY INSURANCE DATA
The following table sets forth supplementary insurance data.
<TABLE>
<CAPTION>
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YEAR ENDED DECEMBER 31 1999 1998 1997
(In millions of dollars, except ratio information)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TRADE RATIOS - GAAP BASIS (A)
Loss ratio............................... 87.1% 81.8% 77.1%
Expense ratio............................ 32.4 33.6 31.3
Combined ratio (before policyholder dividends) 119.5 115.4 108.4
Policyholder dividend ratio.............. 0.3 1.1 0.5
TRADE RATIOS - STATUTORY BASIS (A)
Loss ratio............................... 87.1% 81.5% 77.5%
Expense ratio............................ 33.8 32.8 30.7
Combined ratio (before policyholder dividends) 120.9 114.3 108.2
Policyholder dividend ratio.............. 0.3 1.0 0.8
GROSS LIFE INSURANCE IN-FORCE
Group.................................... $394,743 $317,720 $239,843
Life (c)................................. 75,247 76,674 71,755
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$469,990 $394,394 $311,598
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OTHER DATA - STATUTORY BASIS (B)
Property/casualty capital and surplus*... $ 8,679 $ 7,623 $ 7,123
Life capital and surplus................. 1,222 1,109 1,223
Written premium to surplus ratio........ 1.1 1.4 1.4
Capital and surplus-percent of total
liabilities.............................. 21.9% 20.5% 22.4%
Participating policyholders-percent of gross
life insurance in force.................. 0.5% 0.5% 0.7%
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</TABLE>
*Surplus includes equity of property/casualty companies' ownership in life
insurance subsidiaries.
(a) Trade ratios reflect the results of CNA's property/casualty insurance
subsidiaries. Trade ratios are industry measures of property/casualty
underwriting results. The loss ratio is the percentage of incurred
claim and claim adjustment expenses to premiums earned. The expense
ratio, using amounts determined in accordance with generally accepted
accounting principles (GAAP), is the percentage of underwriting
expenses, including the amortization of deferred acquisition costs, to
premiums earned. The expense ratio, using amounts determined in
accordance with statutory accounting practices, 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.
(b) Other data is determined in accordance with statutory accounting
practices. Dividends of $570 million, $410 million and $175 million,
were paid to CNAF by CCC in 1999, 1998 and 1997, respectively.
Insurance subsidiaries have received, or will receive, reimbursement
from CNAF for general management and administrative expenses,
unallocated loss adjustment expenses and investment expenses of $203
million, $189 million and $217 million, in 1999, 1998 and 1997,
respectively. Life statutory capital and surplus as a percent of total
liabilities is determined after excluding Separate Account liabilities
and reclassifying the statutorily required Asset Valuation and
Interest Maintenance Reserves as surplus.
(c) Lapse ratios for individual life insurance, as measured by surrenders
and withdrawals as a percentage of average ordinary life insurance in
force, were 10.9%, 14.7%, and 6.4% in 1999, 1998 and 1997,
respectively.
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SUPPLEMENTARY INSURANCE DATA--(CONTINUED)
The following table displays the distribution of gross written premiums for the
CNA's property/casualty operations:
<TABLE>
<CAPTION>
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PERCENT OF TOTAL
GROSS WRITTEN PREMIUM ----------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
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<S> <C> <C> <C>
New York........................................... 8.2% 9.5% 9.9%
California......................................... 7.1 8.2 8.8
Texas.............................................. 5.7 6.0 6.2
Florida............................................ 4.6 4.6 4.8
Pennsylvania....................................... 4.3 4.7 5.1
New Jersey......................................... 3.8 4.4 4.3
Illinois........................................... 3.8 4.5 4.4
All other states, countries or political 46.5 48.0 48.0
subdivisions (a)...................................
Reinsurance assumed................................ 16.0 10.1 8.5
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100.0% 100.0% 100.0%
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</TABLE>
(a) No other state, country or political subdivision accounts for more
than 3.0% of gross written premium.
Approximately 97% of CNA's premiums are derived from the United States.
Premiums from any individual foreign country are not significant.
PROPERTY/CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSES
The following loss reserve development table illustrates the change over
time of reserves established for property/casualty claims and claim adjustment
expenses at the end of the preceding eleven calendar years for CNA's
property/casualty operations. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down, shows
the cumulative amounts paid as of the end of successive years with respect to
the originally reported reserve liability. The third section, reading down,
shows re-estimates of the originally recorded 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.
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PROPERTY/CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSES--(CONTINUED)
The loss reserve development table for property/casualty operations 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>
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SCHEDULE OF PROPERTY/CASUALTY
LOSS RESERVE DEVELOPMENT
CALENDAR YEAR ENDED 1989(A) 1990(A) 1991(A) 1992(A) 1993(A) 1994(A) 1995(B) 1996 1997(C) 1998(D) 1999(E)
(In millions of dollars)
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for unpaid
claim and claim
expenses.................. $20,812 $21,639 $31,044 $29,357 $28,533 $28,317 $26,631
Ceded recoverable......... 2,491 2,705 6,089 5,660 5,326 5,424 5,489
------ ------ ------ ------ ------ ------ ------
Net reserves for unpaid claim
and claim expenses..... $11,267 $13,090 $14,415 $17,167 18,321 18,934 24,955 23,697 23,207 22,893 21,142
------- ------- ------- ------- ------ ------ ------ ------ ------ ------ ------
CUMULATIVE NET PAID AS OF:
One year later............ 2,670 3,285 3,411 3,706 3,629 3,656 6,510 5,851 5,954 7,321 --
Two years later........... 4,724 5,623 6,024 6,354 6,143 7,087 10,485 9,796 11,394 -- --
Three years later......... 6,294 7,490 7,946 8,121 8,764 9,195 13,363 13,602 -- -- --
Four years later.......... 7,534 8,845 9,218 10,241 10,318 10,624 16,271 -- -- -- --
Five years later.......... 8,485 9,726 10,950 11,461 11,378 12,577 -- -- -- -- --
Six years later........... 9,108 11,207 11,951 12,308 13,100 -- -- -- -- -- --
Seven years later......... 10,393 12,023 12,639 13,974 -- -- -- -- -- -- --
Eight years later......... 11,086 12,592 14,271 -- -- -- -- -- -- -- --
Nine years later.......... 11,563 14,159 -- -- -- -- -- -- -- -- --
Ten years later........... 13,035 -- -- -- -- -- -- -- -- -- --
NET RESERVES RE-ESTIMATED AS
OF:
End of initial year....... 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,697 23,207 22,893 21,142
One year later............ 11,336 12,984 16,032 17,757 18,250 18,922 24,864 23,479 23,508 23,920 --
Two years later........... 11,371 14,693 16,810 17,728 18,125 18,500 24,294 23,140 23,717 -- --
Three years later......... 13,098 15,737 16,944 17,823 17,868 18,008 23,814 23,270 -- -- --
Four years later.......... 14,118 15,977 17,376 17,765 17,511 17,354 24,092 -- -- -- --
Five years later.......... 14,396 16,440 17,329 17,560 17,082 17,506 -- -- -- -- --
Six years later........... 14,811 16,430 17,293 17,285 17,176 -- -- -- -- -- --
Seven years later......... 14,810 16,551 17,069 17,398 -- -- -- -- -- -- --
Eight years later......... 14,995 16,487 17,189 -- -- -- -- -- -- -- --
Nine years later.......... 14,973 16,592 -- -- -- -- -- -- -- -- --
Ten years later........... 15,091 -- -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Total net (deficiency)
redundancy................ (3,824) (3,502) (2,774) (231) 1,145 1,428 863 427 (510) (1,027) --
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Reconciliation to gross
re-estimated reserves:
Net reserves re-estimated. 15,091 16,592 17,189 17,398 17,176 17,506 24,092 23,270 23,717 23,920 --
Re-estimated ceded recoverable 1,547 1,858 6,020 5,285 4,547 4,472 --
------ ------ ------ ------ ------ ------ ------
Total gross re-estimated
reserves............... 18,723 19,364 30,112 28,555 28,264 28,392 --
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Net (deficiency) redundancy
related to: Asbestos claims (3,496) (3,365) (3,321) (1,633) (1,033) (999) (811) (910) (806) (560) --
Environmental claims... (978) (972) (929) (886) (445) (276) (197) (136) (138) 84 --
------- ------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Total asbestos and
environmental............. (4,474) (4,337) (4,250) (2,519) (1,478) (1,275) (1,008) (1,046) (944) (476) --
Other claims.............. 650 835 1,476 2,288 2,623 2,703 1,871 1,473 434 (551) --
------- ------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Total net (deficiency)
redundancy................ (3,824) (3,502) (2,774) (231) 1,145 1,428 863 427 (510) (1,027) --
======= ======= ======= ======= ====== ====== ====== ====== ====== ======= ======
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</TABLE>
(a) Reflects reserves of CNA's property/casualty insurance subsidiaries,
excluding Continental reserves, which were acquired on May 10, 1995 (the
Acquisition Date). Accordingly, the reserve development (net reserves recorded
at the end of the year, as initially estimated, less net reserves re-estimated
as of subsequent years) does not include Continental.
(b) Includes Continental gross reserves of $9,713 million and net reserves of
$6,063 million acquired on the Acquisition Date and subsequent development
thereon.
(c) Includes net and gross reserves of acquired companies of $57 million and $64
million.
(d) Includes net and gross reserves of acquired companies of $122 million and
$223 million.
(e) Ceded recoverable excludes reserves transferred under retroactive
reinsurance agreements of $784 million as of December 31, 1999.
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PROPERTY/CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSES--(CONTINUED)
Additional information as to CNA's property/casualty claim and claim
expense reserves and reserve development is set forth in Notes A and E of the
Consolidated Financial Statements of the 1999 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
INVESTMENTS
Information as to the Company's investments is set forth in Notes B and C
of the Consolidated Financial Statements of the 1999 Annual Report to
Shareholders, incorporated by reference in Item 8, herein.
Additional information as to the Company's investments is set forth in the
Management's Discussion and Analysis section of the 1999 Annual Report to
Shareholders, incorporated by reference in Item 7, herein.
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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 Robert V. Deutsch
-----------------------------------
Robert V. Deutsch
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Date: April 18, 2000
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