===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) March 17, 2000
-------------------------------------
CNA FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 1-5823 36-6169860
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
CNA Plaza, Chicago, Illinois 60685
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (312) 822-5000
(Former Name or Former Address, if Changed Since Last Report)
===============================================================================
<PAGE>
Item 5. Other Events
------------
Filed as part of this Current Report on Form 8-K are the consolidated balance
sheets for CNA Financial Corporation and subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999 (the "Financial Statements") and the
independent auditors' report thereon.
Item 7. Financial Statements and Exhibits.
----------------------------------
The Financial Statements, together with the independent auditors' report
theron, are included herein.
(c) Exhibits
23. Independent Auditors' Consent
27. Financial Data Schedule.
99. Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, therunto duly authorized.
CNA FINANCIAL CORPORATION
-------------------------
(Registrant)
Dated: March 17, 2000 By: /s/ Robert V. Deutsch
---------------------
Robert V. Deutsch
Senior Vice President
and Chief Financial Officer
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-69741 and 333-84447 of CNA Financial Corporation and subsidiaries on Form
S-3 and S-8, respectively, of our report dated February 23, 2000, appearing in
the Current Report on Form 8-K of CNA Financial Corporation and subsidiaries
dated March 17, 2000.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 17, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 27,248
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,610
<MORTGAGE> 44
<REAL-ESTATE> 3
<TOTAL-INVEST> 35,560
<CASH> 153
<RECOVER-REINSURE> 8,023
<DEFERRED-ACQUISITION> 2,436
<TOTAL-ASSETS> 61,219
<POLICY-LOSSES> 33,352
<UNEARNED-PREMIUMS> 5,103
<POLICY-OTHER> 121
<POLICY-HOLDER-FUNDS> 710
<NOTES-PAYABLE> 2,881
0
150
<COMMON> 464
<OTHER-SE> 8,324
<TOTAL-LIABILITY-AND-EQUITY> 61,219
13,282
<INVESTMENT-INCOME> 2,101
<INVESTMENT-GAINS> 315
<OTHER-INCOME> 705
<BENEFITS> 11,900
<UNDERWRITING-AMORTIZATION> 2,143
<UNDERWRITING-OTHER> 2,169
<INCOME-PRETAX> (11)
<INCOME-TAX> (88)
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (177)
<NET-INCOME> (130)
<EPS-BASIC> (0.77)
<EPS-DILUTED> (0.77)
<RESERVE-OPEN> 21,869
<PROVISION-CURRENT> 7,287
<PROVISION-PRIOR> 1,027
<PAYMENTS-CURRENT> 2,744
<PAYMENTS-PRIOR> 7,460
<RESERVE-CLOSE> 20,358
<CUMULATIVE-DEFICIENCY> 1,027
</TABLE>
EXHIBIT 99
CNA FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements as of
December 31, 1999 and 1998 and for Each of the
Three Years in the Period Ended December 31, 1999
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31, December 31,
(In millions of dollars, except share data) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities available-for-sale (amortized cost: $27,948 and
$29,511)....................................................................$27,248 $30,073
Equity securities available-for-sale (cost: $1,150 and $1,055).............. 3,610 1,970
Mortgage loans and real estate (less accumulated depreciation: $1 and $1)... 47 62
Policy loans................................................................ 192 177
Other invested assets....................................................... 1,108 858
Short-term investments ..................................................... 3,355 4,037
-------- --------
TOTAL INVESTMENTS......................................................... 35,560 37,177
Cash.......................................................................... 153 217
Receivables:
Reinsurance................................................................. 8,023 6,894
Insurance .................................................................. 4,483 5,198
Less allowance for doubtful accounts........................................ (310) (328)
Deferred acquisition costs.................................................... 2,436 2,422
Prepaid reinsurance premiums.................................................. 1,468 323
Accrued investment income..................................................... 387 392
Receivables for securities sold............................................... 284 255
Federal income taxes recoverable (includes: $241 and $234 due from Loews)..... 269 251
Deferred income taxes......................................................... 852 995
Property and equipment at cost (less accumulated depreciation: $701 and $695). 746 824
Intangibles................................................................... 328 368
Other......................................................................... 1,937 2,241
Separate account business..................................................... 4,603 5,203
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $61,219 $62,432
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Claim and claim adjustment expense ........................................$27,356 $29,154
Unearned premiums.......................................................... 5,103 5,039
Future policy benefits..................................................... 5,996 5,352
Policyholders' funds....................................................... 710 855
Collateral on loaned securities............................................... 1,300 130
Payables for securities purchased............................................. 135 316
Participating policyholders' equity........................................... 121 140
Debt.......................................................................... 2,881 3,160
Other......................................................................... 3,881 3,722
Separate account business..................................................... 4,603 5,203
-------- --------
TOTAL LIABILITIES......................................................... 52,086 53,071
-------- --------
Commitments and contingencies
Minority interest............................................................... 195 204
Stockholders' equity:
Common stock ($2.50 par value;
Authorized as of December 31, 1999 - 500,000,000 shares;
Authorized as of December 31, 1998 - 200,000,000 shares;
Issued - 185,525,907 shares;
Outstanding as of December 31, 1999 - 184,406,931 shares,
Outstanding as of December 31, 1998 - 183,889,569 shares)................... 464 464
Preferred stock............................................................... 150 350
Additional paid-in capital.................................................... 126 126
Retained earnings............................................................. 7,114 7,258
Accumulated other comprehensive income........................................ 1,188 1,064
Treasury stock, at cost....................................................... (41) (61)
--------- --------
9,001 9,201
Notes receivable for the issue of stock....................................... (63) (44)
--------- --------
TOTAL STOCKHOLDERS' EQUITY................................................ 8,938 9,157
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $61,219 $62,432
=====================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
CNA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(In millions of dollars, except per share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums....................................................................$13,282 $13,536 $13,624
Net investment income....................................................... 2,101 2,146 2,209
Realized investment gains, net of participating
policyholders' and minority interests....................................... 315 681 738
Other ..................................................................... 705 799 628
-------- -------- --------
Total revenues 16,403 17,162 17,199
-------- -------- --------
Claims, benefits and expenses:
Insurance claims and policyholders' benefits............................... 11,900 11,847 11,395
Amortization of deferred acquisition costs................................. 2,143 2,180 2,138
Other operating expenses................................................... 2,086 2,321 2,100
Restructuring and other related charges ................................... 83 246 -
Interest................................................................... 202 219 198
-------- -------- --------
Total claims, benefits and expenses 16,414 16,813 15,831
-------- -------- --------
Income (loss) before income tax and cumulative
effect of a change in accounting principle................................. (11) 349 1,368
Income tax benefit (expense)................................................. 88 (47) (392)
Minority interest expense.................................................... (30) (20) (10)
-------- -------- --------
Income before cumulative effect of a change in accounting principle.......... 47 282 966
Cumulative effect of a change in accounting principle, net of tax of $95..... (177) - -
-------- -------- --------
NET INCOME (LOSS).......................................................$ (130) $ 282 $ 966
==========================================================================================================
BASIC AND DILUTED EARNINGS PER SHARE
Net income before cumulative effect of a change in accounting principle......$ 0.19 $ 1.49 $ 5.17
Cumulative effect of a change in accounting principle, net of tax............ (0.96) - -
-------- -------- --------
Income (loss)................................................................$ (0.77) $ 1.49 $ 5.17
======== ======== ========
Weighted average outstanding common shares and
common stock equivalents (in millions of shares)... ..................... 184.2 184.9 185.4
==========================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes
Accumulated Receivable
Additional Other for Total
Common Preferred Paid-in Retained Comprehensive Treasury the Issue Stockholders'
(In millions of dollars) Stock Stock Capital Earnings Income Stock of Stock Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $464 $150 $126 $6,024 $299 $(3) $- $7,060
Comprehensive income:
Net income............ - - - $ 966 - - - 966
Other comprehensive
income.............. - - - - 290 - - 290
-------
Total comprehensive
income............ 1,256
Preferred dividends..... - - - (7) - - - (7)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 464 150 126 6,983 589 (3) - 8,309
Comprehensive income:
Net income............ - - - 282 - - - 282
Other comprehensive
income.............. - - - - 475 - - 475
-------
Total comprehensive
loss.............. 757
Issuance of preferred stock - 200 - - - - - 200
Purchase of treasury stock - - - - - (102) - (102)
Issue of stock for notes
receivable......... - - - - - 44 (44) -
Preferred dividends..... - - - (7) - - - (7)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 464 350 126 7,258 1,064 (61) (44) 9,157
Comprehensive income:
Net loss.............. - - - (130) - - - (130)
Other comprehensive
income.............. - - - - 124 - - 124
--------
Total comprehensive
loss.............. (6)
Redemption of preferred
stock................. - (200) - - - - - (200)
Issue of stock for
notes receivable........ - - - (1) - 20 (19) -
Preferred dividends..... - - - (13) - - - (13)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $464 $150 $126 $7,114 $1,188 $(41) $(63) $8,938
====================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------
Year Ended December 31
(In millions of dollars) 1999 1998 1997
- ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income (loss)........................ $ (130) $ 282 $ 966
--------------------------------
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Minority interest ..................... 30 20 10
Deferred income tax provision.......... 43 47 144
Net realized investment gains.......... (315) (681) (738)
Amortization of intangibles............ 23 93 30
Amortization of bond discount.......... (39) (208) (100)
Depreciation........................... 185 166 158
Changes in:
Receivables, net..................... (472) 718 147
Deferred acquisition costs........... 1 (280) (288)
Accrued investment income............ 6 (3) 119
Federal income taxes recoverable..... (17) (233) 116
Prepaid reinsurance premiums......... (1,145) (121) 93
Insurance reserves................... (1,190) 586 (133)
Other................................ 376 101 (717)
- ---------------------------------------------------------------------------
Total adjustments .................. (2,514) (1,231) (1,159)
- ---------------------------------------------------------------------------
NET CASH FLOWS FROM
OPERATING ACTIVITIES ............. (2,644) (949) $ (193)
- ---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Purchases of fixed maturity securities... $(45,515) $(39,039) $(42,492)
Proceeds from fixed maturity securities:
Sales................................. 43,587 35,480 38,429
Maturities, calls and redemptions..... 2,996 3,564 2,997
Purchases of equity securities........... (1,575) (1,071) (1,323)
Proceeds from sale of equity securities.. 1,803 848 1,406
Change in short-term investments......... 703 823 1,112
Change in collateral on loaned
securities............................... 1,170 (23) 53
Change in other investments.............. 151 62 421
Purchases of property and equipment,
net.................................... (250) (261) (280)
Acquisitions, net of cash acquired....... (19) (120) (104)
Other, net............................... 86 180 (7)
- ---------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES 3,137 443 (212)
- ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Dividends paid to preferred stockholders.. $ (13) $ (7) $ 6
Purchase of treasury stock................ - (102) -
Receipts from investment
contracts credited to policyholder
account balances....................... 7 6 7
Return of policyholder account
balances on investment contracts.......... (78) (20) (26)
Principal payments on long-term debt........ (450) (730) (5)
Proceeds from issuance of long-term debt.... 177 993 137
Issuance (redemption) of preferred stock.... (200) 200 -
Net cash flows from financing activities.... (557) 340 107
Net change in cash.......................... (64) (166) 126
- ---------------------------------------------------------------------------
CASH AT BEGINNING OF PERIOD.............. 217 383 257
- ---------------------------------------------------------------------------
CASH AT END OF PERIOD $ 153 $ 217 $ 383
===========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------
Cash paid:
Interest expense......................... $ 201 $ 210 $ 201
Federal income taxes..................... 279 143 95
Non-cash transactions:
Notes receivable for the issue of stock.. 19 44 -
Exchange of Canary Wharf Limited
Partnership interest into common stock. 539 - -
===========================================================================
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------------
BASIS OF PRESENTATION
The consolidated financial statements include CNA Financial Corporation and its
subsidiaries, 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), collectively CNA or the Company. Loews Corporation
(Loews) owns approximately 86% of the outstanding common stock of the Company.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP). Certain amounts
applicable to prior years have been reclassified to conform with the 1999
presentation. All material intercompany amounts have been eliminated.
The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
BUSINESS
CNA serves a wide spectrum of customers, including small, medium and large
businesses; associations; professionals; and groups and individuals with a broad
range of insurance and risk management products and services.
Insurance products include property and casualty coverages; life, accident and
health insurance; and pension products and annuities. CNA services include risk
management, information services, healthcare management, claims administration
and employee leasing/payroll processing. CNA products and services are marketed
through agents, brokers, managing general agents and direct sales.
INSURANCE
PREMIUM REVENUES
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 annuities are recognized as revenue when due after
deductions for ceded insurance premiums.
CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES
Claim and claim adjustment expense reserves, except reserves for structured
settlements, workers' compensation lifetime claims and accident and health
disability claims, are not discounted and are based on (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, (d) estimates of future expenses to be incurred in
settlement of claims and (e) estimates of claim recoveries, exclusive of
reinsurance recoveries which are reported as an asset. Management considers
current conditions and trends as well as past Company and industry experience in
establishing these estimates. The effects of inflation, which can be
significant, are implicitly considered in the reserving process and are part of
the recorded reserve balance.
Claim and claim adjustment expense reserves represent management's estimates of
ultimate liabilities based on currently available facts and case law and the
ultimate liability may vary significantly from such estimates. CNA regularly
reviews its reserves, and any adjustments to the previously established reserves
are recognized in operating income in the period 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 fixed periodic payments to claimants. Certain structured settlements are
funded by annuities purchased from Continental Assurance Company for which the
related annuity obligations are reported in future policy benefits reserves.
Obligations for structured settlements not funded by annuities are included in
claim and claim adjustment expense reserves and carried at present values
determined using interest rates ranging from 6.0% to 7.5%. At December 31, 1999
and 1998 the discounted reserves for unfunded structured settlements were $883
million and $893 million, respectively (net of discounts of $1,483 million and
$1,511 million, respectively).
Workers' compensation lifetime claim reserves and accident and health disability
claim reserves are calculated using mortality and morbidity assumptions based on
the Company's and industry experience, and are discounted at interest rates
allowed by insurance regulators that range from 3.5% to 6.0%. At December 31,
1999 and 1998, such discounted reserves totaled $2,174 million and $2,277
million, respectively (net of discounts of $893 million and $869 million,
respectively).
FUTURE POLICY BENEFITS RESERVES
Reserves for traditional life insurance products (whole and term life products)
are computed using the net level premium method, which incorporates actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions generally vary by plan, age at issue and policy
duration, and include a margin for adverse deviation. Interest rates range from
3% to 9% and mortality, morbidity and withdrawal assumptions are based on CNA
and industry experience prevailing at the time of issue. Expense assumptions
include the estimated effects of inflation and expenses to be incurred beyond
the premium paying period. Reserves for universal life-type contracts are equal
to the account balances that accrue to the benefit of the policyholders.
Interest crediting rates ranged from 4.45% to 7.25% for the three years ended
December 31, 1999.
INVOLUNTARY RISKS
CNA's participation in involuntary risk pools is mandatory and generally a
function of its proportionate share of the voluntary market, by line of
insurance, in each state in which it does business. In the first quarter of
1999, CNA adopted Statement of Position 97-3 "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments"(SOP 97-3). SOP 97-3 requires that
insurance companies recognize liabilities for insurance-related assessments when
an assessment is probable and will be imposed, when it can be reasonably
estimated, and when the event obligating the entity to pay an imposed or
probable assessment has occurred on or before the date of the financial
statements. Adoption of SOP 97-3 resulted in an after-tax charge of $177 million
as a cumulative effect of a change in accounting principle. The pro forma effect
of adoption on reported results for prior periods is not significant.
REINSURANCE
Amounts recoverable from reinsurers are estimated in a manner consistent with
claim and claim adjustment expense reserves or future policy benefits reserves
and reported as a recoverable in the consolidated balance sheets.
DEFERRED ACQUISITION COSTS
Costs of acquiring property/casualty insurance business that 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 future policy benefits 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 duration. To the extent that unrealized gains or losses on
available-for-sale securities would result in an adjustment of deferred policy
acquisition costs, had those gains or losses actually been realized, an
adjustment to deferred acquisition costs is recorded as an adjustment to
unrealized investment gains or losses which are included in accumulated other
comprehensive income and reported as a component of stockholders' equity.
INVESTMENTS
VALUATION OF INVESTMENTS
CNA classifies its fixed maturity securities (bonds and redeemable preferred
stocks) and its equity securities as available-for-sale, and as such, they are
carried at fair value. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity,
and amortization and accretion are included in investment income. Changes in
fair value are reported as a component of other comprehensive income.
Investments are written down to estimated fair values, and losses are recognized
in income, when a decline in value is determined to be other than temporary.
Mortgage loans are carried at unpaid principal balances, including unamortized
premium or discount. Real estate is carried at depreciated cost. Policy loans
are carried at unpaid balances. Short-term investments are carried at amortized
cost, which approximates fair value.
Other invested assets include joint ventures, limited partnerships, certain
derivative securities and other investments. The joint ventures and limited
partnerships are carried at CNA's equity in the investees' net assets. CNA
accounts for its derivative securities at fair value. Under this method, the
derivative securities are recorded in the consolidated balance sheets at fair
value at the reporting date and changes in fair value are recognized in realized
investment gains and losses. For interest rate swaps associated with certain
corporate borrowings, amounts due or payable under these swaps are recorded as
an adjustment to interest expense and changes in the fair value of the swaps are
not recognized in the Company's consolidated financial statements.
INVESTMENT GAINS AND LOSSES
All securities transactions are recorded on the trade date. Realized investment
gains and losses are determined on the basis of the amortized cost of the
specific securities sold.
EQUITY IN AFFILIATES
CNA uses the equity method of accounting for investments in companies in which
its ownership interest of the voting shares is at least twenty percent but not
greater than fifty percent. Equity in operating income of these affiliates is
reported in other income. Equity in investment gains or losses is included in
realized investment gains or losses, or other comprehensive income, as
appropriate.
SECURITIES LENDING ACTIVITIES
CNA lends securities to unrelated parties, primarily major brokerage firms.
Borrowers of these securities must deposit collateral with CNA equal to 100% of
the fair value of the securities if the collateral is cash, or 102% if the
collateral is securities. Cash deposits from these transactions are invested in
short-term investments (primarily commercial paper) and a liability is
recognized for the obligation to return the collateral. CNA continues to receive
the interest on loaned debt securities as beneficial owner, and accordingly,
loaned debt securities are included in fixed maturity securities.
SEPARATE ACCOUNT BUSINESS
Continental Assurance Company and Valley Forge Life Insurance Company write
investment and annuity contracts. The supporting assets and liabilities of
certain of these contracts are legally segregated and reported as assets and
liabilities of separate account business. Continental Assurance Company
guarantees principal and a specified return to the contractholders on
approximately 53% and 64% of the separate account business at December 31, 1999
and 1998, respectively. Substantially all assets of the separate account
business are carried at fair value. Separate account liabilities are carried at
contract values.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
Temporary differences primarily relate to insurance reserves (principally
discounting of claim and claim adjustment expense reserves and differences in
the calculation of unearned premium reserves), deferred acquisition costs and
net unrealized investment gains or losses.
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.
EARNINGS PER SHARE
Earnings per share applicable to common stock are based on weighted-average
outstanding shares, retroactively adjusted for all stock splits. The computation
of earnings per share for the years ended December 31, 1999, 1998 and 1997 was
as follows:
EARNINGS PER SHARE
- -----------------------------------------------------------------------------
Year ended December 31
(In millions of dollars) 1999 1998 1997
- -----------------------------------------------------------------------------
Net income (loss) $ (130) $ 282 $ 966
Less: Preferred dividends (13) (7) (7)
- -----------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (143) $ 275 $ 959
Weighted average outstanding common shares
and common stock equivalents (in millions
of shares) 184.2 184.9 185.4
- -----------------------------------------------------------------------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.77) $ 1.49 $ 5.17
=============================================================================
NOTE B - INVESTMENTS:
- ---------------------
The significant components of net investment income are presented in the
following table:
NET INVESTMENT INCOME
- ------------------------------------------------------------------
Year ended December 31
(In millions of dollars) 1999 1998 1997
- ------------------------------------------------------------------
Fixed maturity securities $ 1,776 $ 1,832 $ 1,817
Short-term investments 188 241 321
Other 178 126 118
- ------------------------------------------------------------------
2,142 2,199 2,256
Investment expenses (41) (53) (47)
- ------------------------------------------------------------------
NET INVESTMENT INCOME $ 2,101 $ 2,146 $ 2,209
==================================================================
Net realized investment gains (losses) and net unrealized appreciation
(depreciation) in investments are set forth in the following table:
NET INVESTMENT APPRECIATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year ended December 31
(In millions of dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized investment gains (losses): Fixed maturity
securities:
Gross realized gains $ 269 $ 621 $ 651
Gross realized losses (580) (154) (199)
- -------------------------------------------------------------------------------------------
Net realized gains (losses) on fixed maturity securities (311) 467 452
Equity securities:
Gross realized gains 481 119 137
Gross realized losses (115) (81) (34)
- -------------------------------------------------------------------------------------------
Net realized gains on equity securities 366 38 103
Other realized investment gains 253 190 198
- -------------------------------------------------------------------------------------------
Total net realized investment gains 308 695 753
Allocation to participating policyholders and minority interest 7 (14) (15)
Income tax expense (123) (247) (260)
- -------------------------------------------------------------------------------------------
Net realized investment gains 192 434 478
- -------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) in investments:
Fixed maturity securities (1,262) 34 347
Equity securities 1,545 796 (38)
Other 33 (112) 72
- -------------------------------------------------------------------------------------------
Total net unrealized appreciation in investments 316 718 381
Net change in unrealized appreciation (depreciation) on separate
accounts and other (74) 5 -
Allocation to participating policyholders and minority interest 24 (6) (9)
Deferred income tax expense (100) (249) (101)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation in investments 166 468 271
- -------------------------------------------------------------------------------------------
NET APPRECIATION IN INVESTMENTS $ 358 $ 902 $ 749
===========================================================================================
</TABLE>
Other realized investment gains for the years ended December 31, 1999 and 1997,
include gains and losses related to the sale of certain operations or
affiliates. See Note O.
The following table provides a summary of investments in fixed maturity
securities and equity securities available-for-sale:
SUMMARY OF FIXED MATURITY AND EQUITY SECURITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(In millions of dollars) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
United States Treasury securities and obligations
of government agencies $ 8,431 $ 14 $ 127 $ 8,318
Asset-backed securities 7,253 14 228 7,039
States, municipalities and political subdivisions
- tax-exempt 4,514 16 134 4,396
Corporate securities 5,502 34 303 5,233
Other debt securities 2,185 36 89 2,132
Redeemable preferred stocks 63 72 5 130
- --------------------------------------------------------------------------------------------
Total fixed maturity securities 27,948 186 886 27,248
Equity securities 1,150 2,635 175 3,610
- --------------------------------------------------------------------------------------------
TOTAL $29,098 $ 2,821 $ 1,061 $30,858
============================================================================================
DECEMBER 31, 1998
United States Treasury securities and obligations
of government agencies $ 7,568 $ 183 $ 17 $ 7,734
Asset-backed securities 8,096 130 12 8,214
States, municipalities and political subdivisions
- tax-exempt 6,127 206 12 6,321
Corporate securities 5,074 135 143 5,066
Other debt securities 2,610 104 70 2,644
Redeemable preferred stocks 36 60 2 94
- --------------------------------------------------------------------------------------------
Total fixed maturity securities 29,511 818 256 30,073
Equity securities 1,055 1,051 136 1,970
- --------------------------------------------------------------------------------------------
TOTAL $30,566 $ 1,869 $ 392 $32,043
============================================================================================
</TABLE>
The following table summarizes fixed maturity securities by contractual maturity
at December 31, 1999:
CONTRACTUAL MATURITY
- ------------------------------------------------------------------------
COST OR
AMORTIZED FAIR
(In millions of dollars) COST VALUE
- ------------------------------------------------------------------------
Due in one year or less $ 1,554 $ 1,541
Due after one year through five years 6,513 6,388
Due after five years through ten years 7,040 6,557
Due after ten years 5,588 5,723
Asset-backed securities 7,253 7,039
- ------------------------------------------------------------------------
TOTAL $ 27,948 $ 27,248
========================================================================
Actual maturities may differ from contractual maturities because some securities
may be called or prepaid with or without call or prepayment penalties.
The carrying value of investments (other than equity securities) that did not
produce income during 1999 was $54 million. At December 31, 1999, the fair value
of the Company's investments in the common stock of Global Crossing, Ltd.
(Global Crossing) and the Vista Fund (a money market fund) were $1,822 million
and $903 million, respectively. No other investments, other than investments in
U.S. government securities, exceeded 10% of stockholders' equity.
RESTRICTED INVESTMENTS
On December 30, 1993, CNA deposited $987 million in an escrow account pursuant
to the Fibreboard Global Settlement Agreement. 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 $36 million and $1,130 million at
December 31, 1999 and 1998, respectively. During 1999, the Company paid
approximately $1.1 billion from escrow to the Fibreboard Trust, which was
established to administer claims pursuant to the Trilateral Agreement. See Note
F.
The Company may from time to time invest in securities that have a limited
market or the sale of which may be restricted in whole or in part. In May 1999,
Global Crossing entered into a transaction to merge Frontier Corporation
(Frontier) into a subsidiary of Global Crossing. As part of the Frontier merger
agreement, certain shareholders of Global Crossing, including the Company,
entered into a voting agreement to limit their sales of Global Crossing common
stock to ensure that 51% of the outstanding shares of Global Crossing would vote
in favor of the merger. A large proportion of those shareholders, including the
Company, also agreed to suspend their rights under a shareholders' agreement and
a registration rights agreement until the closing of the Frontier transaction.
The voting agreement was amended on September 2, 1999 to continue the limitation
on sales and to delay the exercise of those rights described in the previous
sentence until the earlier of the termination of the Frontier transaction or six
months after the closing of the Frontier transaction. The Frontier merger closed
on September 28, 1999. Beginning on March 28, 2000, the Company has the right to
require Global Crossing to register up to 25% of the Company's holdings under
the Securities Act of 1933 (the Act), and beginning on August 13, 2000, to
require Global Crossing to register up to an additional 25% of the Company's
holdings. The Company's holdings of Global Crossing were not acquired in a
public offering, and may not be sold to the public unless the sale is registered
or exempt from the registration requirements of the Act. Such exemptions will
include sales pursuant to Rule 144 under the Act if such sales meet the
requirements of the Rule. Subsequent to December 31, 1999, CNA entered into
option agreements intended to hedge a substantial portion of the market risk
associated with approximately half of its holdings of Global Crossing.
Cash and securities with carrying values of $1.8 billion and $1.7 billion were
deposited by the Company's insurance subsidiaries under requirements of
regulatory authorities as of December 31, 1999 and 1998, respectively.
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 for which
it is practicable to estimate fair value, whether or not such values are
recognized in the consolidated balance sheets. Management attempts to obtain
quoted market prices for the purposes of these disclosures. Where quoted market
prices are not available, fair values are estimated using present value or other
valuation techniques. These techniques are significantly affected by
management's assumptions, including discount rates and estimates of future cash
flows. Potential taxes and other transaction costs have not been considered in
estimating fair values. The estimates presented herein are not necessarily
indicative of the amounts that CNA would realize in a current market exchange.
Non-financial instruments--such as real estate, deferred acquisition costs,
property and equipment, deferred income taxes and intangibles--and certain
financial instruments specifically identified in the accounting literature--such
as insurance reserves and leases--are excluded from the fair value disclosures.
Thus, the fair value amounts cannot be aggregated to determine the underlying
economic value of the Company.
The carrying amounts reported in the consolidated balance sheets for cash,
short-term investments, accrued investment income, receivables for securities
sold, federal income taxes recoverable, securities sold under repurchase
agreements, payables for securities purchased and certain other assets and other
liabilities approximate fair value because of the short-term nature of these
items. These assets and liabilities are not listed in the following tables.
The carrying amounts and estimated fair values of CNA's other financial
instrument assets and liabilities are listed in the following tables. Derivative
financial instruments are shown in a separate table.
FINANCIAL ASSETS
- ------------------------------------------------------------------------------
1999 1998
-------------------- ----------------------
December 31 CARRYING ESTIMATED Carrying Estimated
(In millions of dollars) AMOUNT FAIR VALUE Amount Fair Value
- ------------------------------------------------------------------------------
Investments:
Fixed maturity securities $27,248 $27,248 $30,073 $30,073
Equity securities 3,610 3,610 1,970 1,970
Mortgage loans 44 42 57 61
Policy loans 192 179 177 173
Other invested assets 1,108 1,108 858 858
Separate account business:
Fixed maturity securities 3,260 3,260 4,155 4,155
Equity securities 260 260 297 297
Other 493 493 216 216
Notes receivable for the issue
of stock 63 56 44 39
- ------------------------------------------------------------------------------
The following methods and assumptions were used by CNA in estimating the fair
value for the above financial assets.
The fair values of fixed maturity securities and equity securities were based on
quoted market prices, where available. For securities not actively traded, fair
values were estimated using values obtained from independent pricing services or
quoted market prices of comparable instruments.
The fair values for mortgage loans and policy loans were estimated using
discounted cash flow analyses at interest rates currently offered for similar
loans to borrowers of comparable credit quality. Loans with similar
characteristics were aggregated for purposes of these calculations.
Valuation techniques to determine fair value of other invested assets and other
separate account business assets consisted of discounting cash flows and
obtaining quoted market prices of the investments, comparable instruments or the
underlying assets of the investments.
FINANCIAL LIABILITIES
- ------------------------------------------------------------------------------
1999 1998
------------------- ---------------------
December 31 CARRYING ESTIMATED Carrying Estimated
(In millions of dollars) AMOUNT FAIR VALUE Amount Fair Value
- ------------------------------------------------------------------------------
Premium deposits and annuity
contracts $ 1,293 $ 1,240 $ 1,259 $ 1,205
Debt 2,881 2,775 3,160 3,179
Financial guarantee contracts 111 100 240 231
Separate account business:
Guaranteed investment contracts 1,516 1,518 2,423 2,478
Variable separate accounts 1,505 1,505 1,268 1,268
Deferred annuities 117 125 85 102
Other 571 571 600 600
- ------------------------------------------------------------------------------
Premium deposits and annuity contracts were valued based on cash surrender
values and the outstanding fund balances.
CNA's senior notes and debentures were valued based on quoted market prices. The
fair value for other long-term debt was estimated using discounted cash flow
analyses based on current incremental borrowing rates for similar borrowing
arrangements.
The fair value of the liability for financial guarantee contracts was based on
discounted cash flows utilizing interest rates currently offered for similar
contracts.
The fair values of guaranteed investment contracts and deferred annuities of the
separate account business were estimated using discounted cash flow calculations
based on interest rates currently offered for similar contracts with similar
maturities. The fair values of the liabilities for variable separate account
business were based on the quoted market values of the underlying assets of each
variable separate account. The fair value of other separate account liabilities
approximate their carrying value because of their short-term nature.
DERIVATIVE FINANCIAL INSTRUMENTS
CNA invests in derivative financial instruments in the normal course of business
primarily to reduce its exposure to market risk (principally interest rate,
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. Other than
derivatives held in certain separate accounts, the Company generally does not
hold or issue these instruments for trading purposes. CNA also uses derivatives
to mitigate the risk associated with its indexed group annuity contracts by
purchasing S&P 500 futures contracts in a notional amount equal to the portion
of the customer liability related to S&P 500 exposure.
The gross notional principal or contractual amounts of derivative financial
instruments in the general account at December 31, 1999 and 1998 were $2,062
million and $1,667 million, respectively. The gross notional principal or
contractual amounts of derivative financial instruments in the separate accounts
were $1,627 million and $1,193 million at December 31, 1999 and 1998,
respectively. The contractual or notional amounts are used to calculate the
exchange of contractual payments under the agreements and are not representative
of the potential for gain or loss on these instruments.
The fair values associated with derivative financial instruments are generally
affected by interest rates, equity prices and foreign currency exchange rates.
The credit exposure associated with non-performance by the counterparties to
these instruments is generally limited to the gross fair value asset related to
the instruments recognized in the consolidated balance sheets. The Company
continuously monitors the credit worthiness of its counterparties. The Company
generally does not require collateral from its derivative investment
counterparties.
The fair value of derivatives generally represent the estimated amounts that CNA
would expect to receive or pay upon termination of the contracts at the
reporting date. Dealer quotes are available for substantially all of CNA's
derivatives. For derivative instruments not actively traded, fair values are
estimated using values obtained from independent pricing services, costs to
settle or quoted market prices of comparable instruments.
A summary of the aggregate contractual or notional amounts, estimated fair
values and gains or losses related to derivative financial instruments as of and
for the year ended December 31, 1999 and 1998 are presented below.
SUMMARY OF DERIVATIVE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
FAIR VALUE
------------------------
DECEMBER 31, 1999 CONTRACTUAL RECOGNIZED
(In millions of dollars) NOTIONAL AMOUNT ASSET (LIABILITY) GAIN (LOSS)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GENERAL ACCOUNT
- ---------------
Interest rate swaps on corporate $ 650 $ -- $ -- $ --
borrowings
Total return swaps 7 -- -- 11
Interest rate caps 500 4 -- 4
Commitments to purchase government
and municipal securities 127 -- (1) (1)
Futures sold, not yet purchased 153 -- -- 9
Forwards 591 9 -- 21
Options purchased 25 4 -- (5)
Options written 9 -- -- --
- ----------------------------------------------------------------------------------------------
TOTAL $2,062 $ 17 $ (1) $ 39
==============================================================================================
SEPARATE ACCOUNTS
- -----------------
Futures purchased $1,113 $ -- $ -- $ 131
Futures sold, not yet purchased 79 -- -- 2
Forwards -- -- -- --
Commitments to purchase government
and municipal securities 228 -- (2) (4)
Options purchased 108 1 -- (1)
Options written 99 -- -- 4
- ----------------------------------------------------------------------------------------------
TOTAL $1,627 $ 1 $ (2) $ 132
==============================================================================================
</TABLE>
SUMMARY OF DERIVATIVE FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
FAIR VALUE
------------------------
DECEMBER 31, 1998 CONTRACTUAL/ RECOGNIZED
(In millions of dollars) NOTIONAL AMOUNT ASSET (LIABILITY) GAIN (LOSS)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GENERAL ACCOUNT
- ---------------
Interest rate swaps on corporate $ 650 $ -- $ (10) $ --
borrowings
Total return swaps 78 -- (10) (30)
Interest rate caps 500 1 -- (2)
Futures sold, not yet purchased 158 -- -- (3)
Forwards 211 -- (1) (6)
Options purchased 70 3 -- 51
Options written -- -- -- 2
- ----------------------------------------------------------------------------------------------
TOTAL $1,667 $ 4 $ (21) $ 12
==============================================================================================
SEPARATE ACCOUNTS
- -----------------
Futures purchased $ 928 $ 2 $ -- $ 156
Futures sold, not yet purchased 51 -- -- (1)
Forwards 2 -- -- --
Commitments to purchase government
and municipal securities 69 1 -- 4
Options purchased 77 1 -- (1)
Options written 66 -- -- 2
- ----------------------------------------------------------------------------------------------
TOTAL $1,193 $ 4 $ -- $ 160
==============================================================================================
</TABLE>
The Company has entered into interest rate swap agreements to convert the
variable rate of its borrowings under a revolving credit facility and its
commercial paper program to a fixed rate. The Company was party to interest rate
swap agreements with several banks with an aggregate notional principal amount
of $650 million, at December 31, 1999 and 1998. Those agreements, which
terminate from May 2000 to December 2000, effectively fix the Company's interest
cost on $650 million of variable rate debt for the years ending December 31,
1999 and 1998.
CNA also has outstanding total return swaps which primarily represent an
exchange of the 90-day treasury bill rate for the 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 contract inception, with delivery
and settlement at a specified future date.
Commitments to purchase government and municipal securities are agreements to
purchase securities in the future at a predetermined price.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
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.
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 tax return. In the event that Loews
should have a net operating loss in the future computed on the basis of filing a
separate consolidated tax return without the CNA Tax Group, CNA may be required
to repay tax recoveries previously received from Loews. This agreement between
Loews and CNA may be canceled by either party upon thirty days written notice.
For 1999 and 1998, the inclusion of the CNA Tax Group in the consolidated
Federal income tax return of Loews has resulted in a decreased Federal income
tax liability for Loews. Accordingly, Loews has paid or will pay to CNA
approximately $288 million for 1999 and $83 million for 1998. In 1997, the
inclusion of the CNA Tax Group into the consolidated Federal income tax return
of Loews increased the Loews Federal income tax liability. Accordingly, CNA has
paid Loews approximately $210 million for 1997.
At December 31, 1999, the CNA Tax Group had accumulated net operating losses of
approximately $390 million from 1999 and 1998, available to be carried back or
forward. These net operating losses expire beginning in 2018.
A reconciliation between the Federal income tax at statutory rates and CNA's
effective income taxes, after giving effect to minority interest, but before
giving effect to the cumulative effect of a 1999 change in accounting principle
for SOP 97-3 is as follows:
TAX RATE RECONCILIATION
- ----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(In millions of dollars) 1999 1998 1997
- ----------------------------------------------------------------------------
Income tax (benefit) expense at statutory rates $(14) $115 $475
Tax benefit from tax exempt income (84) (103) (91)
Other expense, including state income taxes 10 35 8
- ----------------------------------------------------------------------------
EFFECTIVE INCOME TAX (BENEFIT) EXPENSE $(88) $ 47 $392
============================================================================
The composition of CNA's total income tax (benefit) expense allocated between
operating income and realized investment gains and losses, excluding the
cumulative effect of the 1999 change in accounting principle for SOP 97-3 is as
follows:
COMPONENTS OF TAX PROVISION
- ----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(In millions of dollars) 1999 1998 1997
- ----------------------------------------------------------------------------
Income tax (benefit) expense on operating income $(211) $(200) $132
Income tax expense on realized investment gains 123 247 260
- ----------------------------------------------------------------------------
TOTAL INCOME TAX (BENEFIT) EXPENSE $ (88) $ 47 $392
============================================================================
The current and deferred components of CNA's income tax (benefit) expense,
excluding the cumulative effect of the 1999 change in accounting principle for
SOP 97-3, are as follows:
CURRENT AND DEFERRED TAXES
- ----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(In millions of dollars) 1999 1998 1997
- ----------------------------------------------------------------------------
Current tax (benefit) expense $(226) $ - $248
Deferred tax expense 138 47 144
- ----------------------------------------------------------------------------
TOTAL INCOME TAX (BENEFIT) EXPENSE $ (88) $ 47 $392
============================================================================
On January 1, 1999, CNA adopted SOP 97-3, and as a result, an accrued liability
was established for financial reporting purposes, but not for income tax
purposes. Consequently on January 1, 1999, as part of the $177 million
cumulative after-tax effect of SOP 97-3, a deferred tax asset of $95 million was
established. During 1999, changes in this assessment accrual reduced the
associated deferred tax asset by $23 million. The deferred tax effect of this
assessment accrual and other significant components of CNA's deferred tax assets
and liabilities as of December 31, 1999 and 1998, respectively, are set forth in
the table below.
COMPONENTS OF NET DEFERRED TAX ASSETS
- ------------------------------------------------------------------------
DECEMBER 31
(In millions of dollars) 1999 1998
- ------------------------------------------------------------------------
Gross deferred tax assets:
Insurance reserves:
Property/casualty claim reserves $ 1,058 $ 1,183
Unearned premium reserves 335 372
Life reserves 213 195
Other insurance reserves 26 27
Postretirement benefits other than pensions 149 142
Net operating losses 137 -
Accrued assessments and guarantees 72 -
Restructuring costs 10 56
Other 257 295
- ------------------------------------------------------------------------
TOTAL GROSS DEFERRED TAX ASSETS 2,257 2,270
- ------------------------------------------------------------------------
Gross deferred tax liabilities:
Deferred acquisition costs (778) (748)
Net unrealized gains (627) (527)
- ------------------------------------------------------------------------
TOTAL GROSS DEFERRED TAX LIABILITIES (1,405) (1,275)
- ------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ 852 $ 995
========================================================================
CNA has a history of profitability and as such, CNA's management believes it is
more likely than not that the deferred tax assets will be realized.
NOTE E - CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES:
- -----------------------------------------------------
CNA's property/casualty insurance claim and claim adjustment expense reserves
represent the estimated amounts necessary to settle all outstanding claims,
including claims 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 factors can affect the estimation of reserves.
Establishing loss reserves is an estimation process. Many factors can ultimately
affect the final settlement of a claim and, therefore, the reserve that is
needed. Changes in the law, results of litigation, medical costs, the cost of
repair materials and labor rates can all 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
estimable than long-tail claims, such as general liability and professional
liability claims.
The table below provides a reconciliation between beginning and ending claim and
claim adjustment expense reserves for 1999, 1998 and 1997.
RECONCILIATION OF CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended December 31
(In millions of dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves at beginning of year:
Gross $28,317 $28,533 $29,357
Ceded 5,424 5,326 5,660
- -------------------------------------------------------------------------------------------------
Net reserves at beginning of year 22,893 23,207 23,697
Net reserves transferred under retroactive reinsurance agreements (1,024) -- --
Net reserves of acquired insurance companies at date of acquisition -- 122 57
- -------------------------------------------------------------------------------------------------
Total net adjustments (1,024) 122 57
- -------------------------------------------------------------------------------------------------
Net incurred claims and claim adjustment expenses:
Provision for insured events of current year 7,287 7,903 7,942
Increase (decrease) in provision for insured events of prior years 1,027 263 (256)
Amortization of discount 139 143 143
- -------------------------------------------------------------------------------------------------
Total net incurred 8,453 8,309 7,829
- -------------------------------------------------------------------------------------------------
Net payments attributable to:
Current year events 2,744 2,791 2,514
Prior year events 7,460 5,954 5,862
Reinsurance recoverable against net reserves transferred under
retroactive reinsurance agreements (240) -- --
- -------------------------------------------------------------------------------------------------
Total net payments 9,964 8,745 8,376
- -------------------------------------------------------------------------------------------------
Net reserves at end of year 20,358 22,893 23,207
Ceded reserves at end of year 6,273 5,424 5,326
- -------------------------------------------------------------------------------------------------
GROSS RESERVES AT END OF YEAR* $26,631 $28,317 $28,533
=================================================================================================
</TABLE>
* Excludes life claim and claim adjustment expense reserves and
intercompany eliminations of $725 million, $837 million and $987
million as of December 31, 1999, 1998 and 1997, respectively, included in the
consolidated balance sheets.
The increase (decrease) in provision for insured events of prior years (reserve
development) is comprised of the following components:
RESERVE DEVELOPMENT
- -----------------------------------------------------------------------
Year Ended December 31
(In millions of dollars) 1999 1998 1997
- -----------------------------------------------------------------------
Asbestos $ 560 $ 243 $ 105
Environmental pollution and other mass tort (84) 227 --
Other 551 (207) (361)
- -----------------------------------------------------------------------
TOTAL $1,027 $ 263 $(256)
=======================================================================
ENVIRONMENTAL POLLUTION, OTHER MASS TORT 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. These claims relate to accident years 1989 and prior, which coincides
with CNA's adoption of the Simplified Commercial General Liability coverage that
includes an absolute pollution exclusion. 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,
allocation of liability among triggered policies, 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 1999 and it is unclear as to
what positions the Congress or the Administration will take in 2000 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 significantly reduced in favor of state action. Substantial
changes in the federal statute or the activity of the EPA may cause states to
reconsider their environmental clean-up statutes and regulations. There can be
no meaningful prediction of the pattern of regulation that would result.
Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to clean-up, and the
standards for clean-up and liability, the ultimate liability of CNA for
environmental pollution claims may vary substantially from the amount currently
recorded.
As of December 31, 1999 and 1998, CNA carried approximately $463 million and
$787 million, respectively, of claim and claim adjustment expense reserves, net
of reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims. In 1999, CNA recorded $84 million of favorable
development compared to $227 million of adverse development in 1998. The changes
were based upon the Company's continuous review of these types of exposures, as
well as its internal study and annual analysis of environmental pollution and
other mass tort claims. The 1999 analysis indicated favorable results in the
number of new claims being reported in the other mass tort area. The 1998
analysis indicated deterioration in claim experience related mainly to pollution
claims.
CNA's insurance subsidiaries also 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 as for
environmental pollution claims discussed above, such as inconsistency of court
decisions, specific policy provisions, allocation of liability among insurers,
missing policies and proof of coverage. As of December 31, 1999 and 1998, CNA
carried approximately $684 million and $1,456 million, respectively, of claim
and claim adjustment expense reserves, net of reinsurance recoverables, for
reported and unreported asbestos-related claims. In 1999, CNA recorded $560
million of adverse development compared to $243 million of adverse development
in 1998. The reserve strengthening in 1999 for asbestos related claims, was a
result of management's continuous review of development with respect to these
exposures, as well as a review of the results of the Company's annual analysis
of these claims which was completed in conjunction with the study of
environmental pollution and other mass tort claims. This analysis indicated
continued deterioration in claim counts for asbestos related claims.
The results of operations in future years may continue to be adversely affected
by environmental pollution and other mass tort, and asbestos claim mass claims
and claim adjustment expenses. Management will continue to monitor these
liabilities and make further adjustments as warranted.
The following table provides additional data related to CNA's environmental
pollution, other mass tort and asbestos-related claim and claim adjustment
expense reserves.
ENVIRONMENTAL POLLUTION, OTHER MASS TORT AND ASBESTOS RESERVES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1999 1998
-------------------------------- -----------------------------
ENVIRONMENTAL Environmental
December 31 POLLUTION AND Pollution and
(In millions of dollars) OTHER MASS TORT ASBESTOS Other Mass Tort Asbestos
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross reserves $ 618 $ 946 $ 828 $1,547
Less ceded reserves (155) (262) (41) (91)
- --------------------------------------------------------------------------------------------
NET RESERVES $ 463 $ 684 $ 787 $1,456
============================================================================================
</TABLE>
OTHER PROPERTY AND CASUALTY RESERVES
Other lines unfavorable claim and claim adjustment expense reserve development
for 1999 of $551 million was due to unfavorable loss development of
approximately $540 million for standard commercial lines, approximately $60
million for medical malpractice, and approximately $70 million for accident and
health. These unfavorable changes were partially offset by favorable development
of approximately $120 million in non-medical professional liability and assumed
reinsurance on older accident years. The unfavorable development in standard
commercial lines was due to commercial automobile liability and workers
compensation losses being higher than expected in recent accident years. In
addition, the number of claims reported for commercial multiple-peril liability
claims from older accident years has not decreased as much as expected. The
unfavorable development for medical malpractice was also due to losses being
higher than expected for recent accident years. The accident and health
unfavorable development is due to higher than expected claim reporting on
assumed personal accident coverage in recent accident years.
Other lines favorable claim and claim adjustment expense reserve development for
1998 of $207 million was due to favorable loss development of approximately $100
million in commercial lines business and approximately $105 million of favorable
loss development in personal lines business. The favorable development in the
commercial lines business was primarily attributable to improved frequency and
severity in the commercial auto lines for older accident years, as well as some
continued improvement in workers' compensation for older years. The favorable
development in the personal lines business was attributable to improved trends,
particularly in personal auto liability.
FINANCIAL GUARANTEE RESERVES
Through August 1, 1989, CNA's property/casualty operations wrote financial
guarantee insurance in the form of surety bonds, and also insured equity
policies. These bonds primarily represented industrial development bond
guarantees and, in the case of insured equity policies, typically extended in
initial terms from ten to thirteen years. For these guarantees and policies CNA
received an advance premium, which is non-refundable and is recognized over the
exposure period and in proportion to the underlying risk insured.
At December 31, 1999 and 1998, gross exposure of financial guarantee surety
bonds and insured equity policies was $352 million and $507 million,
respectively. The degree of risk to CNA related to this exposure is
substantially reduced through reinsurance, diversification of exposures and
collateral requirements. In addition, security interests in improved real estate
are also commonly obtained on the financial guarantee risks. Approximately 37%
and 36% of the risks were ceded to reinsurers at December 31, 1999 and 1998,
respectively. Total exposure, net of reinsurance, amounted to $222 million and
$323 million at December 31, 1999 and 1998, respectively. At December 31, 1999
and 1998, collateral consisting of letters of credit, cash reserves and debt
service reserves amounted to $62 million and $38 million, respectively.
Gross unearned premium reserves for financial guarantee contracts were $11
million and $8 million at December 31, 1999 and 1998, respectively. Gross claim
and claim adjustment expense reserves totaled $100 million and $232 million at
December 31, 1999 and 1998, respectively.
NOTE F - LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES:
- --------------------------------------------------------
FIBREBOARD CORPORATION LITIGATION
An agreement between Continental Casualty Corporation (Casualty), Pacific
Indemnity and Fibreboard Corporation (Fibreboard) (the Trilateral Agreement) has
obtained final court approval and its implementation has substantially resolved
Casualty's exposure with respect to asbestos claims involving Fibreboard. The
Trilateral Agreement calls for payment by Casualty and Pacific Indemnity of an
aggregate $2.0 billion, of which Casualty's portion is approximately $1.46
billion, to Fibreboard to resolove (a) all claims by Fibreboard and (b) all
filed but unsettled asbestos claims as of August 23, 1993, and all future
asbestos claims against Fibreboard. Casualty has paid all amounts required under
this obligation of the Trilateral Agreement. Casualty is also obligated to pay
asbestos claims settled as of August 23, 1993.
Through December 31, 1999, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 133,000 claims, for an
estimated settlement amount of approximately $1.63 billion plus any applicable
interest. Approximately $1.72 billion (including interest of $184 million) was
paid by Casualty through December 31, 1999. Such payments have been partially
recovered from Pacific Indemnity.
While there does exist the possibility of further adverse developments with
respect to Fibreboard claims, management does not anticipate subsequent reserve
adjustments, if any, to materially affect the equity of CNA. Management will
continue to monitor the potential liabilities with respect to Fibreboard
asbestos claims and will make adjustments to claim reserves if warranted. During
1999, the Company paid approximately $1.1 billion from escrow to the Fibreboard
Trust, which was established to administer claims pursuant to the Trilateral
Agreement.
TOBACCO LITIGATION
Three insurance subsidiaries of the Company are defendants in a lawsuit arising
out of policies allegedly issued to Liggett Group, Inc. (Liggett). Although it
did not issue policies to Liggett, the Company also has been named as a
defendant in this lawsuit, which was filed by Liggett and Brooke Group Holding
Inc. in Delaware Superior Court, New Castle County on January 26, 2000. The
lawsuit, which involves numerous insurers, concerns coverage issues relating to
hundreds of tobacco-related claims asserted against Liggett over the past twenty
years. However, Liggett only began submitting claims for coverage under the
policies in January 2000. All of the policies issued by subsidiaries of the
Company that have been located to date contain exclusions for tobacco-related
claims. Based on facts and circumstances currently known, management believes
that the ultimate outcome of the pending litigation should not materially affect
the financial condition of CNA.
IGI CONTINGENCY
In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an
arrangement with IOA Global, Ltd. (IOA), an independent managing general agent
based in Philadelphia, Pennsylvania, to develop and manage a book of accident
and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies,
Ltd. (IGI), a personal accident reinsurance managing general underwriter, was
appointed to underwrite and market the book under the supervision of IOA. Over
the past three years, IGI bound CNA Re Ltd. on a number of reinsurance
arrangements with respect to personal accident insurance worldwide (the IGI
Program). Under various arrangements CNA Re Ltd. both assumed risks as a
reinsurer and also ceded a substantial portion of those risks to other
companies, including other CNA Insurance subsidiaries and ultimately a group of
reinsurers participating in a reinsurance pool known as the Associated Accident
and Health Reinsurance Underwriters (AAHRU) Facility. CNA's Group Health
business unit participated as a pool member in the AAHRU Facility in varying
percentages over the past three years.
CNA has undertaken a review of the IGI Program and, among other things, has
determined that approximately $20 million of premium was assumed by CNA Re Ltd.
with respect to United States workers' compensation "carve-out" insurance. CNA
is aware that a number of reinsurers with respect to such carve-out insurance
have disavowed their obligations under various legal theories. If one or more
such companies are successful in avoiding or reducing their liabilities, then it
is likely that CNA's liability will also be reduced. Moreover, based on
information known at this time, CNA reasonably believes it has strong grounds
for avoiding altogether a substantial portion of its carve-out exposure through
legal action.
As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. Although CNA believes it has valid and
enforceable reinsurance contracts with the AAHRU Facility and other reinsurers
with respect to United States workers' compensation carve-out business, it is
unable to predict to what extent such reinsurers would dispute their liabilities
to CNA. Legal actions could result, and the resolution of any such actions could
take years.
CNA has a reserve of $50 million as of December 31, 1999 with respect to the
United States workers' compensation carve-out exposure it incurred through the
IGI Program. These reserves were established net of estimated recoveries from
retrocessionaires and the estimate of ultimate losses is subject to
consideragble uncertainty. As a result of these uncertainties, the results of
operations in future years may be adversely affected by potentially significant
reserve additions. Management does not believe that any such future reserve
additions will be material to equity.
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.
NOTE G - 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 and CNA's retained
amount varies by type of coverage. Generally, property risks are reinsured on an
excess of loss, per risk basis. Liability coverages are generally reinsured on a
quota share basis in excess of CNA's retained risk. CNA's life reinsurance
includes coinsurance, yearly renewable term and facultative programs.
The ceding of insurance does not discharge the primary liability of the Company.
CNA places reinsurance with carriers only after careful review of the nature of
the contract and a thorough assessment of the reinsurers' credit quality and
claims settlement practices. Further, CNA generally requires collateral,
primarily in the form of bank letters of credit from carriers that are not
authorized reinsurers in CNA's states of domicile. Such collateral was
approximately $1,191 million and $774 million at December 31, 1999 and 1998,
respectively.
CNA's largest recoverables from a single reinsurer, including prepaid
reinsurance premiums, were approximately $788 and $510 million at December 31,
1999, and were with The Allstate Corporation (Allstate) and Lloyds of London,
respectively.
Insurance claims and policyholders' benefits are net of reinsurance recoveries
of $3,272 million, $994 million and $1,309 million for 1999, 1998 and 1997,
respectively.
Life premiums are primarily from long duration contracts and property/casualty
premiums and accident and health premiums are primarily from short duration
contracts.
The effects of reinsurance on earned premiums are shown in the following table:
COMPONENTS OF EARNED PREMIUMS
- -----------------------------------------------------------------------------
Year Ended December 31
(In millions of dollars) Direct Assumed Ceded Net
- -----------------------------------------------------------------------------
1999 EARNED PREMIUMS:
Property/casualty $ 9,158 $ 1,816 $ 2,199 $ 8,775
Accident and health 3,730 198 397 3,531
Life 1,174 222 420 976
- -----------------------------------------------------------------------------
TOTAL 1999 EARNED PREMIUMS $14,062 $ 2,236 $ 3,016 $13,282
=============================================================================
1998 EARNED PREMIUMS:
Property/casualty $ 8,327 $ 1,549 $ 897 $ 8,979
Accident and health 3,745 176 256 3,665
Life 1,014 159 281 892
- -----------------------------------------------------------------------------
TOTAL 1998 EARNED PREMIUMS $13,086 $ 1,884 $ 1,434 $13,536
=============================================================================
1997 EARNED PREMIUMS:
Property/casualty $ 8,528 $ 1,101 $ 612 $ 9,017
Accident and health 3,723 259 280 3,702
Life 908 128 131 905
- -----------------------------------------------------------------------------
TOTAL 1997 EARNED PREMIUMS $13,159 $ 1,488 $ 1,023 $13,624
=============================================================================
The effects of reinsurance on written premiums are shown in the following
table:
COMPONENTS OF WRITTEN PREMIUMS
- -----------------------------------------------------------------------------
Year Ended December 31
(In millions of dollars) Direct Assumed Ceded Net
- -----------------------------------------------------------------------------
1999 WRITTEN PREMIUMS:
Property/casualty $ 9,114 $ 1,948 $ 3,262 $ 7,800
Accident and health 3,764 194 412 3,546
Life 1,177 196 429 944
- -----------------------------------------------------------------------------
TOTAL 1999 WRITTEN PREMIUMS $14,055 $ 2,338 $ 4,103 $12,290
=============================================================================
1998 WRITTEN PREMIUMS:
Property/casualty $ 8,765 $ 1,429 $ 969 $ 9,225
Accident and health 3,785 178 257 3,706
Life 1,014 159 281 892
- -----------------------------------------------------------------------------
TOTAL 1998 WRITTEN PREMIUMS $13,564 $ 1,766 $ 1,507 $13,823
=============================================================================
1997 WRITTEN PREMIUMS:
Property/casualty $ 8,576 $ 1,262 $ 693 $ 9,145
Accident and health 3,592 133 155 3,570
Life 908 128 131 905
- -----------------------------------------------------------------------------
TOTAL 1997 WRITTEN PREMIUMS $13,076 $ 1,523 $ 979 $13,620
=============================================================================
The impact of reinsurance on life insurance in-force is shown in the following
table:
COMPONENTS OF LIFE INSURANCE IN-FORCE
- --------------------------------------------------------------------------
December 31
(In millions of dollars) Direct Assumed Ceded Net
- --------------------------------------------------------------------------
1999 $339,255 $ 130,735 $184,376 $285,614
1998 297,488 96,906 128,896 265,498
1997 235,468 76,130 74,262 237,336
==========================================================================
NOTE H - DEBT:
Debt consists of the following obligations at December 31, 1999 and 1998:
DEBT
- ------------------------------------------------------------------------
December 31
(In millions of dollars) 1999 1998
- ------------------------------------------------------------------------
Variable rate debt:
Commercial paper $ 675 $ 500
Credit facility - CNA 77 235
Credit facility - CNA Surety 100 113
Senior notes:
8.25%, due April 15, 1999 - 100
7.25%, due March 1, 2003 143 147
6.25%, due November 15, 2003 249 249
6.50% , due April 15, 2005 497 497
6.75%, due November 15, 2006 248 248
6.45%, due January 15, 2008 149 149
6.60%, due December 15, 2008 199 199
8.375%, due August 15, 2012 81 98
6.95%, due January 15, 2018 148 148
7.25% debenture, due November 15, 2023 247 247
11.0% secured mortgage notes, due June 30, 2013 - 157
6.9% - 17.02% secured capital leases, due
through December 31, 2011 42 46
Other debt, due through 2019 (rates of 1.0% to 6.60%) 26 27
- ------------------------------------------------------------------------
TOTAL DEBT $2,881 $3,160
========================================================================
CNA has a $795 million revolving credit facility (the Facility) that expires in
May 2001. The amount available under the Facility is reduced by CNA's
outstanding commercial paper borrowings. As of December 31, 1999, there was $43
million of unused borrowing capacity under the Facility. The interest rate on
the Facility was equal to the London Interbank Offered Rate (LIBOR), plus 16
basis points. Additionally, there was an annual facility fee of 9 basis points
on the entire facility. The average interest rate on the borrowings under the
Facility, excluding facility fees, at December 31, 1999 and 1998, was 6.66% and
5.49%, respectively.
The weighted-average interest rate on commercial paper at December 31, 1999 was
6.50% compared to 5.89% at December 31, 1998. Generally, commercial paper has a
weighted average maturity of 40 days.
To offset the variable rate characteristics of the Facility and the interest
rate risk associated with periodically reissuing commercial paper, CNA is party
to interest rate swap agreements with several banks, which have an aggregate
notional principal amount of $650 million at both December 31, 1999 and 1998,
and which terminate from May 2000 to December 2000. These agreements require CNA
to pay interest at a fixed rate, averaging 6.07% at both December 31, 1999 and
1998, in exchange for the receipt of the three month LIBOR. The effect of the
interest rate swaps was to increase interest expense by approximately $4
million, $2 million and $4 million for the years ending December 31, 1999, 1998
and 1997, respectively.
The combined weighted-average cost of borrowings, including facility fees, of
the Facility, commercial paper borrowings and interest rate swaps was 6.47% and
6.36% at December 31, 1999 and 1998, respectively.
On February 15, 2000, Standard & Poor's lowered the Company's senior debt rating
from A- to BBB and lowered the Company's preferred stock rating from BBB to BB+.
As a result of these actions the facility fee payable on the aggregate amount of
the Facility was increased to 12 1/2 basis points per annum and the interest
rate on the Facility was increased to LIBOR plus 27 1/2 basis points.
In 1998, CNA issued $1 billion of senior notes under a $1 billion Registration
Statement on Form S-3 filed with the Securities and Exchange Commission on
August 18, 1997. This shelf registration incorporated $250 million of securities
remaining available for issuance from a prior shelf registration. Since filing
the shelf registration, the Company has issued senior notes in four separate
offerings with an aggregate principal amount of $1 billion.
On April 15, 1999, CNA retired $100 million of 8.25% senior notes.
On August 2, 1999, the Company repaid its $157 million, 11% Secured Mortgage
Notes, due June 30, 2013. The gain realized on the transaction was not
significant.
CNA Surety Corporation (CNA Surety), a 63% owned subsidiary of the Company, has
entered into a $130 million, 5 year revolving credit facility that expires in
September 2002. The interest rate on facility borrowings is based on LIBOR plus
20 basis points. Additionally, there is an annual facility fee of 10 basis
points on the entire facility. The average interest rate on the borrowings under
this facility, including facility fees, at December 31, 1999 and 1998, was 6.49%
and 5.53%, respectively.
The combined aggregate maturities for debt at December 31, 1999, are presented
in the following table:
MATURITY OF DEBT
- ----------------------------------------------------------
Year Ended December 31
(In millions of dollars)
- ----------------------------------------------------------
2000 $ 3
2001 755
2002 103
2003 399
2004 5
Thereafter 1,632
Less original issue discount (16)
- ----------------------------------------------------------
TOTAL $ 2,881
==========================================================
Commercial paper is reported as due in 2001 in the foregoing table because the
commercial paper program is fully supported by the Facility.
NOTE I - BENEFIT PLANS:
- ------------------------
PENSION AND POSTRETIREMENT HEALTHCARE AND LIFE
INSURANCE BENEFIT PLANS
CNA sponsors noncontributory pension plans covering all full-time employees age
21 or over who have completed at least one year of service. While the terms of
the plans vary, benefits are generally based on years of credited service and
the employee's highest sixty consecutive months of compensation.
CNA's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plans are invested
primarily in U.S. government securities with the balance in mortgage backed
securities, equity investments and short-term investments.
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. The funding for these plans is generally to pay
covered expenses as they are incurred.
In 1999, the Company recorded curtailment and other related charges of
approximately $8 million related to the transfer of personal lines insurance
business to Allstate as discussed in Note O. This transaction resulted in a
reduction of the pension and postretirement benefit obligations of $44 million
and $2 million, respectively.
A 1999 amendment to the postretirement plan that affected early retirement
eligibility and level of employer subsidy resulted in a net reduction in the
postretirement benefit obligation of approximately $40 million at December 31,
1999.
Additionally, in 1999, the Company amended its benefit plans to introduce RSKCo
Choice. The amendment resulted in a reduction in the pension and postretirement
benefit obligations of approximately $10 million and $8 million, respectively.
In 1998, CNA amended the Continental Post-Retirement Plan to make the benefits
available to Continental retirees equivalent to the benefits available to CNA
retirees. As a result of this amendment, the Company's consolidated
postretirement benefit obligation was reduced by $99 million.
The Company recorded curtailment charges of approximately $19 million in 1998
related to its restructuring activities as discussed in Note N. These
curtailments resulted in a reduction of the pension and postretirement benefit
obligations of $88 million and $34 million, respectively.
The following table provides a reconciliation of benefit obligations:
BENEFIT OBLIGATIONS AND ACCRUED BENEFIT COSTS
- -----------------------------------------------------------------------------
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- -----------------
(In millions of dollars) 1999 1998 1999 1998
- -----------------------------------------------------------------------------
Benefit obligation at January 1 $1,900 $1,780 $ 321 $ 377
Change in benefit obligation:
Service cost 64 58 11 11
Interest cost 129 126 22 28
Participants' contributions - - 4 5
Plan amendments (10) - (48) (99)
Actuarial gain (loss) (130) 118 (5) 67
Curtailment (44) (88) (2) (34)
Special termination benefits 3 - - -
Acquisition 2 - - -
Benefits paid (99) (94) (35) (34)
- -----------------------------------------------------------------------------
Benefit obligation at December 31 1,815 1,900 268 321
- -----------------------------------------------------------------------------
Fair value of plan assets at January 1 1,424 1,313 - -
Change in plan assets:
Actual return on plan assets (17) 105 - -
Acquisition 2 - - -
Company contributions 142 100 31 29
Participants' contributions - - 4 5
Benefits paid (99) (94) (35) (34)
- -----------------------------------------------------------------------------
Fair value of plan assets at December 31 1,452 1,424 - -
- -----------------------------------------------------------------------------
Funded status (363) (476) (268) (321)
Unrecognized net actuarial loss 173 239 41 51
Unrecognized prior service cost (benefit) 39 60 (132) (97)
- -----------------------------------------------------------------------------
ACCRUED BENEFIT COST $ (151) $ (177) $ (359) $ (367)
=============================================================================
The components of net periodic benefit costs are presented in the following
table:
NET PERIODIC BENEFIT COSTS
- --------------------------------------------------------------------------
POSTRETIREMENT
PENSION BENEFITS BENEFITS
Year ended December 31 ------------------ -----------------
(In millions of dollars) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------
Service cost $ 64 $ 58 $ 54 $ 11 $ 11 $ 10
Interest cost on projected
benefit obligation 129 126 119 22 28 25
Expected return on plan assets (100) (97) (98) - - -
Prior service cost amortization 6 10 11 (13) (4) -
Actuarial loss 8 4 6 3 1 -
Transition amount amortization - (2) (5) - - -
Curtailment loss 8 17 - - 2 -
- --------------------------------------------------------------------------
NET PERIODIC BENEFIT COST $ 115 $ 116 $ 87 $ 23 $ 38 $ 35
==========================================================================
Actuarial assumptions are set forth in the following table:
ACTUARIAL ASSUMPTIONS
- ------------------------------------------------------------------------------
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- --------------------
December 31 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------
Discount rate 7.75% 6.75% 7.25% 7.75% 6.75% 7.25%
Expected return on plan assets 8.00 7.00 7.50 N/A N/A N/A
Rate of compensation increases 5.70 5.70 5.70 N/A N/A N/A
- ------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8% in 1999, 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,
1999 by $12 million and the aggregate net periodic postretirement benefit cost
for 1999 by $2 million. A decrease in the assumed health care cost trend rate of
1% in each year would decrease the accumulated postretirement benefit obligation
as of December 31, 1999 by $11 million and the aggregate net periodic
postretirement benefit cost for 1999 by $2 million.
SAVINGS PLANS
CNA sponsors savings plans, which are generally contributory plans, that allow
employees to make regular contributions of up to 16% of their salary, subject to
contain limitations prescribed by the Internal Revenue Service. CNA contributes
an additional amount equal to 70% of the first 6% of salary contributed by the
employee.
Contributions by the Company to the savings plans were $23 million, $25 million
and $23 million in 1999, 1998 and 1997, respectively.
STOCK OPTIONS
The Board of Directors approved the CNA Long-Term Incentive Plan (the LTI Plan)
during the third quarter of 1999, which authorizes the grant of options to
certain management personnel for up to 2.0 million shares of the Company's
common stock. All options granted have 10-year terms and vest ratably over the
four-year period following the date of grant. The number of shares available for
the granting of options under the LTI Plan as of December 31, 1999, was
approximately 1.7 million.
The following table presents activity under the LTI Plan during 1999:
OPTION PLAN ACTIVITY
- ---------------------------------------------------------------------
Weighted
Average
Option
Number of Price Per
Shares Share
- ---------------------------------------------------------------------
Balance at January 1, 1999 - $ -
Options granted 294,900 35.21
Options forfeited 3,600 35.09
Options exercised - -
- ---------------------------------------------------------------------
Balance at December 31, 1999 291,300 $ 35.21
=====================================================================
The weighted-average remaining contractual life of options granted was 9.6 years
and the range of exercise prices on those options was $35.09 to $36.53. No
options were exercisable at December 31, 1999.
The fair value of granted options was estimated at the grant date using the
Black-Scholes option-pricing model. The weighted-average fair value of options
granted during 1999 was $11.82. The following weighted-average assumptions were
used for the year ended December 31, 1999: risk free interest rate of 6.2%;
expected dividend yield of 0.0%; expected option life of five years; and
expected stock price volatility of 22.9%.
CNA Surety has reserved shares of its common stock for issuance to directors,
officers, employees and certain advisors of CNA Surety through incentive stock
options, non-qualified stock options and stock appreciation rights under a
separate plan (CNA Surety Plan). CNA Surety has also reserved shares of its
common stock for issuance to Capsure Holdings Corp. (Capsure) option holders
under the CNA Surety Corporation Replacement Stock Option Plan (Replacement
Plan). The CNA Surety Plan and the Replacement Plan have an aggregate number of
3.0 million shares available for which options may be granted. At December 31,
1999, approximately 1.2 million options were outstanding under these two plans.
The Company follows the financial disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123) with respect to its stock-based incentive plans.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
plan as permitted by Statement 123. Accordingly, no compensation cost has been
recognized for any of the aforementioned plans, as the exercise price of the
granted options equaled the market price of the underlying stock at the grant
date. However, had the Company applied the fair value provision of Statement
123, the Company's net income, including the pro forma effect of the options
issued under the CNA Surety Plan and the Replacement Plan, for the year ended
December 31, 1999, would have been a loss of $131 million, or loss per share of
$0.78.
NOTE J - LEASES:
- ----------------
CNA occupies facilities under lease agreements that expire at various dates
through 2015. 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 2004.
Most leases contain renewal options that provide for rent increases based on
prevailing market conditions.
CNA has vacated certain owned and leased facilities in connection with its
restructuring and other related activities (see Note N). These facilities have
been leased or subleased under lease agreements that expire at various dates
through 2014. Lease expense for the years ended December 31, 1999, 1998 and 1997
was $81 million, $134 million and $105 million, respectively. Sublease income
for the years ended December 31, 1999, 1998 and 1997 was $7 million, $5 million
and $5 million, respectively.
The table on the following page presents the future minimum lease payments to be
made under non-cancelable operating leases along with lease and sublease future
minimum receipts to be received on owned and leased properties at December 31,
1999.
FUTURE LEASE PAYMENTS AND RECEIPTS
- ---------------------------------------------------------------------------
Future Minimum Lease Future Minimum Lease
(In millions of dollars) Payments Receipts
- ---------------------------------------------------------------------------
2000 $ 163 $ 45
2001 103 44
2002 90 41
2003 72 39
2004 47 38
Thereafter 153 306
- ---------------------------------------------------------------------------
TOTAL $ 628 $ 513
===========================================================================
NOTE K - STOCKHOLDERS' EQUITY AND STATUTORY FINANCIAL INFORMATION:
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
SUMMARY OF CAPITAL STOCK
- -----------------------------------------------------------------------------------------------------
Number of Shares
December 31 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
Cumulative, exchangeable preferred stock, without par value, non-voting;
Series G (stated value $100,000 per share) -- 2,000
Common stock with par value of $2.50;
Authorized 500,000,000 200,000,000
Issued 185,525,907 185,525,907
Outstanding 184,406,931 183,889,569
Treasury stock 1,118,976 1,636,338
- -----------------------------------------------------------------------------------------------------
</TABLE>
On May 20, 1999, the Company increased the number of authorized shares of common
stock from 200,000,000 to 500,000,000.
On May 6, 1998, CNA's Board of Directors approved a three-for-one split of the
Company's common stock which increased the outstanding common shares from
61,798,262 to 185,394,786. The shares were distributed on June 1, 1998 to
shareholders of record on May 22, 1998.
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. As of December 31, 1999, preferred dividends declared and
payable were approximately $7 million. On February 15, 2000, the Company
announced its intention to purchase or redeem all outstanding shares of its
money market preferred stock.
On August 5, 1998, CNA's Board of Directors approved a plan (the Share
Repurchase Program) to purchase, in the open market or through privately
negotiated transactions, its outstanding common stock from time to time, as the
Company's management deems appropriate. During 1998, pursuant to the announced
Share Repurchase Program, CNA purchased 2,734,800 shares of its common stock for
approximately $102 million. Total shares classified on the December 31, 1999 and
December 31, 1998 balance sheets as treasury stock are 1,118,976 and 1,636,338,
respectively, resulting in a decrease in stockholders' equity of approximately
$41 million and $61 million, respectively.
On October 9, 1998, CNA filed a Registration Statement on Form S-8 with the
Securities and Exchange Commission registering $60 million of $2.50 par value
common stock, to be offered pursuant to the CNA Officer Stock Ownership Plan. On
October 9, 1998, prior to the opening of the trading session on the New York
Stock Exchange, CNA sold 1,229,583 shares of common stock that were held in
treasury to certain senior officers of CNA at the average of the highest and
lowest sale price on the New York Stock Exchange composite transactions, which
was at a price of $34.91 per share. The purchases were financed by full
recourse, collateralized loans from CNA, which, at December 31, 1998, were $44
million, including accrued interest. The loans are ten year notes, which bear
interest at the Applicable Federal Rate (AFR) for October 1998 (5.39%),
compounding semi-annually.
During 1999, CNA sold an additional 507,362 shares of common stock that were
held in treasury to certain senior officers of CNA, at the average of the
highest and lowest sale prices on the New York Stock Exchange composite
transactions, for the dates of the sales. The purchases were financed by full
recourse, collateralized loans from CNA which at December 31, 1999, totaling
approximately $20 million, including accrued interest. The loans are ten-year
notes, which bear interest at the AFR for March 1999 (5.23%) and August 1999
(6.14%), compounding semi-annually.
On December 23, 1998, CNA issued 2,000 shares of Series G cumulative,
exchangeable preferred stock to Loews for $200 million. On June 30, 1999 CNA
repurchased the Series G preferred stock from Loews.
STATUTORY ACCOUNTING PRACTICES
CNA's insurance subsidiaries are domiciled in various jurisdictions. These
subsidiaries prepare statutory financial statements in accordance with
accounting practices prescribed or otherwise permitted by the respective
jurisdictions' insurance regulators. Prescribed statutory accounting practices
are set forth in a variety of publications of the National Association of
Insurance Commissioners as well as state laws, regulations, and general
administrative rules. The Company's insurance subsidiaries have no material
permitted accounting practices.
CNA's ability to pay dividends to its stockholders is affected, in part, by
receipt of dividends from its subsidiaries. The payment of dividends to CNA by
its insurance subsidiaries without prior approval of the insurance department of
each subsidiary's domiciliary jurisdiction is limited by formula. Dividends in
excess of these amounts are subject to pre-approval by the respective state
insurance departments. As of December 31, 1999, approximately $887 million of
dividend payments would not be subject to insurance department pre-approval.
Combined statutory capital and surplus and net income (loss), determined in
accordance with accounting practices prescribed by the regulations and statutes
of various insurance regulators, for property/casualty and life insurance
subsidiaries are as follows:
STATUTORY INFORMATION
- -------------------------------------------------------------------------------
Statutory Capital and Statutory Net
Surplus Income(Loss)
---------------------- --------------------------
December 31 Year Ended December 31
(Unaudited) ---------------------- --------------------------
(In millions of dollars) 1999 1998 1999 1998 1997
- -------------------------------------------------------------------------------
Property/casualty companies* $8,679 $7,593 $361 $161 $1,043
Life insurance companies 1,222 1,109 77 (57) 43
- -------------------------------------------------------------------------------
* Surplus includes equity of property/casualty companies' ownership in life
insurance subsidiaries.
NOTE L - COMPREHENSIVE INCOME:
- ------------------------------
Comprehensive income is comprised of all changes to stockholders' equity, except
those changes resulting from transactions with stockholders in their capacity as
stockholders. The components of comprehensive income are shown below:
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year ended December 31
(In millions of dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $(130) $ 282 $ 966
Other comprehensive income:
Change in unrealized gains/losses on general account investments:
Holding gains (losses) arising during the period 729 925 567
Unrealized losses (gains) at beginning of period included in
realized gains/losses during the period (413) (207) (186)
- -------------------------------------------------------------------------------------------
Net change in unrealized gains/losses on general account 316 718 381
investments
Net change in unrealized gains (losses) on separate (74) 5 -
accounts and other
Foreign currency translation adjustment (42) 7 19
Minority interest and other 24 (6) (9)
- -------------------------------------------------------------------------------------------
Other comprehensive income, before tax 224 724 391
Deferred income tax expense related to other comprehensive (100) (249) (101)
income
- -------------------------------------------------------------------------------------------
Other comprehensive income, net of tax 124 475 290
- -------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (6) $ 757 $1,256
===========================================================================================
</TABLE>
In the preceeding table, deferred income tax expense related to other
comprehensive income is attributable to each of the components of other
comprehensive income in equal proportion except for the foreign currency
translation adjustment, for which there are no deferred taxes.
The following table displays the components of accumulated other comprehensive
income included in the consolidated balance sheets at December 31, 1999 and
1998.
ACCUMULATED OTHER COMPREHENSIVE INCOME
- -----------------------------------------------------------------
December 31
(In millions of dollars) 1999 1998
- -----------------------------------------------------------------
Foreign currency translation adjustment $ 31 $ 73
Net unrealized gains on investments 1,157 991
- -----------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME $1,188 $1,064
=================================================================
NOTE M - BUSINESS SEGMENTS:
- ---------------------------
CNA conducts its operations through seven operating segments: Agency Market
Operations, Specialty Operations, CNA Re, Global Operations, Risk Management,
Group Operations and Life Operations. In addition to the seven operating
segments, certain other activities are reported in a Corporate segment. These
segments reflect the way in which CNA distributes its products to the
marketplace and the way in which it manages operations and makes business
decisions.
Agency Market Operations provides a wide range of property/casualty products to
individuals and small to mid-size businesses. Specialty Operations provides a
broad array of professional, financial and specialty property/casualty products
and services. CNA Re offers primarily traditional property/casualty treaty
reinsurance. Global Operations provides marine, casualty, surety, warranty and
specialty products. Risk Management serves the property/casualty needs of large
domestic commercial businesses by offering customized, solution-based strategies
to address risk management needs. Group Operations offers a broad array of group
life and health insurance and reinsurance products to employers, affinity groups
and other entities that purchase insurance as a group. Life Operations provides
financial protection to individuals through a full product line of term life
insurance, universal life insurance, long-term care insurance and annuities and
provides retirement service products to institutional markets.
Corporate segment results consist of interest expense on corporate borrowings,
certain run-off insurance operations, asbestos claims related to Fibreboard
Corporation, financial guarantee insurance contracts, and certain non-insurance
operations, principally the operations of AMS Services, Inc. (AMS), an
information technology and agency software development subsidiary. See Note O to
the consolidated financial statements regarding the sale of a significant
portion of the Company's investment in AMS during 1999.
The accounting policies of the segments are the same as those described in the
summary of significant accounting polices. The Company manages its assets on a
legal entity basis while segment operations are conducted across legal entities,
as such assets are not readily identifiable by individual segment. In addition,
distinct investment portfolios are not maintained for each segment, and
accordingly, allocation of assets to each segment is not performed. Therefore
investment income and realized investment gains/losses are allocated based on
each segment's net carried insurance reserves, as adjusted.
All intersegment income and expense has been eliminated. Risk Management's other
revenues and expenses in 1999 include revenues for services provided by RSKCoSM
to other units within the Risk Management segment that are eliminated at the
consolidated level. Such intrasegment revenue and expenses eliminated at the
consolidated level were $176 million for the year ended December 31, 1999.
Income taxes have been allocated on the basis of the taxable income of the
segments.
Approximately 97% of the Company's premiums are derived from the United States.
Premiums from any individual foreign country are not significant.
Group Operations' revenues include $2.1 billion, $2.0 billion and $2.1 billion
in 1999, 1998 and 1997, respectively, under contracts covering U.S. government
employees and their dependents (FEHBP).
SEGMENT RESULTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Agency
Year Ended December 31, 1999 Market Specialty Global Risk
(In millions of dollars) Operations Operations CNA Re Operations Management
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 4,799 $ 1,001 $ 1,176 $ 1,010 $ 801
Benefits and Expenses 5,791 1,166 1,369 1,037 936
Restructuring and other related charges 60 - - - -
- ----------------------------------------------------------------------------------------------------------
Underwriting gain (loss) (1,052) (165) (193) (27) (135)
Net investment income 686 235 161 132 154
Other revenues 80 19 4 120 316
Other expenses 77 30 - 100 307
Non-insurance restructuring & related charges - - - - 10
- ----------------------------------------------------------------------------------------------------------
Pre-tax operating income (loss) (363) 59 (28) 125 18
Income tax benefit (expense) 162 (10) 15 (33) 1
Minority interest - - - (28) -
- ----------------------------------------------------------------------------------------------------------
Net operating income (loss) (excluding realized
investment gains (losses)) (201) 49 (13) 64 19
Realized investment gains, net of tax and
minority interest 75 38 21 15 19
Cumulative effect of a change in accounting
principle, net of tax (93) (3) - (3) (74)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ (219) $ 84 $ 8 $ 76 $ (36)
==========================================================================================================
</TABLE>
SEGMENT RESULTS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Agency
Year Ended December 31, 1998 Market Specialty Global Risk
(In millions of dollars) Operations Operations CNA Re Operations Management
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 5,247 $ 1,092 $ 944 $ 941 $ 823
Benefits and Expenses 6,050 1,251 1,005 991 1,018
Restructuring and other related charges 96 5 1 1 -
- ----------------------------------------------------------------------------------------------------------
Underwriting gain (loss) (899) (164) (62) (51) (195)
Net investment income 744 245 163 110 144
Other revenues 48 27 5 82 230
Other expenses 52 44 11 80 227
Non-insurance restructuring & related charges - - - - 88
- ----------------------------------------------------------------------------------------------------------
Pre-tax operating income (loss) (159) 64 95 61 (136)
Income tax benefit (expense) 105 (6) (27) (18) 48
Minority interest - - - (25) -
- ----------------------------------------------------------------------------------------------------------
Net operating income (loss) (excluding realized
investment gains (losses)) (54) 58 68 18 (88)
Realized investment gains, net of tax and
minority interest 171 57 27 17 31
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 117 $ 115 $ 95 $ 35 $ (57)
==========================================================================================================
</TABLE>
- ---------------------------------------------------------------------
Group Life
Operations Operations Corporate Eliminations Total
- ---------------------------------------------------------------------
$ 3,571 $ 936 $ 35 $ (47) $ 13,282
3,706 1,331 228 (224) 15,340
5 - - - 65
- ---------------------------------------------------------------------
(140) (395) (193) 177 (2,123)
130 556 47 - 2,101
40 123 204 (196) 710
46 68 387 (19) 996
- - 8 - 18
- ---------------------------------------------------------------------
(16) 216 (337) - (326)
10 (71) 137 - 211
- - (2) - (30)
- ---------------------------------------------------------------------
(6) 145 (202) - (145)
4 (31) 51 - 192
(2) (2) - - (177)
- ---------------------------------------------------------------------
$ (4) $ 112 $ (151) $ - $ (130)
=====================================================================
- ---------------------------------------------------------------------
Group Life
Operations Operations Corporate Eliminations Total
- ---------------------------------------------------------------------
$ 3,733 $ 823 $ (26) $ (41) $ 13,536
3,903 1,225 308 (57) 15,694
39 3 - - 145
- ---------------------------------------------------------------------
(209) (405) (334) 16 (2,303)
133 525 82 - 2,146
24 115 284 (16) 799
31 68 360 - 873
- 4 9 - 101
- ---------------------------------------------------------------------
(83) 163 (337) - (332)
35 (58) 121 - 200
- - 5 - (20)
- ---------------------------------------------------------------------
(48) 105 (211) - (152)
29 82 20 - 434
- ---------------------------------------------------------------------
$ (19) $ 187 $ (191) $ - $ 282
=====================================================================
SEGMENT RESULTS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Agency
Year Ended December 31, 1997 Market Specialty Global Risk
(In millions of dollars) Operations Operations CNA Re Operations Management
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 5,092 $ 1,251 $ 898 $ 854 $ 776
Benefits and expenses 5,491 1,397 991 858 974
- -----------------------------------------------------------------------------------------------------------
Underwriting gain(loss) (399) (146) (93) (4) (198)
Net investment income 787 268 153 117 158
Other revenues 50 14 7 29 194
Other expenses 6 10 5 26 216
- -----------------------------------------------------------------------------------------------------------
Pre-tax operating income (loss) 432 126 62 116 (62)
Income tax benefit (expense) (106) (31) (11) (35) 25
Minority interest - - - (29) -
- -----------------------------------------------------------------------------------------------------------
Net operating income (loss) (excluding realized
investment gains/(losses)) 326 95 51 52 (37)
Realized investment gains, net of tax and
minority interest 187 63 34 20 37
- -----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 513 $ 158 $ 85 $ 72 $ -
===========================================================================================================
</TABLE>
- ---------------------------------------------------------------------
Group Life
Operations Operations Corporate Eliminations Total
- ---------------------------------------------------------------------
$ 3,936 $ 797 $ 20 $ - $ 13,624
4,069 1,158 323 (24) 15,237
- ---------------------------------------------------------------------
(133) (361) (303) 24 (1,613)
117 501 108 - 2,209
17 105 249 (37) 628
19 58 267 (13) 594
- ---------------------------------------------------------------------
(18) 187 (213) - 630
10 (66) 82 - (132)
- - 19 - (10)
- ---------------------------------------------------------------------
(8) 121 (112) - 488
28 124 (15) - 478
- ---------------------------------------------------------------------
$ 20 $ 245 $ (127) $ - $ 966
=====================================================================
NOTE N - RESTRUCTURING AND OTHER RELATED CHARGES:
- -------------------------------------------------
The Company finalized and approved a restructuring plan (the Plan) in August
1998. In connection with the Plan, the Company incurred various expenses that
were recorded in the third and fourth quarters of 1998 and throughout 1999.
These restructuring and other related charges primarily related to the following
activities: planned reductions in the workforce; the consolidation of certain
processing centers; the exiting of certain businesses and facilities; the
termination of lease obligations; and the writeoff of certain assets related to
these activities. The Plan contemplates a gross reduction in workforce of 4,500
employees, resulting in a planned net reduction of approximately 2,400
employees. As of December 31, 1999, the Company had completed essentially all
aspects of the Plan.
The Company accrued $220 million of these restructuring and other related
charges in the third quarter of 1998 (the Initial Accrual). Other charges such
as parallel processing costs, relocation costs, and retention bonuses, did not
qualify for accrual under GAAP and have been charged to expense as incurred
(Period Costs). The Company incurred Period Costs of $83 million and $26 million
during 1999 and the fourth quarter of 1998, respectively.
The Company incurred restructuring and other related charges of $246 million in
1998 that were comprised of the Initial Accrual and fourth quarter Period Costs,
and which included the following: a) costs and benefits related to planned
employee terminations of $98 million, of which $53 million related to severance
and outplacement costs, $24 million related to other employee transition related
costs and $21 million related to benefit plan curtailment costs; b) writedown of
certain assets to their fair value of $74 million, of which $59 million related
to a writedown of an intangible asset, and $15 million of abandoned leasehold
improvements and other related fixed assets associated with leases that were
terminated as part of the restructuring plan; c) lease termination costs of $42
million; d) losses incurred on the exiting of certain businesses of $32 million.
The 1998 restructuring and other related charges incurred by Agency Market
Operations were approximately $96 million. These charges included employee
severance and outplacement costs of $43 million related to the planned net
reduction in the workforce of approximately 1,200 employees. Lease termination
costs of approximately $29 million were incurred in connection with the
consolidation of four regional offices into two zone offices and a reduction of
the number of claim processing offices from 24 to 8. The Agency Market
Operations charges also included benefit plan curtailment costs of $12 million,
parallel processing charges of $7 million and $5 million of fixed asset
writedowns. Through December 31, 1998, approximately 364 Agency Market
Operations employees, the majority of whom were loss adjusters and office
support staff had been released.
The 1999 Period Costs incurred by Agency Market Operations were approximately
$60 million. These charges included employee related expenses (outplacement,
retention bonuses and relocation costs) of $23 million, parallel processing
costs of $16 million and consulting expenses of $10 million. Other charges,
including technology and facility charges, were approximately $15 million.
Additionally, Agency Market Operations reduced its estimate for lease
termination costs by $4 million during 1999. During 1999, approximately 1,000
Agency Market Operations employees, the majority of whom were office support
staff, were released.
The 1998 restructuring and other related charges incurred by Risk Management
were approximately $88 million. These charges included lease termination costs
associated with the consolidation of claim offices in 36 market territories of
approximately $8 million. In addition, employee severance and outplacement costs
relating to the planned net reduction in workforce of approximately 200
employees were approximately $10 million and the writedown of fixed and
intangible assets was approximately $64 million. Parallel processing and other
charges were approximately $6 million. Through December 31, 1998, approximately
152 Risk Management employees had been released, the majority of whom were claim
adjusters and office support staff.
The charges related to fixed and intangible assets were primarily due to a
writedown of an intangible asset (goodwill) related to Alexsis, Inc., a wholly
owned subsidiary acquired by the Company in 1995 that provided claims
administration services for unrelated parties. As part of the Company's periodic
reviews of asset recoverability and as a result of several adverse events, the
Company concluded, based on an undiscounted cash flow analysis completed in the
third quarter of 1998, that an impairment existed, and based on a discounted
cash flow analysis, that a $59 million writeoff was necessary. The adverse
events contributing to this conclusion included operating losses from the
business, the loss of several significant customers whose business volume with
this operation constituted a large portion of the revenue base, and substantial
changes in the overall market demand for the services offered by this operation
which, in turn, had negative effects on the prospects for achieving the
profitability levels necessary to recover the intangible asset.
The 1999 Period Costs incurred by Risk Management were approximately $10
million. These charges included employee related expenses of $3 million and
parallel processing charges of $3 million. Other charges, including consulting
and facility charges, were approximately $7 million. Additionally, Risk
Management reduced its estimate for lease termination costs by $2 million and
its estimate of employee severance costs by $1 million during 1999. During 1999,
approximately 136 Risk Management employees were released, the majority of whom
were claims adjusters and office support staff.
The 1998 restructuring and other related charges incurred by Group Operations
were approximately $39 million. These charges included approximately $29 million
of costs related to the Company's decision to exit the Employer Health and
Affinity lines of business. These costs represent the Company's estimate of
losses in connection with fulfilling the remaining obligations under contracts.
Earned premiums for these lines of business were approximately $400 million in
1998. The 1998 charges also included employee severance and outplacement costs
of approximately $7 million related to the planned net reduction in workforce of
approximately 400 employees. Charges for lease termination costs and fixed asset
writedowns were $3 million. Through December 31, 1998, approximately 56 Group
Operations employees had been released. The majority of the released employees
were claims and sales support staff.
The 1999 Period Costs incurred by Group Operations were approximately $5
million. These charges include $7 million of employee severance and related
charges. Additionally, Group Operations reduced its estimate for business exit
costs by $2 million during 1999. During 1999, approximately 300 Group Operations
employees were released, the majority of whom were claims adjusters and sales
support staff.
For the other segments of the Company, restructuring and other related charges
were approximately $23 million in 1998. Charges related primarily to the closing
of leased facilities were $3 million and employee severance and outplacement
costs related to planned net reductions of 600 employees in the current
workforce and benefit costs associated with those reductions were $13 million.
In addition, there were charges of $4 million related to the writedown of
certain assets and $3 million related to the exiting of certain businesses.
Through December 31, 1998, approximately 270 employees of these other segments,
most of whom were underwriters and office support staff, had been released.
For the other segments of the Company, Period Costs were approximately $8
million for 1999. These charges were primarily for employee termination related
costs. Through December 31, 1999, approximately 600 employees of these other
segments, most of whom were underwriters and office support staff, had been
released.
The following table sets forth the major categories of the Initial Accrual and
the activity in the accrual during 1998 and 1999.
ACCRUED RESTRUCTURING AND OTHER RELATED CHARGES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Employee
Termination and Lease
Related Benefit Writedown Termination Business
(In millions of dollars) Costs of Assets Costs Exit Costs Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial Accrual $72 $74 $42 $32 $220
Payments charged against
liability (14) - - - (14)
Costs that did not
require cash (21) (74) - - (95)
- -----------------------------------------------------------------------------------------------
Accrued costs at December 31,
1998 37 - 42 32 111
Payments charged against
liability (32) - (9) (15) (56)
Reduction in estimated
costs (1) - (6) (2) (9)
- -----------------------------------------------------------------------------------------------
Accrued costs at
December 31, 1999 $4 $- $27 $15 $ 46
================================================================================================
</TABLE>
NOTE O - SIGNIFICANT TRANSACTIONS:
- ----------------------------------
PERSONAL INSURANCE TRANSACTION
On October 1, 1999, certain subsidiaries of CNA completed a transaction with
Allstate, whereby CNA's personal lines insurance business and related employees
were transferred to Allstate. Approximately $1.1 billion of cash and $1.1
billion of additional assets (primarily premium receivables and deferred policy
acquisition costs) were transferred to Allstate, and Allstate assumed $2.2
billion of claim and claim adjustment expense reserves. Additionally, CNA
received $140 million in cash which consisted of (i) $120 million in ceding
commission for the reinsurance of the CNA personal insurance business by
Allstate, and (ii) $20 million for an option exercisable during 2002 to purchase
100% of the common stock of five CNA insurance subsidiaries at a price equal to
GAAP carrying value as of the exercise date. Also, CNA invested $75 million in a
ten year equity-linked note issued by Allstate.
CNA will continue to write new and renewal personal insurance policies and to
reinsure this business with Allstate companies, until such time as Allstate
exercises its option to buy the five CNA subsidiaries. Prior to 2002, the
Company will concentrate the direct writing of personal lines insurance business
into the five optioned companies, such that most, if not all, business related
to this transaction will be written by those companies by the date Allstate
exercises its option. CNA continues to have primary liability on policies
reinsured by Allstate.
CNA will continue to have an ongoing interest in the profitability of CNA's
personal lines insurance business and the related successor business through an
agreement licensing the "CNA Personal Insurance" trademark and a portion of
CNA's Agency Market Operations distribution system to Allstate for use in
Allstate's personal insurance agency business for a period of five years. Under
this agreement, CNA will receive a royalty fee based on the business volume of
personal insurance policies sold through the CNA agents for a period of six
years. In addition, the $75 million equity-linked note will be redeemed on
September 30, 2009 (subject to earlier redemption on stated contingencies) for
an amount equal to the face amount plus or minus an amount not exceeding $10
million, depending on the underwriting profitability of the CNA personal
insurance business.
CNA also shares in any reserve development related to claim and claim adjustment
expense reserves transferred to Allstate at the transaction date. Under the
reserve development sharing agreement, 80% of any favorable or adverse reserve
development up to $40 million and 90% of any favorable or adverse reserve
development in excess of $40 million inure to CNA. CNA's obligation with respect
to unallocated loss adjustment expense reserves was settled at the transaction
date, and is therefore not subject to the reserve sharing arrangement.
The retroactive portion of the reinsurance transaction, consisting primarily of
the cession of claim and claim adjustment expense reserves approximating $1.0
billion, was not recognized as reinsurance because criteria for risk transfer
was not met for this portion of the transaction. The related consideration paid
was recorded as a deposit and is included in reinsurance receivables in the
consolidated balance sheets. The prospective portion of the transaction, which
as of the transaction date consisted primarily of the cession of $1.1 billion of
unearned premium reserves, has been recorded as reinsurance. The related
consideration paid was recorded as prepaid reinsurance premiums. Premiums ceded
after the transaction date will follow this same treatment. The $20 million
received from Allstate for the option to purchase the five CNA subsidiaries was
deferred and will not be recognized until Allstate exercises its option, at
which time it will be recorded in realized gains and losses.
CNA recognized an after-tax realized loss of approximately $39 million related
to the transaction, consisting primarily of the accrual of lease obligations and
the write-down of assets that related specifically to the Personal Insurance
lines of business. The ceding commission related to the prospective portion of
the transaction will be recognized in proportion to the recognition of the
unearned premium reserve to which it relates. $51 million of the ceding
commission was earned in 1999. Royalty fees earned in 1999 were approximately $7
million.
The Personal Insurance lines transferred to Allstate contributed net earned
premiums of $1,354 million, $1,622 million and $1,607 million and pre-tax
operating income of $89 million, $97 million and $237 million for the nine
months ended September 30, 1999 and the years ended December 31, 1998 and 1997,
respectively.
SALE OF AMS SERVICES, INC.
On November 30, 1999, CNA sold the majority of its interest in AMS Services,
Inc. (AMS), a software development company serving the insurance agency market.
Prior to the sale, CNA owned 89% of AMS and consolidated AMS in its financial
statements. As a result of the sale, CNA owns 9% of AMS and therefore AMS is no
longer consolidated. CNA recognized an after-tax gain of $21 million on the
sale. Total assets of AMS as of the sale date were approximately $135 million.
CNA's share of the AMS' operating results were $206 million, $264 million, and
$216 million of operating revenue and $8 million, $28 million, and $10 million
of operating losses, for the eleven months ended November 30, 1999, and the
years ended December 31, 1998 and 1997, respectively.
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 (CNA Surety), of
which CNA owns approximately 63%. The transaction closed on September 30, 1997
and was accounted for as a sale of approximately 39% of CNA's previous surety
business and a purchase of 61% of Capsure. In conjunction with the closing of
the 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 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.
NOTE P - UNAUDITED QUARTERLY FINANCIAL DATA:
- --------------------------------------------
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(In millions of dollars,
except per share data) First Second Third Fourth Year
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 QUARTERS
Revenues $4,386 $4,387 $3,922 $3,708 $16,403
Net operating income (loss)
excluding realized gains/losses 28 45 82 (300) (145)
Net realized investment gains (losses) 144 109 (53) (8) 192
- --------------------------------------------------------------------------------------------
Net Income (loss) before cumulative effect
of a change in accounting principle 172 154 29 (308) 47
Cumulative effect of a change in
accounting principle, net of tax (177) - - - (177)
- --------------------------------------------------------------------------------------------
Net income (loss) $ (5) $ 154 $ 29 $ (308) $ (130)
============================================================================================
Basic and diluted earnings (loss) per
share $(0.05) $ 0.82 $ 0.15 $(1.68) $ (0.77)
============================================================================================
1998 QUARTERS
Revenues $4,354 $4,466 $4,170 $4,172 $17,162
Net operating income (loss)
excluding realized gains/losses 117 64 (70) (263) (152)
Net realized investment gains 116 146 56 116 434
- ------------------------------------------------------------------------------------------
Net income (loss) $ 233 $ 210 $ (14) $ (147) $ 282
==========================================================================================
Earnings (loss) per share $ 1.25 $ 1.12 $(0.09) $(0.81) $ 1.49
==========================================================================================
1997 QUARTERS
Revenues $4,172 $4,273 $4,337 $4,417 $17,199
Net operating income
excluding realized gains/losses 136 126 121 105 488
Net realized investment gains 42 109 153 174 478
- ------------------------------------------------------------------------------------------
Net income $ 178 $ 235 $ 274 $ 279 $ 966
==========================================================================================
Earnings per share $ 0.95 $ 1.26 $ 1.47 $ 1.49 $ 5.17
==========================================================================================
</TABLE>
NOTE Q- RELATED PARTY TRANSACTIONS:
- -----------------------------------
CNA reimburses or pays directly to Loews for management fees, travel and related
expenses, and expenses of investment facilities and services provided to CNA.
Amounts paid to Loews amounted to approximately $13 million, $13 million and $11
million in 1999, 1998 and 1997, respectively.
CNA and its eligible subsidiaries are included in the consolidated Federal
income tax return of Loews and its eligible subsidiaries. See Note D for a
detailed description of the income tax agreement between the Company and Loews.
Note D also includes payments made between the Company and Loews pursuant to
this agreement.
CNA writes, at standard rates, a limited amount of insurance for Loews and its
affiliates. The total premiums from Loews and its affiliates were $5 million for
1999, and $6 million for 1998 and 1997.
CNA assumes the risk for a limited amount of insurance from R.V.I. Guaranty
Company, Inc. (RVI), a 50% owned affiliate. CNA assumed approximately $5 million
in written premiums from RVI during 1999.
CNA sponsors a stock ownership plan whereby the Company finances the purchase of
Company stock by certain executive officers. See Note K for a detailed
discussion of this plan.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of CNA Financial Corporation:
We have audited the consolidated balance sheets of CNA Financial Corporation (an
affiliate of Loews Corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 the accounting principles used and significant estimates made by
management, as well as evaluating the ove rall 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for liabilities for insurance-related
assessments in 1999.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 23, 2000
