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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1998 Commission File
Number 1-5823
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-6169860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA PLAZA
CHICAGO, ILLINOIS 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B)OF THE ACT:
Name of each exchange on
Title of each class which registered
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Common Stock New York Stock Exchange
with a par value Chicago Stock Exchange
of $2.50 per share Pacific Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G)OF THE ACT:
None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No....
As of March 1, 1999, 183,889,569 shares of common stock were outstanding
and the aggregate market value of the common stock of CNA Financial Corporation
held by non-affiliates was approximately $936 million.
DOCUMENTS INCORPORATED
BY REFERENCE:
Portions of the CNA Financial Corporation 1998 Annual Report to
Shareholders are incorporated by reference into Parts I and II of this Report.
Portions of the CNA Financial Corporation Proxy Statement prepared for the
1999 annual meeting of shareholders, pursuant to Regulation 14A, are
incorporated by reference into Part III of this Report.
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CNA FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
Item Page
Number PART I Number
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1. Business........................................................... 3
2. Properties......................................................... 10
3. Legal Proceedings.................................................. 11
4. Submission of Matters to a Vote of Security Holders................ 11
PART II
5. Market for the Registrant's Common Stock and
Related Stockholder Matters...................................... 13
6. Selected Financial Data............................................ 13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
7A. Quantitative and Qualitative Disclosures about Market Risk......... 13
8. Financial Statements and Supplementary Data........................ 13
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 13
PART III
10. Directors and Executive Officers of the Registrant................. 14
11. Executive Compensation............................................. 14
12. Security Ownership of Certain Beneficial Owners and Management..... 14
13. Certain Relationships and Related Transactions..................... 14
PART IV
14. Financial Statements, Schedules, Exhibits and Reports on Form 8-K.. 14
2
PART I
ITEM 1. BUSINESS
CNA Financial Corporation (CNAF) was incorporated in 1967 and is the parent
company of Continental Casualty Company (CCC), incorporated in 1897, and
Continental Assurance Company (CAC), incorporated in 1911. In 1975, CAC became a
wholly-owned subsidiary of CCC. In 1995, CNAF acquired The Continental
Corporation and it became a wholly-owned subsidiary of CNAF. The Continental
Corporation (Continental), a New York corporation incorporated in 1968, is an
insurance holding company. Its principal subsidiary, The Continental Insurance
Company (CIC), was organized in 1853. The principal business of Continental is
the ownership of a group of property and casualty insurance companies.
CNAF is a holding company whose primary subsidiaries consist of
property/casualty and life insurance companies, collectively these subsidiaries
are CNA. CNA's property/casualty insurance operations are conducted by CCC and
its affiliates and CIC and its affiliates. Life insurance operations are
conducted by CAC and its life insurance affiliates. CNA's principal business is
insurance conducted through its insurance subsidiaries. CNA underwrites
property, casualty, life and accident and health coverages, as well as pension
products and annuities. CNA's principal market for insurance products is the
United States.
COMPETITION
All aspects of the insurance business are highly competitive. CNA competes
with a large number of stock and mutual insurance companies and other entities
for both producers and customers, and must continuously allocate resources to
refine and improve insurance products and services.
There are approximately 3,400 individual companies that sell
property/casualty insurance in the United States. CNAF's consolidated
property/casualty subsidiaries ranked as the third largest property/casualty
insurance organization based upon 1997 statutory net written premiums.
There are approximately 1,600 companies selling life insurance in the
United States. CAC is ranked as the thirty-second largest life insurance
organization based on 1997 consolidated statutory premium volume.
DIVIDENDS BY INSURANCE SUBSIDIARIES
The payment of dividends to CNAF by its insurance affiliates without prior
approval of the affiliates' domiciliary state insurance commissioners is limited
to amounts determined by formula in accordance with the accounting practices
prescribed or permitted by each state's insurance department. This formula
varies by state. The formula used by the majority of the states provides that
the greater of 10% of prior year statutory surplus or prior year statutory net
income, less the aggregate of all dividends paid during the twelve months prior
to date of payment is available to dividend to the parent company. Some states,
however, have an additional stipulation that dividends can't exceed prior year's
surplus. Based upon the formulas applied by the respective domiciliary states of
the operating companies, approximately $663 million in dividends can be paid to
CNAF by its insurance affiliates in 1999 without prior approval. All dividends
must be reported to the domiciliary insurance department prior to declaration
and payment.
3
REGULATION
The insurance industry is subject to comprehensive and detailed regulation
and supervision throughout the United States. Each state has established
supervisory agencies with broad administrative powers relative to licensing
insurers and agents, approving policy forms, establishing reserve requirements,
fixing minimum interest rates for accumulation of surrender values and maximum
interest rates of policy loans, prescribing the form and content of statutory
financial reports, regulating solvency and the type and amount of investments
permitted. Such regulatory powers also extend to premium rate regulations which
require that rates not be excessive, inadequate or unfairly discriminatory. In
addition to regulation of dividends by insurance subsidiaries discussed above,
intercompany transfers of assets may be subject to prior notice or approval by
the state insurance regulator, depending on the size of such transfers and
payments in relation to the financial position of the insurance affiliates
making the transfer.
Insurers are also required by the states to provide coverage to insureds
who would not otherwise be considered eligible by the insurers. Each state
dictates the types of insurance and the level of coverage which must be provided
to such involuntary risks. CNA's share of these involuntary risks is mandatory
and generally a function of its respective share of the voluntary market by line
of insurance in each state.
Reform of the U.S.'s tort liability system is another issue facing the
insurance industry. Although federal standards would create more uniform laws,
tort reform supporters still look primarily to the states for passage of reform
measures. Over the last decade, many states have passed some type of reform, but
more recently, a number of state courts have modified or overturned these
reforms. Additionally, new causes of action and theories of damages continue to
be proposed in state court actions or by legislatures. Continued
unpredictability in the law means that insurance underwriting and rating is
difficult in commercial lines, professional liability and some specialty
coverages.
Although the federal government and its regulatory agencies do not directly
regulate the business of insurance, federal legislative and regulatory
initiatives can impact the insurance business in a variety of ways. These
initiatives include tort reform proposals; measures to limit Year 2000
liability; proposals to overhaul the Superfund hazardous waste removal and
liability statute; financial services modernization legislation, which includes
provisions to remove barriers that prevent banks from engaging in the insurance
business; and various tax proposals affecting insurance companies.
In 1998, federal legislation to provide a new and comprehensive framework
for affiliation and regulation of the banking, insurance and securities
industries was passed by the House of Representatives but not by the Senate.
Congress is expected to continue efforts to enact legislation in the financial
services area. This legislation could result in significant regulatory changes
in the financial services industry.
Environmental clean-up remains the subject of both federal and state
regulation. For the last several years Congress and the Executive branch have
failed to reach an agreement on ways to overhaul the federal Superfund hazardous
waste program. The legislative stalemate is the result of a failure by Superfund
stakeholders and Congress to reach a compromise on clean-up standards, the
repeal of retroactive liability and the methodology for financing future
clean-up costs. Although Superfund reform continues to be listed as one of
Congress' legislative priorities, at this time it is unclear if any reform will
be enacted. By some estimates, there are thousands of potential waste sites
subject to clean-up. The insurance industry is involved in extensive litigation
regarding coverage issues concerning clean up of hazardous waste. Judicial
interpretations in many cases have expanded the scope of coverage and liability
beyond the original intent of the policies. For further discussion, see Note E
of the Consolidated Financial Statements of the 1998 Annual Report to
Shareholders, incorporated by reference in Item 8, herein.
In recent years, increased scrutiny of state regulated insurer solvency
requirements by certain members of the U.S. Congress resulted in the National
Association of Insurance Commissioners developing industry minimum Risk-Based
Capital (RBC) requirements. The RBC requirements establish a formal state
accreditation process designed to regulate for solvency more closely, minimize
the diversity of approved statutory accounting and actuarial practices, and
increase the annual statutory statement disclosure requirements.
4
REGULATION--(CONTINUED)
The RBC formulas are designed to identify an insurer's minimum capital
requirements based upon the inherent risks (e.g., asset default, credit and
underwriting) of its operations. In addition to the minimum capital
requirements, the RBC formula and related regulations identify various levels of
capital adequacy and corresponding actions that the state insurance departments
should initiate. The level of capital adequacy below which insurance departments
would take action is defined as the Company Action Level. As of December 31,
1998, all of CNAF's property/casualty and life insurance affiliates had adjusted
capital amounts in excess of Company Action Levels.
REINSURANCE
Information as to CNA's reinsurance business is set forth in Note G of the
Consolidated Financial Statements of the 1998 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
EMPLOYEE RELATIONS
CNA has approximately 23,600 full-time equivalent employees and has
experienced satisfactory labor relations. CNA has never had work stoppages due
to labor disputes.
CNA has comprehensive benefit plans for substantially all of its employees,
including retirement plans, savings plans, disability programs, group life
programs and group health care programs. See Note I of the Consolidated
Financial Statements of the 1998 Annual Report to Shareholders for further
discussion, incorporated by reference in Item 8, herein.
GOVERNMENT CONTRACTS
CNA's premium revenues includes premiums under contracts involving U.S.
government employees and their dependents. Such premiums amounted to
approximately $2.0 billion, $2.1 billion and $2.1 billion in 1998, 1997 and
1996, respectively.
5
BUSINESS SEGMENTS
Information as to CNA's business segments is set forth in Note M of the
Consolidated Financial Statements of the 1998 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
Additional information as to CNA's business segments is set forth in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the 1998 Annual Report to Shareholders, incorporated by
reference in Item 7, herein.
SUPPLEMENTARY INSURANCE DATA
The following table sets forth supplementary insurance data.
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Year Ended December 31 1998 1997 1996
(in millions of dollars, except ratio information)
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Trade Ratios - GAAP basis (a)
Loss ratio............................... 80.8% 77.1% 76.4%
Expense ratio............................ 32.8 31.3 30.9
Combined ratio (before policyholder dividends) 113.6 108.4 107.3
Policyholder dividend ratio.............. 1.1 0.5 1.6
Trade Ratios - Statutory basis (a)
Loss ratio............................... 81.5% 77.5% 76.8%
Expense ratio............................ 32.7 30.7 30.6
Combined ratio (before policyholder dividends) 114.2 108.2 107.4
Policyholder dividend ratio.............. 1.0 0.8 1.4
Gross Life Insurance In-Force
Group.................................... $317,720 $239,843 $172,213
Life (c)................................. 76,674 71,755 64,796
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$394,394 $311,598 $237,009
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Other Data - Statutory basis (b)
Property/casualty capital and surplus*... $ 7,593 $ 7,123 $ 6,349
Life capital and surplus................. 1,109 1,223 1,163
Written premium to surplus ratio........ 1.4 1.4 1.6
Capital and surplus-percent of total liabilities 20.5% 22.4% 25.5%
Participating policyholders-percent of gross 0.5% 0.7% 0.5%
life insurance in force..................
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*Surplus includes equity of property/casualty companies' ownership in life insurance subsidiaries.
(a) GAAP trade ratios reflect the results of CNA's property/casualty
insurance subsidiaries. Trade ratios are industry measures of
property/casualty underwriting results. The loss ratio is the
percentage of incurred claim and claim adjustment expenses to premiums
earned. Under generally accepted accounting principles, the expense
ratio is the percentage of underwriting expenses, including the change
in deferred acquisition costs, to premiums earned. Under statutory
accounting principles, the expense ratio is the percentage of
underwriting expenses (with no deferral of acquisition costs) to
premiums written. The combined ratio is the sum of the loss and expense
ratios. The policyholder dividend ratio is the ratio of dividends
incurred to premiums earned.
(b) Other data is determined on the statutory basis of accounting.
Dividends of $410 million, $175 million, $545 million, were paid to
CNAF by CCC in 1998, 1997, and 1996, respectively. Insurance
subsidiaries have received, or will receive, reimbursement from CNAF
for general management and administrative expenses, unallocated loss
adjustment expenses and investment expenses of $187 million, $217
million and $223 million, in 1998, 1997, and 1996, respectively. Life
statutory capital and surplus as a percent of total liabilities is
determined after excluding Separate Account liabilities and
reclassifying the statutorily required Asset Valuation and Interest
Maintenance Reserves as surplus.
(c) Lapse ratios for individual life insurance, as measured by surrenders
and withdrawals as a percentage of average ordinary life insurance in
force, were 14.7%, 6.4%, and 7.2% in 1998, 1997, and 1996,
respectively.
6
SUPPLEMENTARY INSURANCE DATA--(CONTINUED)
The following table displays the distribution of gross written premiums for the
CNA's property/casualty operations:
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Gross Written Premiums % of Total
----------------------
Year Ended December 31 1998 1997 1996
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New York.................................................... 9.5 9.9 9.3
California.................................................. 8.2 8.8 8.5
Texas....................................................... 6.0 6.2 6.0
Pennsylvania................................................ 4.7 5.1 4.9
Florida..................................................... 4.6 4.8 4.2
Illinois.................................................... 4.5 4.4 5.3
New Jersey.................................................. 4.4 4.3 4.1
All other states, countries or political subdivisions (*)... 48.0 48.0 46.8
Reinsurance assumed:
Voluntary............................................... 9.1 9.7 9.1
Involuntary............................................. 1.0 (1.2) 1.8
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100.0 100.0 100.0
================================================================================
(*) No other state, country or political subdivision accounts for more than 3.0%
of gross written premiums.
Approximately 96% of CNA's premiums are derived from the United States.
Premiums from any individual foreign country are not significant.
PROPERTY/CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSES
The following loss reserve development table illustrates the change over
time of reserves established for property/casualty claim and claim adjustment
expenses at the end of various calendar years for CNA's property/casualty
operations. The first section shows the reserves as originally reported at the
end of the stated year. The second section, reading down, shows the cumulative
amounts paid as of the end of successive years with respect to the originally
reported reserve liability. The third section, reading down, shows re-estimates
of the original recorded reserve as of the end of each successive year which is
the result of the Company's property/casualty insurance subsidiaries' expanded
awareness of additional facts and circumstances that pertain to the unsettled
claims. The last section compares the latest re-estimated reserve to the reserve
originally established, and indicates whether the original reserve was adequate
or inadequate to cover the estimated costs of unsettled claims.
7
PROPERTY/CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSES--(CONTINUED)
The loss reserve development table for property/casualty operations is
cumulative and, therefore, ending balances should not be added since the amount
at the end of each calendar year includes activity for both the current and
prior years.
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SCHEDULE OF
PROPERTY/CASUALTY
LOSS RESERVE
DEVELOPMENT
CALENDAR YEAR ENDED 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996 1997(d) 1998(e)
(In millions of
dollars)
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Gross reserves
for unpaid claim
and claim expenses.... $ -- $ -- $16,530 $17,712 $20,034 $20,812 $21,639 $31,044 $29,395 $28,571 $28,355
Ceded recoverable..... -- -- 3,440 3,297 2,867 2,491 2,705 6,089 5,660 5,326 5,424
----- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net reserves
for unpaid claim
and claim expenses.... 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 23,245 22,931
----- ------- ------- ------- ------- ------- ------- ------- ------ ------ -------
CUMULATIVE NET PAID AS OF:
One year later........ 2,040 2,670 3,285 3,411 3,706 3,629 3,656 6,510 5,851 5,954 --
Two years later....... 3,622 4,724 5,623 6,024 6,354 6,143 7,087 10,485 9,796 -- --
Three years later..... 4,977 6,294 7,490 7,946 8,121 8,764 9,195 13,363 -- -- --
Four years later...... 6,078 7,534 8,845 9,218 10,241 10,318 10,624 -- -- -- --
Five years later...... 6,960 8,485 9,726 10,950 11,461 22,489 -- -- -- -- --
Six years later....... 7,682 9,108 11,207 11,951 12,308 -- -- -- -- -- --
Seven years later..... 8,142 10,393 12,023 12,639 -- -- -- -- -- -- --
Eight years later..... 9,303 11,086 12,592 -- -- -- -- -- -- -- --
Nine years later...... 9,924 11,563 -- -- -- -- -- -- -- -- --
Ten years later.......10,342 -- -- -- -- -- -- -- -- -- --
NET RESERVES RE-ESTIMATED
AS OF:
End of initial year... 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 23,245 22,931
One year later........ 9,737 11,336 12,984 16,032 17,757 18,250 18,922 24,864 23,479 23,508 --
Two years later....... 9,781 11,371 14,693 16,810 17,728 18,125 18,500 24,294 23,140 -- --
Three years later..... 9,796 13,098 15,737 16,944 17,823 17,868 18,008 23,814 -- -- --
Four years later......11,471 14,118 15,977 17,376 17,765 17,511 17,354 -- -- -- --
Five years later......12,496 14,396 16,440 17,329 17,560 17,082 -- -- -- -- --
Six years later.......12,742 14,811 16,430 17,293 17,285 -- -- -- -- -- --
Seven years later.....13,167 14,810 16,551 17,069 -- -- -- -- -- -- --
Eight years later.....13,174 14,995 16,487 -- -- -- -- -- -- -- --
Nine years later......13,396 14,973 -- -- -- -- -- -- -- -- --
Ten years later.......13,431 -- -- -- -- -- -- -- -- -- --
------- ------- -------- ------ ------ ------ ------ ------ ------ ------ ------
Total net (deficiency)(3,879) (3,706) (3,397) (2,654) (118) 1,239 1,580 1,141 595 (263) --
redundancy
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Schedule of
Property/Casualty
Loss Reserve
Development
Calendar Year Ended 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(b) 1995(c) 1996 1997(d) 1998(e)
(In millions of
dollars)
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Reconciliation to gross
re-estimated reserves:
Net reserves 13,431 14,973 16,487 17,069 17,285 17,082 17,354 23,814 23,140 23,508 --
re-estimated
Re-estimated ceded -- -- 3,339 3,173 2,714 2,287 2,480 6,420 5,940 5,646 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
recoverable
Total gross
re-estimated -- -- 19,826 20,242 19,999 19,369 19,834 30,234 29,080 29,154 --
reserves
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Net (deficiency) redundancy
related to:
Asbestos claims (3,190) (3,092) (2,958) (2,911) (1,222) (622) (587) (399) (348) (243) --
Environmental claims... (1,013) (988) (981) (937) (894) (451) (279) (289) (226) (227) --
------- ------ ------ ------ ------ ------ ------ ------ -------------- -----
Total asbestos and (4,203) (4,080) (3,939) (3,848) (2,116)(1,073) (866) (688) (574) (470) --
environmental
Other claims........... 324 374 542 1,194 1,998 2,312 2,446 1,829 1,169 207 --
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -----
Total net (deficiency) (3,879) (3,706) (3,397) (2,654) (118) 1,239 1,580 1,141 595 (263) --
redundancy ======= ======= ======= ======= ====== ====== ====== ====== ======= ======= =======
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(a) Reflects reserves of CNA's property/casualty insurance subsidiaries,
excluding Continental reserves, which were acquired on May 10, 1995 (the
Acquisition Date). Accordingly, the reserve development (net reserves recorded
at the end of the year, as initially estimated, less net reserves re-estimated
as of subsequent .years) does not include Continental.
(b) Reserve development related to the 1994 reserves of CNA, excluding
Continental, as determined by the balances in this column, plus adverse reserve
development of $134 million related to the reserves of Continental, on the
Acquisition Date, which are not reflected in this column, were recorded by CNA
in 1995 and subsequent periods.
(c) Includes Continental gross reserves of $9,713 million and net reserves of
$6,063 million acquired on the Acquisition Date and subsequent development
thereon.
(d) Includes net and gross reserves of acquired companies of $57 million and $64
million.
(e) Includes net and gross reserves of acquired companies of $122 million and
$223 million.
8
PROPERTY/CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSES--(CONTINUED)
Additional information as to CNA's property/casualty claim and claim
expense reserves is set forth in Notes A and E of the Consolidated Financial
Statements of the 1998 Annual Report to Shareholders, incorporated by reference
in Item 8, herein.
Information as to CNA's reserve development is set forth in Note E of the
Consolidated Financial Statements of the 1998 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
INVESTMENTS
Information as to the Company's investments is set forth in Note B of the
Consolidated Financial Statements of the 1998 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
Additional information as to the Company's investments is set forth in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the 1998 Annual Report to Shareholders, incorporated by
reference in Item 7, herein.
At December 31, 1998, CNA had an approximate 25% ownership interest in C.W.
Investments Limited Partnership (CWI) with a carrying value of approximately $25
million. CNA accounted for CWI under the equity method. CWI was the sole
shareholder of Canary Wharf Group P.L.C. (CWG).
On March 25, 1999, CWG shares were sold in an initial public offering (IPO)
at a price of (pound)3.30 per share and listed on the London Stock Exchange. As
a result of the IPO, CNA will receive approximately 100 million shares of CWG
stock and approximately $143 million in cash. After completion of the
transaction, CNA will own approximately 15% of the outstanding stock of CWG. CNA
will account for its ownership in CWG as an available-for-sale security with a
carrying value of approximately $535 million (based upon the IPO price of
(pound)3.30 per share).
Additionally the original investors, including CNA, have entered into a
lock-up agreement with the underwriters, under which they may not sell their
shares of CWG until September 30, 1999.
9
ITEM 2. PROPERTIES
CNA Plaza, owned by Continental Assurance Company, serves as the home
office for CNAF and its insurance subsidiaries. An adjacent building (located at
55 E. Jackson Blvd.), jointly owned by Continental Casualty Company and
Continental Assurance Company, is partially situated on grounds under leases
expiring in 2058. Approximately 15% of the adjacent building is rented to
non-affiliates. CNAF's subsidiaries lease office space in various cities
throughout the United States and in other countries. The following table sets
forth certain information with respect to the principal office buildings owned
or leased by CNAF's subsidiaries:
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Amount Of Building
Owned and Occupied or
Leased by CNA or its
Location Subsidiaries Principal Usage
- - --------------------------------------------------------------------------------
CNA 1,144,378 sq. ft.* Principal Executive
Plaza Offices of CNAF
333 S. Wabash
Chicago, Illinois
180 Maiden Lane 1,091,570* Property/Casualty
New York, New York Insurance Offices
55 E. Jackson Blvd. 440,292* Principal Executive
Chicago, Illinois Offices of CNAF
401 Penn Street 254,589* Property/Casualty
Reading, Pennsylvania Insurance Offices
100 CNA Drive 251,363* Life Insurance Offices
Nashville, Tennessee
7361 Calhoun Place 224,725** Life Insurance Offices
Rockville, Maryland
200 S. Wacker Drive 265,727** Property/Casualty
Chicago, Illinois Insurance Offices
1111 E. Broad St. 225,470** Property/Casualty
Columbus, Ohio Insurance Offices
1110 Ward Avenue Honolulu, 186,687* Property/Casualty
Hawaii Insurance Offices
3501 State Highway 66 183,184** Property/Casualty
Neptune, New Jersey Insurance Offices
2405 Lucien Way 178,744** Property/Casualty
Maitland, Florida Insurance Offices
333 Glen Street 164,032** Property/Casualty
Glens Falls, New York Insurance Offices
- - --------------------------------------------------------------------------------
Amount Of Building
Owned and Occupied or
Leased by CNA or its
Location Subsidiaries Principal Usage
- - --------------------------------------------------------------------------------
1100 Cornwall Road 147,884** Property/Casualty
Monmouth Junction, Insurance Offices
New Jersey
600 North Pearl Street 139,151** Property/Casualty
Dallas, Texas Insurance Offices
* Represents property owned by CNAF or its subsidiaries.
** Represents property leased by CNAF or its subsidiaries.
10
ITEM 3. LEGAL PROCEEDINGS
Information as to CNA's legal proceedings is set forth in Note F of the
Consolidated Financial Statements of 1998 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION AND
OFFICES HELD FIRST BECAME
WITH REGISTRANT OFFICER OF CNA
NAME AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
Laurence A. Tisch Chief Executive 76 * Co-Chairman of the Board of Loews Corporation.
Officer, CNA President, Chief Executive Officer and Director of
Financial CBS, Inc. until November 1995.Executive officer of
Corporation the Registrant since 1974.
Dennis H. Chookaszian Chairman of the 55 1975 Chairman of the Executive Committee of the
Board and Chief Registrant. Until February 1999, Chairman of the
Executive Board and Chief Executive Officer of CNA since
Officer, CNA** September 1992. Executive officer of the
Registrant since 1975.
Philip L. Engel President, CNA*** 58 1977 President of CNA since September 1992. Prior
thereto, Mr. Engel was Executive Vice President
of CNA. Executive officer of the Registrant
since 1992.
Bernard L. Hengesbaugh Chairman of the 52 1980 Chairman of the Board and Chief Executive Officer
Board and Chief of CNA since February 1999. Executive Vice
Executive President and Chief Operating Officer of CNA
Officer, CNA**** from February 1998 until February 1999. Senior
Vice President of CNA since November 1990.
Executive officer of the Registrant since 1992.
W. James MacGinnitie Senior Vice 60 1997 Senior Vice President and Chief Financial Officer
President and of CNA and of the Registrant since October 1997.
Chief Financial From 1994 through 1997, Partner at Ernst &
Officer Young LLP. Prior to that time, Principal
with Tillinghast.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
*Mr. Tisch is not an officer of CNA.
**Mr. Chookaszian resigned effective February 9, 1999.
***On March 25, 1999, Mr. Engel announced his intention to retire from his
position as President on or about September 30, 1999.
****Mr. Hengesbaugh was elected Chairman of the Board and Chief Executive
Officer of CNA effective February 9, 1999.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Incorporated herein by reference from page 118 of the 1998 Annual Report to
Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from page 2 of the 1998 Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference from pages 11 through 57 of the 1998 Annual
Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference under the heading Market Risk in Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
1998 Annual Report to Shareholders on pages 46 through 50.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Year Ended December 3l, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity - December 31, 1998, 1997 and
1996
Consolidated Statements of Cash Flows - Year Ended December 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
The above Consolidated Financial Statements, the related Notes to
the Consolidated Financial Statements and the Independent Auditors'
Report are incorporated herein by reference from pages 58 through 117 of
the 1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required in Part III has been omitted as the Registrant intends to
file a definitive proxy statement pursuant to Regulation 14A with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
Information required in Part III has been omitted as the Registrant intends to
file a definitive proxy statement pursuant to Regulation 14A with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required in Part III has been omitted as the Registrant intends to
file a definitive proxy statement pursuant to Regulation 14A with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required in Part III has been omitted as the Registrant intends to
file a definitive proxy statement pursuant to Regulation 14A with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year.
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
Page
Number
------
(a) 1. FINANCIAL STATEMENTS:
A separate index to the Consolidated Financial Statements 13
is presented in Part II, Item 8....................................
(a) 2. FINANCIAL STATEMENT SCHEDULES:
Schedule I Summary of Investments................................ 18
Schedule II Condensed Financial Information (Parent Company)...... 19
Schedule III Supplementary Insurance Information................... 23
Schedule V Valuation and Qualifying Accounts and Reserves........ 24
Schedule VI Supplementary Information Concerning Property/Casualty
Insurance Operations.................................. 24
Other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is provided in the Consolidated Financial
Statements or notes thereto.
Independent Auditors' Report....................................... 25
14
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(CONTINUED)
(a) 3. EXHIBITS:
Exhibit
Number
-------
Description of Exhibit
----------------------
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession:
Securities Purchase Agreement, dated as of December 6, 1994, by
and between CNA Financial Corporation and The Continental
Corporation (with exhibits thereto)(Exhibit 1 to Form 8-K dated
December 9, 1994 incorporated herein by reference.)............. 2.1
Merger Agreement, dated as of December 6, 1994, by and among CNA
Financial Corporation, Chicago Acquisition Corp. and The
Continental Corporation (Exhibit 2 to Form 8-K dated December
9, 1994 incorporated herein by reference.)....................... 2.2
(3) Articles of incorporation and by-laws:
Certificate of Incorporation of CNA Financial Corporation, as
amended May 6,1998 (Exhibit 3.1 to Form S-8 filed on
October 9, 1998 incorporated herein by reference.)................ 3.1
By-Laws of CNA Financial Corporation, as amended February 10, 1999. 3.2*
(4) Instruments defining the rights of security holders, including
indentures: CNA Financial Corporation hereby agrees to furnish to
the Commission upon request copies of instruments with respect to
long-term debt, pursuant to Item 601(b) (4) (iii) of Regulation S-K. --
(10) Material contracts:
Continental Casualty Company "CNA" Annual Incentive Bonus Plan
Provisions(Exhibit 10.1 to 1994 Form 10K incorporated herein by
reference.)........................................................ 10.1
Continuing Services Agreement between CNA Financial Corporation
and Dennis H. Chookaszian, dated February 9, 1999.................. 10.2*
Employment Agreement between CNA Financial Corporation and
Philip L. Engel, dated December 31, 1995(Exhibit 10.3 to
1995 Form 10-K incorporated herein by reference.)................. 10.3
Continuing Services Agreement between CNA Financial Corporation
and Edward J. Noha, dated February 27, 1991 (Exhibit 6.0 to 1991
Form 8-K, filed March 18, 1991, incorporated herein by reference.). 10.4
CNA Employees' Retirement Benefit Equalization Plan, as
amended through January 1, 1993 (Exhibit 10.4 to 1992 Form
10-K incorporated herein by reference.)........................... 10.5
CNA Employees' Supplemental Savings Plan, as amended through
January 1, 1993 (Exhibit 10.6 to 1992 Form 10-K incorporated
herein by reference.).............................................. 10.6
15
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(CONTINUED)
(a) 3. EXHIBITS:
Exhibit
Number
------
Description of Exhibit
----------------------
(10) Material contracts (continued):
Federal Income Tax Allocation Agreement dated February
29, 1980 between CNA Financial Corporation and Loews
Corporation (Exhibit 10.2 to 1987 Form 10-K incorporated
herein by reference.)..................................... 10.7
Agreement between Fibreboard Corporation and
Continental Casualty Company, dated April 9, 1993 (Exhibit
A to 1993 Form 8-K filed April 12, 1993 incorporated
herein by reference.)..................................... 10.8
Settlement Agreement entered into on October 12, 1993 by
and among Fibreboard Corporation, Continental Casualty
Company, CNA Casualty of California, Columbia Casualty
Company and Pacific Indemnity Company together the
"Parties" (Exhibit 10.1 to September 30, 1993
Form 10-Q incorporated herein by reference.)............... 10.9
Continental-Pacific Agreement entered into October 12,
1993 between Continental Casualty Company and Pacific
Indemnity Company (Exhibit 10.2 to September 30, 1993
Form 10-Q incorporated herein by reference.)............... 10.10
Global Settlement Agreement among Fibreboard Corporation,
Continental Casualty Company, CNA Casualty Company of
California, Columbia Casualty Company, Pacific Indemnity
Company and the Settlement Class dated December 23, 1993
(Exhibit 10.11 to 1993 Form 10-K incorporated herein
by reference.)................................................ 10.11
Glossary of Terms in Global Settlement Agreement, Trust
Agreement, Trust Distribution Process and Defendant Class
Settlement Agreement as of December 23, 1993 (Exhibit 10.12
to 1993 Form 10-K incorporated herein by reference.)........... 10.12
Fibreboard Asbestos Corporation Trust Agreement dated December
23, 1993 (Exhibit 10.13 to 1993 Form 10-K incorporated herein
by reference.)................................................ 10.13
Trust Distribution Process - Annex A to the Trust Agreement as
of December 23, 1993 (Exhibit 10.14 to 1993 Form 10-K
incorporated herein by reference.)............................ 10.14
Defendant Class Settlement Agreement dated December 22, 1993
(Exhibit 10.15 to 1993 Form 10-K incorporated herein
by reference.)................................................ 10.15
Escrow Agreement among Continental Casualty Company, Pacific
Indemnity Company and The First National Bank of Chicago dated
December 23, 1993(Exhibit 10.16 to 1993 Form 10-K incorporated
herein by reference.).......................................... 10.16
Letter extending Employment Agreement between CNA Financial
Corporation and Philip L. Engel, dated February 17, 1999....... 10.17*
16
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(continued)
(a) 3. EXHIBITS:
Exhibit
Number
--------
Description of Exhibit
----------------------
(10) Employment Agreement between CNA Financial Corporation and
Bernard Hengesbaugh, dated February 9, 1999................. 10.18*
(11) Computation of Net Income per Common Share.................. 11.1*
(12) Statements regarding computation of ratios:
Computation of Ratio of Earnings to Fixed Charges........... 12.1*
Computation of Ratio of Net Income, As Adjusted, to Fixed
Charges..................................................... 12.2*
(13) 1998 Annual Report.......................................... 13.1*
(21) Primary Subsidiaries of CNA................................. 21.1*
(27) Financial Data Schedule..................................... 27*
*Filed herewith
(b) REPORTS ON FORM 8-K:
On December 3, 1998, CNA Financial Corporation filed a report on Form
8-K that announced a senior management succession plan, under
which Bernard L. Hengesbaugh was to succeed Dennis H.
Chookaszian as chairman and chief executive officer of CNA.
17
SCHEDULE I
CNA FINANCIAL CORPORATION
SUMMARY OF INVESTMENTS
- - -------------------------------------------------------------------------------------------------------------------
December 31 1998 1997
---------------------------------- ------------------------------
Fair Carrying Fair Carrying
(In millions of dollars) Cost Value Value Cost Value Value
- - -------------------------------------------------------------------------------------------------------------------
Fixed maturities available-for-sale:
Bonds:
United States government and government
agencies and authorities-taxable... $ 9,507 $ 9,694 $ 9,694 $13,798 $13,920 $13,920
States, municipalities and political
subdivisions-tax exempt............. 6,127 6,321 6,321 4,534 4,724 4,724
Foreign governments and political
subdivisions........................ 1,543 1,545 1,545 998 998 998
Public utilities..................... 683 694 694 340 355 355
Convertibles and bonds with warrants
attached............................ 1 1 1 3 2 2
All other corporate.................. 11,614 11,724 11,724 9,280 9,452 9,452
Redeemable preferred stocks.............. 36 94 94 67 97 97
------ ------ ------ ------- ------ ------
Total fixed maturities available-for-sale 29,511 30,073 30,073 29,020 29,548 29,548
------ ====== ------ ------- ====== ------
Equity securities available-for-sale:
Common stocks:
Banks, trusts and insurance companies 10 6 6 8 7 7
Industrial and other................. 724 1,659 1,659 559 672 672
Non-redeemable preferred stocks.......... 321 305 305 128 135 135
------ ------ ------ ------ ------ -----
Total equity securities available-for-sale 1,055 $ 1,970 1,970 695 $ 814 814
------ ======= ------ ------ ====== ------
Mortgage loans.............................. 57 57 80 80
Real estate................................. 5 5 5 5
Policy loans................................ 177 177 177 177
Other invested assets....................... 806 858 544 695
Short-term investments...................... 4,037 4,037 4,884 4,884
- - ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $35,648 $37,177 $35,405 $36,203
==================================================================================================================
18
SCHEDULE II
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
FINANCIAL POSITION
- - ------------------------------------------------------------------------------------------
December 31 1998 1997
(In millions of dollars)
- - ------------------------------------------------------------------------------------------
ASSETS:
Investments in subsidiaries..................................... $10,865 $ 9,770
Deferred income taxes........................................... 240 511
Notes receivable from affiliates................................ 514 205
Short-term investments.......................................... 3 174
Amounts due from affiliates..................................... 53 -
Other........................................................... 5 4
------- --------
Total assets............................................. $11,680 $10,664
======= ========
LIABILITIES:
Debt............................................................ $ 2,475 $ 1,972
Federal income taxes payable.................................... 48 108
Amounts due to affiliates....................................... - 106
Other........................................................... - 169
------- -------
Total liabilities...................................... 2,523 2,355
STOCKHOLDERS' EQUITY:
Net unrealized investment gains ................................ $ 991 $ 523
Other stockholders' equity...................................... 8,166 7,786
------- -------
Total stockholders' equity............................... 9,157 8,309
- - ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,680 $10,664
==========================================================================================
RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
(In millions of dollars)
- - --------------------------------------------------------------------------------------------
REVENUES:
Equity in income of subsidiaries before income tax:
Operating (loss) income ......................................$ ( 54) $ 956 $1,089
Realized investment gains..................................... 697 742 610
Net investment income............................................ 25 12 13
Realized investment losses....................................... (2) (4) (5)
--------- -------- -------
666 1,706 1,707
--------- ------- -------
EXPENSES:
Administrative and general expenses.............................. 189 217 223
Interest expense................................................. 148 131 135
Other............................................................ -- -- 4
--------- ------- -------
337 348 362
--------- ------- -------
Income before income tax.................................. 329 1,358 1,345
Income tax expense............................................... 47 392 380
- - --------------------------------------------------------------------------------------------
NET INCOME $ 282 $ 966 $ 965
============================================================================================
See accompanying Notes to Condensed Financial Information.
19
SCHEDULE II
(continued)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
(In millions of dollars)
- - --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 282 $ 966 $ 965
----- ---- -----
Adjustments to reconcile net income to net cash flows
from operating activities:
Undistributed earnings of affiliates........................................ (159) (1,523) (828)
Realized losses ........................................................... 2 4 5
Deferred income taxes....................................................... 47 144 352
Changes in:
Federal income taxes....................................................... (60) 79 165
Other, net................................................................. (143) (352) (391)
----- ------- -------
TOTAL ADJUSTMENTS.......................................................... (27) (944) (697)
----- ------ -------
NET CASH FLOWS FROM OPERATING ACTIVITIES................................... 255 22 268
----- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term investments................................................ 11 (15) (2)
Capital contribution to subsidiaries............................................ (257) -- --
Purchase of preferred stock of subsidiaries..................................... (305) -- --
Other........................................................................... -- (4) (5)
------ ----- -------
NET CASH FLOWS FROM INVESTING ACTIVITIES................................... (551) (19) (7)
------ ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES: .............................................
Dividends paid to preferred shareholders........................................ (7) (6) (6)
Proceeds from issuance of long-term debt........................................ 1,000 -- 248
Principal payments on long-term debt............................................ (490) -- (500)
Issuance of cumulative exchangeable preferred stock............................. 200 -- --
Purchase of treasury stock...................................................... (102) -- --
Loans to subsidiaries........................................................... (305) -- --
------ ------ -------
NET CASH FLOWS FROM FINANCING ACTIVITIES.................................... 296 (6) (258)
----- ----- -------
NET CASH FLOWS.............................................................. -- (3) 3
Cash at beginning of year.......................................................... -- 3 --
- - --------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ -- $ -- $ 3
===============================================================================================================
Supplemental disclosures of cash flow information:
Cash (paid) received:
Interest....................................................................$ (129) $ (134) $(141)
Federal income taxes........................................................ (143) (95) 15
Non-cash transactions:
NoteS receivable from officer stockholders' for sale of treasury stock...... (44) -- --
==================================================================================================================
See accompanying Notes to Condensed Financial Information.
20
SCHEDULE II
(continued)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL INFORMATION
a. Basis of presentation
The condensed financial information of CNA Financial Corporation
(Parent Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in the CNA Financial
Corporation Annual Report to Shareholders. Investments in subsidiaries
are accounted for using the equity method of accounting.
Certain amounts applicable to prior years have been reclassified to
conform to classifications followed in 1998.
b. Debt
----------------------------------------------------------------------------
December 31 1998 1997
(In millions of dollars)
- - -----------------------------------------------------------------------------
Variable Rate Debt:
Commercial Paper......................................$ 500 $ 675
Credit Facility - CNAF................................ 235 400
Senior Notes:
8.875%, due March 1, 1998............................ -- 150
6.25%, due November 15, 2003......................... 249 249
6.50% , due April 15, 2005........................... 497 --
6.75%, due November 15, 2006......................... 248 248
6.45%, due January 15, 2008.......................... 149 --
6.60%, due December 15, 2008......................... 199 --
6.95%, due January 15, 2018.......................... 148 --
7.25% Debenture, due November 15, 2023.................. 247 247
1.0% Urban Development Action Grant, due May 7, 2019..... 3 3
- - -----------------------------------------------------------------------------
TOTAL $2,475 $1,972
=============================================================================
CNAF has a $795 million revolving credit facility that expires in May
2001. The amount available is reduced by CNAF's outstanding commercial
paper borrowings. As of December 31, 1998, there was $60 million of
unused borrowing capacity under the facility. The interest rate on the
bank loans is based on the London Interbank Offered Rate (LIBOR), plus
16 basis points. Additionally, there is a facility fee of 9 basis
points annually. The average interest rate on the bank loans under the
credit facility at December 31, 1998, 1997 and 1996, was 5.49%, 6.16%
and 5.72%, respectively.
To offset the variable rate characteristics of the facility, CNAF
entered into interest rate swap agreements with several banks having a
total notional principal amount at December 31, 1998 and 1997 of $650
million and $950 million, respectively, which terminate from May 2000
to December 2000. These agreements provide that CNAF pay interest at a
fixed rate, averaging 6.07% at December 31, 1998 and 6.20% at December
31, 1997 and 1996, respectively, in exchange for the receipt of
interest at the three month LIBOR rate. The effect of these interest
rate swaps was to increase interest expense by
21
SCHEDULE II
(continued)
CNA FINANCIAL CORPORATION
(PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL INFORMATION--(CONTINUED)
approximately $2 million, $4 million and $7 million for the years ended December
31, 1998, 1997 and 1996, respectively.
The weighted average interest rate on commercial paper at December 31, 1998 was
5.89% compared to 6.05% and 5.67% at December 31, 1997 and 1996, respectively.
The commercial paper borrowings are fully supported by the committed credit
facility. The weighted average interest rate (interest and facility fees) on the
combined revolving credit facility, commercial paper borrowings and interest
rate swaps was 6.36%, 6.35% and 6.28% at December 31, 1998, 1997 and 1996,
respectively.
In 1998, CNAF 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 in four separate offerings senior
notes with an aggregate principal amount of $1 billion.
c. Management and administrative expenses
CNAF has reimbursed, or will reimburse, its subsidiaries for general
management and administrative expenses, unallocated loss adjustment
expenses and investment expense of $187 million, $217 million and $223
million in 1998, 1997 and 1996, respectively.
d. Capital contributions
In 1998, CNAF contributed approximately $257 million to the capital of
its subsidiaries. There were no contributions made by CNAF to the
capital of its subsidiaries in 1997 or 1996.
- - ------------------------------------------------------------------------------
22
SCHEDULE III
CNA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
- - -------------------------------------------------------------------------------------------------------------------
Gross Insurance Reserves
-----------------------------------------
Claim Insurance
Deferred And Future Policy- Net Net Claims and
Acquisition Claim Policy Unearned holders' Premium Investment Policyholders'
(In millions of dollars) Costs Expense Benefits Premiums Funds Revenue Income Benefits
- - -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Agency Market Operations...$ - $ - $ - $ - $ - $ 5,247 $ 744 $4,431
Specialty Operations....... - - - - - 1,092 245 951
CNA Re..................... - - - - - 944 163 707
Global Operations.......... - - - - - 941 110 585
Risk Management............ - - - - - 823 144 909
Group Operations........... - - - - - 3,712 133 3,177
Life Operations............ - - - - - 684 525 871
Corporate.................. - - - - - (27) 82 127
Eliminations............... - - - - - (41) - (41)
Consolidated............... 2,422 29,192 5,418 5,039 789 - - -
-----------------------------------------------------------------------------------------
$2,422 $29,912 $ 5,418 $ 5,039 $ 789 $13,375 $2,146 $11,717
========================================================================================
December 31, 1997
Agency Market Operations.$ - $ - $ - $ - $ - $ 5,092 $ 787 $ 3,871
Specialty Operations.... - - - - - 1,251 268 1,011
CNA Re.................. - - - - - 898 153 670
Global Operations....... - - - - - 854 117 490
Risk Management......... - - - - - 776 158 893
Group Operations........ - - - - - 3,903 117 3,375
Life Operations......... - - - - - 688 501 855
Corporate............... - - - - - 20 108 103
Eliminations............ - - - - - -- - -
Consolidated............ 2,142 29,558 4,829 4,700 742 -- - -
---------------------------------------------------------------------------------------
$2,142 $29,558 $4,829 $ 4,700 $ 742 $13,482 $2,209 $11,268
========================================================================================
December 31, 1996
Agency Market Operations $ - $ - $ - $ - $ - $ 5,346 $ 828 $ 4,277
Specialty Operations.... - - - - - 1,217 273 1,092
CNA Re.................. - - - - - 944 161 694
Global Operations....... - - - - - 945 134 594
Risk Management......... - - - - - 572 179 567
Group Operations........ - - - - - 3,816 118 3,272
Life Operations......... - - - - - 654 485 838
Corporate............... - - - - - 53 98 59
Eliminations............ - - - - - (22) - (22)
Consolidated............ 1,854 30,395 4,181 4,659 746 - - -
--------------------------------------------------------------------------------------
$1,854 $30,395 $ 4,181 $4,659 $ 746 $13,525 $2,276 $11,371
======================================================================================
SCHEDULE III (CONT.)
CNA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
- - ----------------------------------------------------------------
Amortization
of Deferred Other
Acquisition Operating Premiums
(In millions of dollars) Costs Expenses Written*
- - ----------------------------------------------------------------
DECEMBER 31, 1998
Agency Market Operations... $ 1,239 $ 491 $5,463
Specialty Operations....... 175 169 1,023
CNA Re..................... 252 57 907
Global Operations.......... 224 251 985
Risk Management............ 98 234 888
Group Operations........... 5 731 1,008
Life Operations............ 178 104 295
Corporate.................. 9 326 -
Eliminations............... - - -
Consolidated Operations.... - - -
--------------------------------------
$2,180 $2,363 $10,569
=====================================
December 31, 1997
Agency Market Operations $1,242 $ 384 $5,085
Specialty Operations.... 247 149 1,267
CNA Re.................. 247 79 1,091
Global Operations....... 173 221 812
Risk Management......... 101 196 706
Group Operations........ - 680 963
Life Operations......... 120 147 247
Corporate............... 8 244 15
Eliminations............ - - -
Consolidated Operations. - - -
-----------------------------------
$2,138 $2,100 $10,186
====================================
December 31, 1996
Agency Market Operations $1,183 $ 560 $5,473
Specialty Operations.... 232 79 1,200
CNA Re.................. 119 172 937
Global Operations....... 221 145 993
Risk Management......... 60 248 660
Group Operations........ (24) 674 1,037
Life Operations......... 61 144 188
Corporate............... 4 185 33
Eliminations............ - - -
Consolidated Operations. - - -
-------------------------------------
$1,856 $2,207 $10,611
=====================================
- - ------------------------------
*Premiums written relates to property/casualty companies only.
23
SCHEDULE V
CNA FINANCIAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- - ---------------------------------------------------------------------------------------------
Balance Balance
at Charged to Charged to at
Beginning Costs and Other End of
(In millions of dollars) of Period Expenses Amounts Deductions Period
- - ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Deducted from assets:
Allowance for doubtful accounts:
Receivables.....................$ 303 $ 35 $ -- $ 10 $ 328
===== ===== ===== ===== =====
YEAR ENDED DECEMBER 31, 1997
Deducted from assets:
Allowance for doubtful accounts:
Receivables......................$ 277 $ 30 $ -- $ 4 $ 303
===== ===== ===== ===== =====
YEAR ENDED DECEMBER 31, 1996
Deducted from assets:
Allowance for doubtful accounts:
Receivables......................$ 289 $ 34 $ -- $ 46 $ 277
===== ===== ===== ===== =====
- - ----------------------------------------------------------------------------------------------
SCHEDULE VI
CNA FINANCIAL CORPORATION
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
- - -----------------------------------------------------------------------------
Consolidated Property/
Casualty Entities
------------------------
As of and for the Year Ended December 31 1998 1997 1996
(In millions of dollars)
- - ----------------------------------------------------------------------------------------------------
Deferred acquisition costs.....................................$ 1,279 $ 1,162 $ 1,084
Reserves for unpaid claims and claim adjustment expenses....... 28,355 28,571 29,395
Discount deducted from claim and claim adjustment expense
reserves above(based on interest rates ranging from
3.5% to 7.5%).................................................. 2,380 2,409 2,459
Unearned premiums.............................................. 5,039 4,700 4,659
Earned premiums................................................ 10,079 9,927 10,127
Net investment income.......................................... 1,731 1,790 1,881
Incurred claim and claim adjustment expenses related to
current year................................................... 7,903 7,942 7,922
Incurred claim and claim adjustment expenses related to
prior years..................................................... 263 (256) (91)
Amortization of deferred acquisition costs...................... 2,042 2,017 1,843
Paid claim and claim expenses................................... 8,745 8,376 9,200
Net Premiums written............................................ 10,569 10,186 10,611
- - ---------------------------------------------------------------------------------------------------
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CNA Financial Corporation
We have audited the consolidated financial statements of CNA Financial
Corporation (an affiliate of Loews Corporation) and subsidiaries as of December
31, 1998 and 1997, and for each of the three years in the period ended December
31, 1998 and have issued our report thereon dated February 10, 1999. Such
consolidated financial statements and report are included in the Company's 1998
Annual Report to Shareholders and are incorporated herein by reference. Our
audits also included the financial statement schedules of CNA Financial
Corporation and subsidiaries listed in Item 14. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
February 10, 1999
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNA Financial Corporation
By S\LAURENCE A. TISCH
--------------------------------------
Laurence A. Tisch
Chief Executive Officer
(Principal Executive Officer)
By S\W. JAMES MACGINNITIE
--------------------------------------
W. James MacGinnitie
Senior Vice President and
Chief Financial Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title |
|
|
S\ANTOINETTE COOK BUSH Director |
- - ------------------------------------ |
Antoinette Cook Bush |
|
|
S\DENNIS H. CHOOKASZIAN Director |
- - ------------------------------------ |
Dennis H. Chookaszian |
|
S\PHILIP L. ENGEL Director | Dated
- - ------------------------------------ |
Philip L. Engel | March 31, 1999
|
S\ROBERT P. GWINN Director |
- - ------------------------------------ |
Robert P. Gwinn |
|
S\BERNARD L. HENGESBAUGH Director |
- - ------------------------------------ |
Bernard L. Hengesbaugh |
26
SIGNATURES--(continued)
Signature Title |
|
S\Walter F. Mondale Director |
- - ------------------------------- |
Walter F. Mondale |
|
S\EDWARD J. NOHA Chairman of the Board |
- - ------------------------------------ and Director |
Edward J. Noha |
|
S\JOSEPH ROSENBERG Director |
- - ------------------------------------ |
Joseph Rosenberg |
|
S\RICHARD L. THOMAS Director | Dated
- - ------------------------------------ |
Richard L. Thomas | March 31, 1999
|
S\JAMES S. TISCH Director |
- - ----------------------------------- |
James S. Tisch |
|
S\LAURENCE A. TISCH Chief Executive Officer|
- - ------------------------------------ and Director |
Laurence A. Tisch |
|
S\PRESTON R. TISCH Director |
- - ------------------------------------ |
Preston R. Tisch |
|
S\MARVIN ZONIS Director |
- - ------------------------------------ |
Marvin Zonis |
27
EXHIBIT 11.1
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
===============================================================================
Year Ended December 31 1998 1997 1996 1995 1994
(In millions, except per share data)
- - -------------------------------------------------------------------------------
Weighted average shares outstanding..............184.9 185.4 185.4 185.4 185.4
===== ===== ===== ===== =====
Net income.......................................$ 282 $ 966 $ 965 $ 757 $ 36
Less preferred stock dividends................... 7 7 7 7 5
----- ----- ----- ----- -----
Net income available to common stockholders...$ 275 $ 959 $ 958 $ 750 $ 31
===== ===== ===== ===== =====
Earnings per share:
Net income available to common stockholders...$1.49 $5.17 $5.17 $4.05 $0.17
===== ===== ===== ===== =====
- - -------------------------------------------------------------------------------
28
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
- - -------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996 1995 1994
(In millions of dollars, except ratios)
- - -------------------------------------------------------------------------------
Income (loss) before income tax, as adjusted....$329 $1,358 $1,345 $1,042 $(134)
Adjustments:
Interest expense............................. 219 198 200 182 71
Interest element of operating lease rental... 47 34 32 47 19
----- ----- ------ ------ -----
Earnings before fixed charges...................$595 $1,590 $1,577 $1,271 $ (44)
===== ===== ====== ====== =====
Fixed charges:
Interest expense.............................$219 $ 198 $ 200 $ 182 $ 71
Interest element of operating lease rental... 47 34 32 47 19
---- ------ ------ ------ -----
Total fixed charges.............................$266 $ 232 $ 232 $ 229 $ 90
==== ====== ====== ====== =====
Ratio of earnings to fixed charges (1).......... 2.2 6.8 6.8 5.6 (0.5)
- - -------------------------------------------------------------------------------
(1) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges of consolidated companies. Fixed charges
consist of interest and that portion of operating lease rental expense
which is deemed to be an interest factor for such rentals.
EXHIBIT 12.2
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF NET INCOME,
AS ADJUSTED, TO FIXED CHARGES
- - -------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996 1995 1994
(In millions of dollars, except ratios)
- - -------------------------------------------------------------------------------
Net income......................................$282 $ 966 $ 965 $757 $37
Adjustments:
Interest expense, after tax.................. 143 129 130 119 46
Interest element of operating lease rental,
after tax.................................... 30 22 21 30 12
----- ----- ----- ----- ----
Net income, as adjusted.........................$455 $ 1,117 $1,116 $906 $95
===== ====== ====== ===== ====
Fixed charges:
Interest expense, after tax..................$143 $ 129 $ 130 $119 $46
Interest element of operating lease rental,
after tax.................................... 30 22 21 30 12
----- ----- ----- ----- -----
Total fixed charges.............................$173 $ 151 $ 151 $149 $58
===== ======= ====== ===== ====
Ratio of net income, as adjusted, to fixed
charges......................................... 2.6 7.4 7.4 6.1 1.6
- - -------------------------------------------------------------------------------
(1) For purposes of computing this ratio, net income, as adjusted, consists of
net income plus fixed charges of consolidated companies, after tax. Fixed
charges consist of after-tax interest and that portion of operating
lease rental expense which is deemed to be an interest factor for such
rentals.
29
EXHIBIT 21.1
PRIMARY SUBSIDIARIES OF CNA
PLACE OF
COMPANY INCORPORATION
- - -------- --------------
AMS Services, Inc. Delaware
American Casualty Company of Reading, Pennsylvania Pennsylvania
CNA Casualty of California California
CNA Reinsurance Company, Ltd. United Kingdom
CNA Surety Corporation Delaware
Columbia Casualty Company Illinois
Commercial Insurance Company of Newark, N. J. New Jersey
Continental Assurance Company Illinois
Continental Casualty Company Illinois
Firemen's Insurance Company of Newark, New Jersey New Jersey
First Insurance Company of Hawaii Hawaii
National Fire Insurance Company of Hartford Connecticut
National-Ben Franklin Insurance Company of Illinois Illinois
Pacific Insurance Company California
The Buckeye Union Insurance Company Ohio
The Continental Insurance Company New Hampshire
The Fidelity and Casualty Company of New York New Hampshire
Transcontinental Insurance Company New York
Transcontinental Technical Services, Inc. Illinois
30
EXHIBIT 21.1 - (continued)
PRIMARY SUBSIDIARIES OF CNA--(continued)
PLACE OF
COMPANY INCORPORATION
- - ------- -------------
Transportation Insurance Company Illinois
Valley Forge Insurance Company Pennsylvania
Valley Forge Life Insurance Company Pennsylvania
Western National Warranty Corporation Arizona
All other subsidiaries, when aggregated, are not considered significant.
31
CNA FINANCIAL CORPORATION
CNA PLAZA
CHICAGO, ILLINOIS 60685
G-123177-A (98)