Document/Exhibit Description Pages Size
1: 10-K 1999 Form 10-K 35 142K
2: EX-3.1 Certificate of Incorporation 3± 11K
5: EX-10.14 Employment Agreement 19± 89K
3: EX-10.3 Cna Employees' Supplemental Savings Plan 2 11K
4: EX-10.4 Cna Employees' Retirment Benefit Equalization Plan 2 13K
6: EX-13.1 1999 Annual Report 79 467K
7: EX-27 Article 7 FDS for 10-K 2± 9K
CNA FINANCIAL CORPORATION
1999 ANNUAL REPORT
FOCUSED ON PERFORMANCE
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS.......................................... 1
CHAIRMAN'S LETTER............................................. 2
FINANCIAL POSITION............................................ 5
MANAGEMENT ROUNDTABLE......................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS.......................... 13
CONSOLIDATED BALANCE SHEETS................................... 42
CONSOLIDATED STATEMENTS OF OPERATIONS......................... 44
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............... 45
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................... 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................... 48
INDEPENDENT AUDITORS' REPORT.................................. 74
DIRECTORS..................................................... 75
OFFICERS...................................................... 75
COMPANY INFORMATION........................................... 76
CNA FINANCIAL CORPORATION
COMPANY PROFILE
CNA Financial Corporation is a holding company whose primary subsidiaries
consist of property/casualty and life insurance companies. Collectively, these
subsidiaries comprise CNA, one of the largest insurance organizations in the
United States.
CNA serves businesses and individuals with a broad range of insurance and other
risk management products and services. Insurance products include property and
casualty coverages; life, accident and health insurance; and pension products
and annuities. CNA services include risk management, information services,
health care management and claims administration. CNA products and services are
marketed through agents, brokers, managing general agents and direct sales.
CNA Financial Corporation, with 1999 revenues of $16.4 billion, assets of $61.2
billion and stockholders' equity of $8.9 billion, is the holding company of
Continental Casualty Company, incorporated in 1897, Continental Assurance
Company, incorporated in 1911, and The Continental Corporation, incorporated in
1853.
CNA Financial Corporation stock is traded primarily on the New York Stock
Exchange, and is approximately 86 percent owned by Loews Corporation.
1999 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
RESULTS OF OPERATIONS & FINANCIAL CONDITION
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------
As of and for the Year Ended December 31 1999 1998 1997 1996 1995*
(In millions of dollars, except per share data and ratios)
-----------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenues $16,403 $17,162 $17,199 $16,988 $14,700
Net operating income (loss) (145) (152) 488 578 463
Net realized investment gains 192 434 478 387 294
Cumulative effect of a change
in accounting principle, net of tax (177) - - - -
------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (130) $ 282 $ 966 $ 965 $ 757
=================================================================================================================
EARNINGS PER SHARE
Net operating income(loss) $ (0.85) $(0.86) $ 2.59 $ 3.08 $ 2.46
Net realized investment gains, net of tax
and minority interest 1.04 2.35 2.58 2.09 1.59
Cumulative effect of a change
in accounting principle, net of tax
and minority interest (0.96) - - - -
-----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (0.77) $ 1.49 $ 5.17 $ 5.17 $ 4.05
==================================================================================================================
FINANCIAL CONDITION
Invested assets $35,560 $37,177 $36,203 $35,412 $35,886
Total assets 61,219 62,432 61,675 60,455 60,360
Reserves 39,165 40,400 39,829 39,981 40,803
Debt 2,881 3,160 2,897 2,765 3,026
Stockholders' equity 8,938 9,157 8,309 7,060 6,739
Book value per common share 47.66 47.89 44.01 37.27 35.52
Return on average stockholders' equity -1.4% 3.2% 12.6% 14.0% 13.4%
STATUTORY SURPLUS
------------------------------------------------------------------------------------------------------------------
Property/casualty companies** $ 8,679 $ 7,593 $ 7,123 $ 6,349 $ 5,696
Life insurance companies 1,222 1,109 1,224 1,163 1,056
==================================================================================================================
* RESULTS OF OPERATIONS DATA INCLUDES THE CONTINENTAL CORPORATION SINCE ITS
ACQUISITION ON MAY 10, 1995.
** SURPLUS INCLUDES EQUITY OF PROPERTY/CASUALTY COMPANIES OWNERSHIP IN LIFE
INSURANCE SUBSIDIARIES.
CNA FINANCIAL CORPORATION 1
FOCUSED ON PERFORMANCE
CHAIRMAN'S LETTER
Dear Shareholder:
According to conventional wisdom, we are in a "mature" industry. Certainly, when
you look at the recent financial and stock market performance of our company -
and of most of our competitors - that perception seems true.
But we beg to differ.
There is nothing conventional about the accelerating impact of technology in an
economy that is more global every day, or the fact that risks facing our
customers are becoming more varied and complex.
As an organization focused on helping businesses manage such risks, we believe
this time of change presents the greatest opportunity in our working lives. We
believe our industry is on the threshold of a new era of growth - particularly
for companies like CNA that have the vision and financial strength to adapt.
But before expanding on our vision, you and I know that there is still much work
to be done right now to improve CNA's operating performance and shareholder
value.
2 1999 ANNUAL REPORT
Important progress
In the year since I became chief executive officer of the CNA Insurance
Companies, I believe we have made tremendous progress in sharpening our focus
and building a solid financial foundation to help us pursue our vision
successfully. Our multi-year turnaround plan is firmly in place and the momentum
from 1999 is carrying over into 2000.
That said, this management team is not satisfied with our progress, as the
bottom line has not yet improved commensurate with our actions.
This became especially true when some of the worst storms Europe had ever seen,
together with reserve strengthening, combined to wipe out three straight
quarters of progress we had made in increasing our net operating income.
But we remain focused on performance.
Our drive to improve the quality of our underwriting across the board remains
central to our strategy, today and tomorrow. We are shedding under-priced
business in troubled lines -almost $1.2 billion of property/casualty premiums on
a base of $6.8 billion - and making significant progress in achieving adequate
rates on the remaining risks.
We have taken more than $380 million out of our run-rate cost of operations as a
down payment on our relentless determination to be a low cost competitor.
These steps are putting us on the right track.
And while there are challenges to meet, they should not obscure three truths
about CNA:
o We continue to have one of the strongest balance sheets in the industry -
despite a $363 million after-tax reserve strengthening in loss and
allocated loss adjustment expense for prior periods. This strength gives us
the financial flexibility to invest in our vision and to fix weak
businesses.
o We have many lines of business delivering outstanding underwriting results,
including insurance to protect officers and directors, liability insurance
for professionals, warranty and our majority-owned CNA Surety operation.
o We have one of the most effective partnerships with agents and brokers in
the sector. Much of our progress, especially in the troubled standard
commercial lines market, is due to the strength of these relationships.
Getting focused on business
The stage is now set for us to reach our vision: to be the premier underwriter
of the risks facing businesses.
This required some very difficult decisions. In the end, we decided to exit
long-time CNA businesses that, however successful in their own right, did not
fit with our core strategy. So, last year, we transferred our personal insurance
business to Allstate and sold the majority of our interest in AMS Services,
Inc., an insurance technology provider, to a private management partnership. In
the first quarter of 2000, we also announced a decision to explore the sale of
our life and life reinsurance businesses.
In total, CNA will re-deploy substantial assets to concentrate on businesses
where we hold strategic advantages - such as specialized products and services
targeted to businesses.
A new opportunity
With the rise of e-commerce, service- and technology-based enterprises, and the
globalization of businesses of virtually any size, the needs for risk management
products and services are evolving rapidly. This creates an enormous opportunity
that will require real focus and talent to capture.
The opportunity comes in two forms:
o Existing clients need new products and services to address their evolving
risks. The markets our customers serve are changing, their exposures are
changing, and the ways they choose to communicate and interact with us are
changing.
CNA FINANCIAL CORPORATION 3
o Entirely new types of businesses are being created with a unique set of
risks and insurance needs. They, too, will look to us for new products and
services.
Our objective is to make the most of this opportunity by refocusing CNA on its
core strength as the underwriter of choice in the business insurance market.
Completing our turnaround plan lays the essential underwriting and management
foundation for making our vision a bottom-line success.
Thanks for the hard work
Before closing, I want to thank the people of CNA for their commitment to
building a stronger company. I also want to thank our entire senior leadership
team, which was made even stronger with the addition of Bob Deutsch as our chief
financial officer late in 1999. Finally, I want to recognize Ron Gallatin, who
joined our board of directors in February 2000. We welcome the perspective and
experience he brings to our organization.
The work we have undertaken in 1999 has not been easy. But I am confident our
ongoing actions to improve operational and financial performance, in combination
with the company's strong and stable balance sheet, will enable CNA to take full
advantage of the changes sweeping through our industry. In this way, we will be
able to deliver enhanced value to our shareholders in the years ahead.
Thank you for your continued support.
Sincerely,
Bernard L. Hengesbaugh
Chairman and Chief Executive Officer
CNA Insurance Companies
March 15, 2000
4 1999 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
FINANCIAL POSITION (1989-1999)
FINANCIAL POSITION
This page of CNA Financial Corporation's annual report has four bar graphs which
illustrate the trend in revenues, assets, stockholders' equity and book value
per common share from 1989 through 1999.
($ IN BILLIONS EXCEPT PER SHARE DATA)
|-----------------------|----------|---------|---------------|---------------|
|Measurement Period | | | Stockholders'| Book Value Per|
| (Fiscal Year Covered) | Revenues | Assets | Equity | Common Share* |
|-----------------------|----------|---------|---------------|---------------|
|FYE 12/31/89...........| 9.1 | 30.9 | 4.2 | 21.58 |
|FYE 12/31/90...........| 9.9 | 34.7 | 4.5 | 23.41 |
|FYE 12/31/91...........| 11.1 | 39.2 | 5.1 | 26.75 |
|FYE 12/31/92...........| 10.8 | 39.7 | 4.8 | 25.02 |
|FYE 12/31/93...........| 11.0 | 41.9 | 5.4 | 28.22 |
|FYE 12/31/94...........| 11.0 | 44.3 | 4.5 | 23.71 |
|FYE 12/31/95...........| 14.7 | 60.4 | 6.7 | 35.52 |
|FYE 12/31/96...........| 17.0 | 60.5 | 7.1 | 37.27 |
|FYE 12/31/97...........| 17.2 | 61.7 | 8.3 | 44.01 |
|FYE 12/31/98...........| 17.2 | 62.4 | 9.2 | 47.89 |
|FYE 12/31/99...........| 16.4 | 61.2 | 8.9 | 47.66 |
|-----------------------|----------|---------|---------------|---------------|
*Previous years have been restated for 3 for 1 stock split that occurred on
5/98.
CNA FINANCIAL CORPORATION 5
MANAGEMENT ROUNDTABLE
QUESTIONS & ANSWERS
In the 1998 CNA Financial Corporation annual report, CNA Insurance Companies
Chairman and Chief Executive Officer Bernard L. Hengesbaugh stated that
conditions in the insurance industry had never been more competitive and that
CNA's operating performance was unacceptable to CNA's management and board.
Given these critical factors, 1999 was a year in which management focused on
operating performance. To help shareholders measure CNA's progress to date and
understand its strategy for handling challenges still facing the company, the
following section features a roundtable discussion with several key CNA
officers. In it, they answer the tough questions most often asked by investors
and financial analysts.
Featured are Bernie Hengesbaugh; Bob Deutsch, senior vice president and chief
financial officer; Mike McGavick, president and chief operating officer of
Agency Market Operations; and Tom Taylor, executive vice president.
6 1999 ANNUAL REPORT
Where does CNA stand today versus a year ago?
HENGESBAUGH: In short, we continue to work our turnaround plan to bring our
operating performance back up to the level of the top companies in the business.
We improved underwriting discipline, reduced expenses and strengthened our
management team. As a result, CNA is in a fundamentally stronger position today
than we were a year ago.
Even so, you reported a significant operating loss for the year. How do you
account for this performance?
DEUTSCH: Well, for the year, we strengthened loss and allocated loss adjustment
expense reserves for prior periods by $363 million after taxes, $235 million of
which was taken in the fourth quarter based upon recently-completed actuarial
studies. It became clear that losses on our existing business - primarily our
1997 and 1998 accident years - were developing higher than our earlier
estimates, so we adjusted our reserves accordingly. We also strengthened our
1999 accident year by $103 million after-tax in the fourth quarter.
With this reserve action behind us, we are well positioned to deliver strong
operating results in 2000. And by that statement, I do not in any way mean to
suggest that we will let our overall reserve adequacy slip in order to deliver
earnings.
We also had catastrophe losses for the full year of $253 million after-tax
versus $218 million for the full year 1998. The principal drivers were the
French and Danish windstorms in the fourth quarter and Hurricane Floyd in the
third quarter.
After two years of disappointing performance, your stock is selling below book
value. Why should anyone be an investor in CNA?
DEUTSCH: To begin with, we have a goal of being a top quartile performer in our
industry, which, given current interest rates, would be in the range of 10-12
percent. And of course, we're not performing anywhere near that level right now.
We believe the key is improvement in our net operating income. That's why we're
so focused on underwriting discipline and expense reduction. As we improve those
areas, we believe our shareholders will be rewarded.
The best insurance companies produce operating returns on equity north of 10
percent. We're on a program of getting ourselves positioned to compete at those
levels. When we get there, I believe the market will recognize the inherent
value of CNA.
The market values financial strength in insurance companies. How would you
characterize the strength of CNA's balance sheet?
DEUTSCH: In a word, excellent. The strength of our balance sheet really arises
from our investments, reserve position and capital structure.
Our investments in Global Crossing and Canary Wharf Group plc continue to have a
favorable impact on our equity position. Global Crossing is a provider of
Internet and long distance services with an undersea digital fiber-optic cable
network. Canary Wharf is a publicly-traded holding company that operates the
Canary Wharf Real Estate development in the London docklands.
Since year-end 1998, the market value of these two holdings increased
approximately $1.5 billion to $2.4 billion at the end of 1999. The market values
of Global Crossing and Canary Wharf at December 31 were $1.8 billion and $600
million, respectively, virtually all of which is unrealized gains.
Offsetting the equity gains were unrealized losses in our bond portfolio. Bond
interest rates generally increased across the yield curve by approximately 175
basis points during 1999. This shift contributed to a $1.3 billion unfavorable
change in unrealized bond market values for CNA, from an unrealized gain at
year-end 1998 of $600 million to an unrealized loss at December 31 of $700
million.
As for reserves, we emphasize a conservative philosophy. The paid and incurred
loss activity during the year indicated that market conditions had led to higher
loss ratios than we expected, and we stepped up to those indications. While no
one can
CNA FINANCIAL CORPORATION 7
guarantee that our actuarial estimates will not change over time, we believe
that the reserves are in a strong position to withstand further changes. The
pricing and underwriting actions taken over the last several quarters will
strengthen our financial position.
We also have a solid capital structure. Our stockholders' equity was $8.9
billion at the end of 1999. Assets were $61.2 billion, and overall debt levels,
including preferred stock, decreased by approximately $479 million, or 14
percent. This capital structure provides a strong base to build on as we move
into the future.
In 1999, we made important progress in getting the deep financial resources of
this company moving in the right direction. As this momentum builds, we continue
to believe that the value of the CNA franchise will be fully recognized and the
commitment of our shareholders will be well rewarded.
What will it take for CNA to become a top performer?
HENGESBAUGH: The first thing we have to do is produce strong returns from our
insurance operations and our investment portfolio. On the investment side, we
are already there. So the real question for the CNA leadership team is this -How
do we get the financial muscle in this company working to help us produce
superior operating returns?
As we thought about that question, there was a clear recognition of what needed
to be done, especially for our property/casualty businesses. We are in a tough
part of the cycle right now. And we knew if CNA was going to get any benefit
from future improvement in the market, however slight, then some very important
changes had to take place within CNA very quickly.
So in 1999, we started on what in fact is a turnaround plan for CNA.
It is not business as usual, and it has involved a lot of rethinking of what
we're doing and how we're doing it. While the plan involves a whole series of
strategic activities, the real day-to-day priorities are underwriting
discipline, expense reduction and overall improvement of the operating results.
OK, let's start with underwriting discipline. Can you give us an update?
HENGESBAUGH: A key priority of our turnaround plan is improved underwriting
discipline. Taking the lead in this process is our new Underwriting Policy
Group, headed by Tom Taylor, that we formed in 1999. This small group of experts
in underwriting, claims and pricing is working closely with our business leaders
to enhance underwriting proficiency across all our operations. We are totally
focused on rebuilding the disciplines required to serve our customers and
produce superior underwriting results.
TAYLOR: Adding to what Bernie said, there really is a broader context here.
Several of our specialty businesses -- directors and officers, warranty, surety,
credit, fidelity and non-medical professional liability -- are already solid
performers. These are strong businesses we are looking to grow. The businesses
that need the most work are middle markets, large accounts and medical
malpractice.
We are getting off underpriced business and working with our key agents and
brokers to achieve necessary price increases. For the year, we did not renew
$1.2 billion in property/casualty business on a base of $6.8 billion as we
worked to achieve adequate pricing and implemented key re-underwriting actions.
Average price increases were between 5 and 6 percent, with retention holding in
the 70 to 80 percent range throughout the year.
How are your agents and brokers handling this?
HENGESBAUGH: We have tremendous support from our brokers and independent agents
in middle-market commercial business, which is one of the toughest segments for
price competition. Their cooperation and support really validates our position
on the fundamental need for adequate pricing in middle-market commercial lines.
Our agents know we are committed to working with them over the long term, and
they are giving us every indication that they want to work with us.
After four consecutive quarters of essential price increases, we are encouraged
by our progress. We also recognize that our work to achieve adequate pricing
doesn't stop here. We'll need continued underwriting discipline - and more than
one renewal cycle of price increases - to get our entire property/casualty book
up to an appropriate level of profitability.
How about a specific example. Could you tell us about your efforts in commercial
middle markets?
MCGAVICK: First of all, we are aggressively getting off accounts that have been
unprofitable. Where we can't find a solution that is acceptable to us, we're
getting off the risk.
Secondly, and a much more difficult task, is getting adequate price on business
that we want to retain. Usually, this is business that many companies would like
to have. We have steadfast resolve in getting
8 1999 ANNUAL REPORT
an adequate price, even in this business. In 1999, we did not renew nearly $750
million of commercial premiums on a base of $3.4 billion as we worked through
critical underwriting and pricing initiatives.
It is also important to look at the quarter-to-quarter trend. In middle-market
business, as we work to attain rate adequacy, average price increases were 2
percent in the first quarter, 6 percent in the second quarter, 8 percent in the
third quarter and 9 percent in the fourth quarter. Retention has been holding
steady in the 70 to 75 percent range throughout the year.
You increased prices in commercial middle markets and still produced an
underwriting loss. Has anything really changed?
MCGAVICK: When you look at the fundamentals of our book of business, we are in a
much better position now than at the start of 1999. At that point, we were
coming off two quarters of price decreases - 0.5 percent in the third quarter of
1998 and 1 percent in the fourth quarter - and these rolled over into our 1999
operating results. Now we are sitting on four consecutive quarters of necessary
price increases that reached 9 percent in the fourth quarter, and we expect
these actions will work their way into our results for 2000.
At the end of 1998, we were looking back on a year when new business relative to
total business was at an all-time high. Loss ratios on new business are
generally higher than on renewal business, and that's what was rolling into our
operating results in 1999. By contrast, we were much more disciplined on new
business in 1999. As a result, a larger proportion of more adequately priced
business will be rolling into our 2000 results.
Another key fundamental relates to our cost structure. At the end of 1998, we
were in the early stages of transforming a 20-year-old operating platform. Going
into 2000, the transformation is virtually complete. Centralized processing,
restructured claims functions and greater focus on territorial underwriting are
expected to take $100 million out of our annual operating costs and to improve
our service to agents and customers.
Finally, at the end of 1998, our incentives for agents and underwriters rewarded
volume. Today, we have much stronger incentives for agents and employees tied to
the bottom line. When you consider all these factors, we are in a fundamentally
stronger position going forward.
What about progress on your large account business?
TAYLOR: In this business, we continue to see some signs of firming in the
market. For the year, we did not renew $75 million in premium on a base of
nearly $500 million. In the process, however, we achieved an average price
increase of 8 percent with the retention percentage running in the upper 70s. So
we think we're going in the right direction here.
How are you doing in your medical malpractice business?
TAYLOR: It's still a very competitive market, and we are sticking by our resolve
to achieve adequate rates. For the year, we did not renew about $105 million in
business on a base of $470 million. For the business we renewed, we achieved
price increases that averaged 7 percent for the year with the retention
percentage in the low 80s.
The biggest pricing issues in medical malpractice have been with corporate
accounts, that is, large physician groups and hospitals. Here, we achieved
average price increases of almost 12 percent on renewal business for the year,
with retention around 70 percent.
We are also encouraged by the firming in our nursing home business, where we
renewed more than 83 percent of our accounts for the year, and achieved average
price increases of 10 percent.
Business we did not renew includes accounts we chose to offer no renewal terms
as well as accounts we offered terms with increases in price significantly
larger than the amounts mentioned earlier.
Do you think you're on the right track now?
TAYLOR: The pricing and retention indicators in these three property/casualty
businesses tell us that we're on the right track. We are also achieving other
improvements in terms, such as deductibles, coinsurance and insurance to value.
As we work our plan, we recognize that there is a tier of players out there that
seems intent on growing their market share. But we strongly feel we need to get
the price necessary to make this business stable over a longer period of time,
and so we're sticking with our plan.
How long can you sustain your pricing initiatives?
TAYLOR: With our retention rates holding up, we think there is still more room
for achieving fair prices in our book of property/casualty business. We are also
encouraged by a number of signs we are seeing in the market, including trends in
reinsurance, the pricing initiatives of our competitors and the combined ratios
of key business lines.
CNA FINANCIAL CORPORATION 9
This gives us breathing room to focus on the other fundamentals of underwriting
- loss control, risk selection, claims handling and so on. That's critical,
because sustained profitability really goes back to achieving excellence across
the entire underwriting process.
MCGAVICK: CNA's scale in middle markets turns into a major advantage in the kind
of transition market Tom just described. Such a market plays to our advantages
of scale and agency relationships. Agents want to maintain their volume and
relationships with CNA and so choose to continue to do business with us. We both
win, and that's what we see starting to happen.
Turning to new business, what are your plans?
MCGAVICK: We're focusing on those markets where we know we have the underwriting
expertise and customer knowledge that differentiate us from the competition.
Although we're cautious in writing new business, we are going to stay in the
game, particularly with our top agents. We will work together with them on new
business when we think we can get an adequate rate, and the business is in a
class where we have some distinct knowledge.
HENGESBAUGH: I'd also add that there are some pockets in the overall company
that are showing growth. CNA Re is reporting a good flow of new business in its
facultative and Canadian operations. The international group in Europe is
expanding as a result of the 1998 acquisition of Maritime Insurance. Surety net
written premium is up 11 percent. Guarantee & Credit grew 13 percent.
What progress have you made on expense reduction?
HENGESBAUGH: As we've said, expense reduction is another major priority in our
turnaround plan. It goes back to 1998, when we launched an initiative to ensure
that each of our businesses is working with an operating platform that is on a
par with its most cost-efficient competitors. Each business committed to
quarterly expense reduction targets, with an aggregate goal of reducing CNA's
annualized running rate expense by $300-350 million by the end of 1999.
We completed the effort in the fourth quarter and exceeded this very important
goal. It was tough, but we got it done by thinking much more creatively about
how to work certain parts of our operating platform. One important example is
the investment we have made in our commercial insurance processing center.
Of course, the expense reduction effort doesn't stop here. It's now hard-wired
into our management process, and our intent is to keep it going year after year.
What we've learned is that this whole process is really all about simplification
and getting focused on what really matters to our customers, agents and brokers.
That is going to serve us well across all our businesses going forward.
Why aren't the expense reductions made in 1998 and 1999 going to show up in
financial results until 2000?
DEUTSCH: From a consolidated level, it's very hard to see the impact on our
expense ratios of what we're doing. It's clouded by two factors.
First, we are measuring these expense reductions on a run-rate basis. This means
that, as we're making these reductions during the year, we're still left with
the transition costs in the expense ratio for the current year. In 2000,
however, we should begin to see the effect of these efforts.
Second, our net written premiums were off by $1.5 billion as a result of the
actions we've taken in re-underwriting our book, walking away from unprofitable
business and completing the personal insurance business transaction with
Allstate. These factors cause the expense ratio to increase given the fixed
nature of some expenses.
To follow up, what impact has expense reduction had on employee morale? What
about service to your agents, brokers and customers?
HENGESBAUGH: There's no question that 1999 was a challenging year for CNA
employees, agents and brokers, and we have been watching that very carefully. My
sense from meeting with employees is that achieving our running-rate expense
reduction and operating income goals in many businesses and moving ahead on our
turnaround plan are helping build confidence. It's confidence in our ability to
accomplish what looked like very difficult goals. And that confidence is
absolutely necessary to make this turnaround work all the way through.
MCGAVICK: I'd add that when we said that we had to radically change our expense
structure, we also said the job had to be done while making our underwriting and
service better. That was the twin mission. So we radically redesigned the way we
handle business. We consolidated all premium processing and policy issue
functions from 24 branches to a central facility in Florida.
This frees our underwriters, who remain local, from backroom headaches, and
lower costs. Service hasn't been where it needs to be, but our agents have hung
in there with us, because I think they see the value of the model as well.
10 1999 ANNUAL REPORT
That's important because if you want to be a preferred agency company, you have
to have a preferred service capability, and we think we have an operating model
that can get us there.
There are still pockets of service problems, as you would expect with any
massive conversion. But when fully operational, we think our processing center
will get us to one of the best expense ratios among our competitors and to a
world-class level of service to agents and insureds.
Let's focus now on operating income.
HENGESBAUGH: Consistent improvement in net operating income is key to our
turnaround plan. In 1999, we had three consecutive quarters of improved
operating income. In the fourth quarter, there were some unique events that
interrupted the momentum temporarily - the reserve strengthening and the
catastrophe losses.
But it is the momentum that is really important to us. Hitting our targets for
three quarters is an early sign of a management team that is committed to and
capable of meeting the targets we have set out. The fourth-quarter results only
make us more focused on improving the fundamentals and getting right back on
track.
You announced in the first quarter that you are exploring the sale of your
individual life and life reinsurance operations. Can you explain the strategy
behind this?
HENGESBAUGH: Our strategy going forward is to concentrate on insurance products
and services for businesses. We believe that sharpening our focus in this way
will make CNA a more valued provider to our customers, a better partner for our
distributors and a stronger performer for our shareholders. As an employer, we
will be able to provide better opportunities for people who are excited by the
challenge of applying our core underwriting expertise to the issues faced by
small, medium and large businesses. In 1999, we took an important step in
sharpening our focus with the transfer of our personal insurance business to
Allstate. We also sold most of our stake in AMS Services, an insurance
technology company.
So, to sum up, by dedicating our substantial resources to the needs of
businesses, we are very well equipped for a leadership position in this rapidly
expanding marketplace.
What are your plans for the $1 billion in capital freed up by the personal lines
insurance business transaction with Allstate?
DEUTSCH: The Allstate transaction closed on October 1, 1999. Over time, it will
free up a good portion of capital, and we will be faced with the issue of
capital deployment. That issue is being addressed as part of the overall
turnaround plan.
We have begun a complete capital allocation review for all of our businesses.
All options will be open, including dividends or other alternatives, to get the
capital base in line with our business opportunities.
For each business, we are evaluating the value we add to our customers, the fit
with the rest of CNA's operations, the risk/return equation and our relative
expertise. This is a long-term analysis, but in the meantime, no one gets a
pass. Each of our businesses is required to earn a competitive rate of return
over a reasonable period of time.
HENGESBAUGH: I'd also say that our capital allocation strategy is not simply a
one-sided matter of exiting businesses. Rather, if we see good opportunities to
re-deploy capital that fit with our overall approach, we will seize those as
well.
CNA FINANCIAL CORPORATION 11
Is share buy back an option you're considering? What about acquisitions?
DEUTSCH: We have had a stock buy-back program in place since November 1998. To
the extent we have excess capital for it, and under the right market conditions,
we would consider buying back stock under our existing program.
But there are a lot of issues in these decisions. A simple measure such as
premiums to surplus might show us as overcapitalized. Outside constituencies, on
the other hand, are looking at a completely different set of measures of capital
adequacy.
As for acquisitions, we certainly don't want to say never. If we make an
acquisition, it has to be at a very attractive price. And then there's the
question of how we would pay for it. With our stock as undervalued as it is, we
would not want to use our stock as acquisition currency.
A lot of companies are doing what you're doing - cutting expenses and repricing
the business. Wouldn't it make sense for more of these companies to consolidate?
HENGESBAUGH: On the property/casualty side, gaining expense reduction through a
consolidation is extremely challenging. Having gone through this ourselves with
the Continental merger, we did in fact extract cost from the system. But I think
there also are some diseconomies of size and scale.
For instance, if you increase the span of control of your underwriting managers,
that can be a great economy of scale. But, if not done the right way, it also
could be disastrous to your loss ratio.
Another problem relates to shared distributors. They don't like to put all their
eggs into one basket. So a combined company may not be able to hold onto all the
business of the two separate companies.
The final item is that technology is moving so quickly that it doesn't always
require size to get some of the economies. For example, the Internet already is
altering the cost and the speed with which we can get things done with our
clients and brokers.
Can you tell us where you are with e-commerce?
MCGAVICK: We see electronic commerce and the Internet as another way to leverage
the value of our relationships with partners and customers. In commercial
insurance, our agent-centered strategy provides value-added tools and services
to the independent agent, who we believe will continue to be the dominant
distribution channel in middle markets.
For example, our electronic capabilities enable agents to underwrite, rate and
submit policies for small business customers at the point of sale. The Internet
also gives them access to real-time claim status and all of our commercial
policy forms, and makes it easy to process commercial auto endorsements. Our
product guides and sales kits are available via the Internet, and it allows
agents and staff to provide immediate feedback on CNA service.
We're using our experience in these areas to develop broader and more robust
e-commerce capabilities in all of our businesses.
Are the days of the large insurance organization numbered? Why should a company
as big as CNA exist?
HENGESBAUGH: While scale may not always produce the economies people expect, it
does have some major advantages. Foremost is the fact that a large, financially
sound company such as CNA can leverage both capital resources and brand
recognition in ways that smaller companies can't.
TAYLOR: In addition, there is the matter of underwriting knowledge. For example,
in our professional liability business for architects and engineers, scale is
critical because it has allowed us over time to understand more about the risks
architects and engineers face - and the problems we can help them solve - than
just about anybody in the business. If we didn't have the cross-section that we
do of business, we couldn't get to those understandings; and in fact that's a
major competitive advantage.
Finally, what makes you think that CNA can create superior shareholder value
over the long term in an industry as mature as insurance?
HENGESBAUGH: It's certainly true that the traditional insurance products like
workers' compensation and property are mature. But that doesn't mean insurance
is not a growth industry. It's just not going to grow through traditional
products alone. Over the last 10 years or so, the economy has been growing much
faster than insurance premiums. That means there is a lot of wealth that needs
protection but it's not being addressed by traditional insurance industry
products.
The insurance organizations that can develop the new products and respond to
these changing exposures are going to be the winners. For example, CNA is a
leading provider of commercial equipment maintenance programs that cover the
computers, copiers, fax machines and other equipment that a business owner
relies on. Instead of separate service agreements, the customer saves money and
enjoys the convenience of having one number to call for repairs. That's just one
of many opportunities for non-traditional products that respond to changing
needs.
So we believe that insurance in fact is a growth industry. It's an industry that
needs to grow with the rest of the global economy, and we intend to be a big
part of it.
12 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion highlights significant factors influencing the
consolidated results of operations and financial condition of CNA Financial
Corporation and subsidiaries (CNA or the Company). This discussion should be
read in conjunction with the Consolidated Financial Statements and the related
notes, appearing on pages 42 through 73, and the five-year summary of selected
financial highlights appearing on page 1.
The discussion also includes an overview of each of the Company's seven
operating segments, the products offered, the customers served, the distribution
channels used and an analysis of operating results. Because distinct investment
portfolios are not maintained for each insurance segment, the discussion of
investment results, including investment income and realized investment gains,
is on a consolidated basis and begins on page 32. The 1999 and 1998 provisions
for restructuring and other related charges are also discussed on a consolidated
basis beginning on page 31.
CNA FINANCIAL CORPORATION 13
------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS
BUSINESS OVERVIEW
CNA is one of the largest insurance organizations in the United States and,
based on 1998 net written premium, is the fifth largest property/casualty
company and the thirty-fifth largest life insurance company.
CNA's overall goal is to create long-term enterprise value by pursuing
disciplined underwriting as well as operating efficiencies.
CNA conducts its operations through the seven segments listed below. In addition
to the seven segments, certain other activities are reported in a Corporate
segment.
AGENCY MARKET OPERATIONS
SPECIALTY OPERATIONS
CNA RE
GLOBAL OPERATIONS
RISK MANAGEMENT
GROUP OPERATIONS
LIFE OPERATIONS
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. A more detailed description of each segment is included later in this
discussion.
OPERATING RESULTS
The following chart summarizes the consolidated operating results for each of
the last three years.
[Enlarge/Download Table]
CONSOLIDATED OPERATIONS
------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
Operating revenues:
Premiums $13,282 $13,536 $13,624
Net investment income 2,101 2,146 2,209
Other 705 799 628
------------------------------------------------------------------------------------------
Total operating revenues 16,088 16,481 16,461
Benefits and other expenses 16,331 16,567 15,831
Restructuring and other related charges 83 246 -
------------------------------------------------------------------------------------------
Operating income (loss) before income tax and minority interest (326) (332) 630
Income tax benefit (expense) 211 200 (132)
Minority interest (30) (20) (10)
------------------------------------------------------------------------------------------
Net operating income (loss) (145) (152) 488
Net realized investment gains, net of tax and minority interest 192 434 478
Cumulative effect of a change in accounting principle, net of tax and
minority interest (177) - -
------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (130) $ 282 $ 966
==========================================================================================
[Enlarge/Download Table]
CONSOLIDATED OPERATIONS
------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
BASIC AND DILUTED EARNINGS PER SHARE
Net operating income (loss) $(0.85) $(0.86) $ 2.59
Net realized investment gains, net of tax and minority interest 1.04 2.35 2.58
Cumulative effect of a change in accounting principle, net of tax
and minority interest (0.96) - -
------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(0.77) $ 1.49 $ 5.17
==========================================================================================
14 1999 ANNUAL REPORT
Total operating revenues were $16.1 billion in 1999 and $16.5 billion in 1998
and 1997. Premiums declined $253 million in 1999 principally in the
property/casualty product lines, due to price competition in the industry
combined with the Company's focus on underwriting discipline, and the increased
use of reinsurance. Premiums for the Company's Life and Group Operations were
down $49 million, principally due to the exit from selected medical markets in
late 1998. Premiums for 1998 declined by $107 million when compared to 1997.
This decrease was primarily due to intense price competition facing the
commercial lines insurance market.
The Company had a net operating loss for the year ended December 31, 1999 of
$145 million, or $0.85 per share, compared to a net operating loss of $152
million, or $0.86 per share, for the year ended December 31, 1998.
The 1999 operating loss includes $363 million after-tax in loss and allocated
loss adjustment expense reserve strengthening for prior periods. Included in
this amount is $33 million after-tax for excess workers' compensation
reinsurance. After-tax catastrophe losses were approximately $35 million higher
in 1999. The operating loss also includes $54 million, or $0.29 per share, in
after-tax restructuring and other related charges. This compares to $169
million, or $0.91 per share, in after-tax restructuring and other related
charges in 1998. The 1999 operating loss also reflects an after-tax benefit of
$51 million, or $0.28 per share, resulting from regulatory changes in the basis
on which certain insurance-related assessments are calculated.
Discussions of the results of operations from the Company's segments follow:
CNA FINANCIAL CORPORATION 15
AGENCY MARKET OPERATIONS
BUSINESS OVERVIEW
Agency Market Operations builds on the Company's long and successful
relationship with the independent agency distribution system to market a broad
range of property/casualty insurance products and services to both businesses
and individuals. Business products include workers' compensation, commercial
packages, general liability and commercial auto, as well as a variety of
creative risk management services. Products for individuals were primarily
personal auto and homeowners insurance. In addition, in 1997, Agency Market
Operations launched a professional employer organization, CNA UniSource, which
provides various employer-related services.
Agency Market Operations is comprised of the following four groups.
COMMERCIAL INSURANCE
Commercial Insurance (CI) provides traditional property/casualty insurance
products such as workers' compensation, general and product liability, property,
commercial auto and umbrella coverage to businesses with less than $1 million in
annual premiums. The majority of CI customers are small and medium-sized
businesses. CI is among the market leaders in applying industry segmentation
techniques to design products and services tailored to the needs of its targeted
customer groups.
During 1998, CI completed an extensive review of its business and developed a
new, more effective operating model, that management believes will position CI
as a world class competitor for the new century. The basis for this model was to
move decision-making authority and resources closer to CI's customers.
CI's focus during 1999 was the transition to this operating model. The model
includes branches, located throughout the U.S., that provide customer support in
the areas of underwriting, loss control, sales and claims, and a centralized
processing center in Maitland, Florida that houses premium processing and
accounting for all branches, and includes a call center for increased customer
service. Eight claim service centers, located throughout the U.S., provide
customers and claimants with improved service through more specialized claim
handling and easier claim reporting.
The efficiencies resulting from these changes are expected to decrease expenses
in underwriting and claims through the implementation of new technology, process
redesign and centralization. In addition, CI recognizes that an even lower cost
platform is necessary to be successful in the small commercial marketplace.
During 2000, CI will be consolidating its underwriting for small commercial
products with the existing centralized processing. Management expects that this
centralization, along with the implementation of new technology, tools and
processes, will allow CI to improve underwriting and further lower the cost
model related to its small commercial business.
PERSONAL INSURANCE
On October 1, 1999, certain CNA subsidiaries completed a previously announced
transaction with The Allstate Corporation (Allstate) involving the transfer of
substantially all of CNA's personal lines insurance business. See Note O to the
Consolidated Financial Statements.
Personal Insurance (PI) sold primarily personal auto and homeowners coverages
and also offered excess liability, separate scheduled property, boat-owners and
other recreational vehicle insurance. These coverages were primarily sold in a
package product.
CNA E&S
CNA E&S (E&S) provides specialized insurance and other financial products for a
wide array of commercial customers. Risks covered by E&S are generally viewed as
high risk and less predictable in exposure than those covered by the more
traditional insurers. By combining superior insurance and financial expertise
with a detailed understanding of customer operations and future direction, E&S
is able to create and implement innovative business solutions that are valued by
the customer. In addition, E&S actively seeks business partners who can
supplement CNA resources and enhance value for the customer.
CNA UNISOURCE
CNA UniSource offers outsourcing services and other financial products that
relieve businesses of many administrative tasks, allowing them more time to
focus on their core objectives. CNA UniSource provides human resources (HR)
information technology, payroll and benefits processing and Professional
Employer Organization (PEO) services. CNA UniSource is also engaged in
delivering Internet-based HR and payroll administrative services and is a leader
in the implementation of HR information outsourcing for large-scale businesses.
When it functions as a PEO, CNA UniSource establishes a co-employment
relationship with its clients and contractually assumes substantial employer
administrative responsibilities such as regulatory compliance and benefits
administration. At December 31, 1999, CNA Unisource had 768 clients with over
30,000 co-employees and conducts business in 45 states and the District of
Columbia via 30 geographically dispersed service offices and a state-of-the-art
customer service call center. The number of co-employees grew 150 percent
compared with 1998. The primary sales force is comprised of independent
insurance agencies. Management expects significant growth in the number of
clients and co-employees over the next several years.
16 1999 ANNUAL REPORT
OPERATING RESULTS
---------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
(In millions of dollars)
---------------------------------------------------------------------
Net earned premiums $4,799 $5,247 $5,092
Benefits and expenses 5,791 6,050 5,491
Restructuring and other related charges 60 96 -
---------------------------------------------------------------------
Underwriting loss (1,052) (899) (399)
Net investment income 686 744 787
Other revenues 80 48 50
Other expenses 77 52 6
---------------------------------------------------------------------
Pre-tax operating income (loss) (363) (159) 432
Income tax benefit (expense) 162 105 (106)
---------------------------------------------------------------------
NET OPERATING INCOME (LOSS) $(201) $(54) $326
=====================================================================
RATIOS
Loss and loss adjustment expenses 90.4% 83.1% 74.9%
Expenses 31.0 32.6 31.8
Dividends 0.5 1.4 1.1
---------------------------------------------------------------------
COMBINED 121.9% 117.1% 107.8%
=====================================================================
SUMMARY
Agency Market Operations consists primarily of commercial property/casualty
insurance. For the first nine months of 1999, Agency Market Operations also
includes results of PI, which was transferred to Allstate effective October 1,
1999. Net written premium for the combined CI and E&S business units was $3.3
billion in 1999, down from $3.8 billion in 1998. This decrease reflects the
impact of the increased use of reinsurance and efforts to achieve adequate
pricing and the shedding of unprofitable business. Agency Market Operations had
a net operating loss of $201 million, compared with a $54 million loss in 1998.
The larger loss was due primarily to strengthening of prior year reserves and
the loss ratio for the 1999 accident year. Partially offsetting the effect of
the reserve strengthening was the positive impact of reinsurance, rate and
underwriting actions and regulatory changes in the basis on which certain
insurance-related assessments are calculated.
PREMIUMS
Earned premiums decreased by $448 million in 1999 from the prior year. This
decrease was mainly attributable to the transfer of essentially all the
Company's PI business to Allstate in the fourth quarter, which resulted in a
decrease in net earned premiums of $297 million. Net earned premiums for the
combined CI and E&S business units decreased $153 million during 1999, primarily
due to rate and underwriting actions taken to improve the core book of business
and the impacts of reinsurance agreements executed in 1999.
Earned premiums for 1998 increased by $155 million, or approximately 3.0%, which
was primarily attributable to premiums from involuntary risks. The increase in
involuntary risk premiums in 1998 as compared with 1997 was largely a function
of the 1997 involuntary risk premiums being reduced by a revision of prior
years' estimated premiums. Earned premiums for PI grew $61 million in 1998.
Contributing to the growth was the strong product identity of the Personal
Package policy, a personal insurance product providing a wide range of available
coverage options and the convenience of single policy delivery and combined
billing.
UNDERWRITING RESULTS
Underwriting losses for 1999 were $1.1 billion as compared to $899 million in
1998 due to deterioration in the combined ratio partially offset by reductions
in volume. The combined ratio for 1999 increased 4.8 points due to an increase
in the loss ratio of 7.3 points partially offset by decreases in the expense and
dividend ratios of 1.6 points and 0.9 points, respectively. The increase in the
loss ratio is principally due to increased adverse loss reserve development in
1999 partially offset by the beneficial effects of reinsurance agreements
executed in 1999. The 1999 adverse loss reserve development included development
related to automobile, workers' compensation and packaged general liability
exposures. The decrease in the expense ratio is attributable to lower
restructuring and other related charges in 1999 as compared to 1998. See the
discussion of restructuring and other related charges on page 31 and Note N to
the Consolidated Financial Statements. Additionally, Agency Market Operations'
1999 expense ratio benefited 0.9 points from regulatory changes in the basis on
which certain insurance-related assessments are calculated.
Underwriting results for 1998 declined by $500 million as compared with 1997 due
to a combination of increases in volume and an increase in the combined ratio.
The combined ratio for 1998 increased 9.3 points primarily attributable to an
8.2 point increase in the loss ratio. Contributing to this increase were net
changes in reserve development and catastrophe losses. Restructuring and other
related charges also contributed to the increase in the combined ratio. Net
adverse reserve development in 1998 was $168 million as compared with net
favorable reserve development of $276 million in 1997. Management strengthened
reserves in 1998 primarily in response to deteriorating claim experience for
asbestos and other mass tort exposures. Reserves were also increased for
construction defect claims. Beginning in 1997, actions were taken to mitigate
further exposure to construction defect liabilities that arose almost
exclusively out of exposures underwritten in California. The favorable loss
development in involuntary risks in 1997 was attributable to better than
expected results in workers' compensation and private passenger automobile lines
stemming from improved frequency and severity in these lines. In 1998,
catastrophe losses were $131 million higher than the 1997 losses of $68 million.
CNA FINANCIAL CORPORATION 17
SPECIALTY OPERATIONS
BUSINESS OVERVIEW
Specialty Operations provides a broad array of professional, financial and
specialty property/casualty products and services through a network of brokers,
managing general agencies and independent agencies. Specialty Operations
provides creative solutions for managing the risks of its clients, including
architects, engineers, lawyers, healthcare professionals, financial
intermediaries and corporate directors and officers.
Specialty Operations is composed of three principal groups.
CNA PRO
CNA Pro is one of the largest providers of non-medical professional liability
insurance and risk management services in the U.S. CNA Pro's customers include
architects and engineers, lawyers, accountants and real estate agents and
brokers, along with a broad range of large and small corporate clients and
not-for-profit organizations. CNA Pro's products include errors and omissions,
directors and officers, and employment practices liability coverages and a broad
range of fidelity products. Products are distributed on a national basis through
a variety of channels including brokers, agents and managing general agents.
CNA HEALTHPRO
CNA HealthPro offers a comprehensive set of specialized insurance products and
clinical risk management consulting services designed to assist health care
providers in managing the quality-of-care risks associated with the delivery of
healthcare. Key customer segments include individual, small group and large
corporate purchasers of malpractice insurance. Caronia Corporation, acquired
during 1997, provides third-party claims administration for medical professional
liability insureds.
CNA GUARANTY AND CREDIT
CNA Guaranty and Credit provides credit insurance on short-term trade
receivables for domestic and international clients and credit enhancement
products that focus on asset backed transactions. Credit insurance is primarily
distributed through captive agents with additional distribution through brokers
and financial institutions. Credit enhancement products are distributed through
specialty brokers and directly to customers.
OTHER OPERATIONS
Other operations consisted principally of Hedge Financial Products, which
focused on securitization of insurance risk and the embedding of financial
protections within traditional insurance programs, and agricultural and
entertainment insurance business. During 1999 and 1998 the Company decided to
exit Hedge Financial Products, and argiculture and entertainment insurance
businesses, respectively.
OPERATING RESULTS
-------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
(In millions of dollars)
-------------------------------------------------------------------
Net earned premiums $1,001 $1,092 $1,251
Benefits and expenses 1,166 1,251 1,397
Restructuring and other related charges - 5 -
--------------------------------------------------------------------
Underwriting loss (165) (164) (146)
Net investment income 235 245 268
Other revenues 19 27 14
Other expenses 30 44 10
--------------------------------------------------------------------
Pre-tax operating income 59 64 126
Income tax expense (10) (6) (31)
--------------------------------------------------------------------
NET OPERATING INCOME $49 58 95
====================================================================
RATIOS
Loss and loss adjustment expenses 90.6% 87.0% 80.8%
Expenses 25.9 28.1 30.9
--------------------------------------------------------------------
COMBINED 116.5% 115.1% 111.7%
====================================================================
SUMMARY
Specialty Operations' operating income for 1999 declined principally because of
unfavorable loss reserve development in CNA HealthPro related to prior policy
years. Modest premium growth in non-medical professional liability and financial
insurance was offset by declines in medical malpractice due to efforts to
achieve needed price increases and eliminate unprofitable business. Specialty
Operations remains committed to conservative underwriting practices in this
difficult environment.
PREMIUMS
Earned premiums for 1999 declined $91 million, or 8.3%, from 1998 levels,
primarily due to declines in CNA HealthPro and businesses exited. Premiums for
CNA HealthPro declined $40 million, due mainly to two new ceded reinsurance
agreements covering 1999 risks and business lost due to efforts to achieve price
increases and eliminate unprofitable business. Hedge, agriculture and
entertainment premiums decreased a combined $46 million from 1998 due to the
decision to exit from these lines of business.
Premiums in 1998 decreased by $159 million, or approximately 12.7%, compared
with 1997. The decrease was largely attributable to an approximate $100 million
reduction in premiums caused by management's decision to exit the agricultural
insurance market. The remaining decline in premiums in 1998 was due to increased
price competition and management's resolve not to accept inadequately priced
business.
18 1999 ANNUAL REPORT
Specialty Operations' commitment to prudent underwriting and responsible pricing
is expected to continue to limit premium growth until general market pricing
improves.
UNDERWRITING RESULTS
The underwriting loss for 1999 was $165 million, essentially unchanged from
1998, due to the offsetting impacts of a higher combined ratio and lower earned
premiums. The combined ratio for 1999 increased 1.4 points due principally to a
3.6 point increase in the loss ratio, which was negatively impacted by adverse
claim experience in the medical malpractice and non-medical professional
liability lines of business. The impact of adverse claim experience in these
lines to business was to increase the 1999 loss ratio for Specialty Operations
by 6.6 points over its 1998 level. The 1999 loss ratio was favorably impacted
by 4.1 points due to the exit from the agricultural insurance line of business.
The expense declined 2.2 points in 1999 due principally to businesses exited.
The underwriting loss for 1998 worsened by $18 million over 1997 due to
deterioration in the loss ratio, partially offset by a decrease in volume. While
the exit of the agricultural and entertainment lines of business, as well as
decisions not to write inadequately priced business, had a favorable impact, an
unfavorable change in medical malpractice reserve development resulted in the
net increase in the loss ratio of 6.2 points.
CNA FINANCIAL CORPORATION 19
CNA RE
BUSINESS OVERVIEW
CNA Re operates globally as a reinsurer in the broker market, offering both
treaty and facultative products through major offices in London and Chicago. CNA
Re's operations include the business of CNA Reinsurance Company Limited (CNA Re
U.K.), a U.K. company, and U.S. operations based in Chicago. While CNA Re's
primary product is traditional treaty reinsurance, it is also developing
positions in facultative and financial reinsurance. CNA Re also participates in
Lloyd's of London through CNA Corporate Capital Ltd., which provides capital to
Lloyd's Syndicate 1229.
CNA Re U.K. writes in both the London market and other European markets through
its headquarters in London and offices in Amsterdam, Milan, Singapore and
Zurich. As one of the largest reinsurers in this market, CNA Re U.K. has ratings
of A (Strong) from Standard & Poor's, A (Excellent) from A.M. Best and A3 (Good)
from Moody's. CNA Re U.K. writes U.S. and international treaty and professional
liability business, including medical malpractice, errors and omissions, and
directors and officers coverages.
The U.S. operations of CNA Re provide products to the North American markets.
Treaty products include working layer property, working layer casualty, property
catastrophe, workers' compensation, products liability, general liability,
professional liability, specialty and excess and surplus lines. In addition,
financial reinsurance products are offered as well as property and casualty
facultative reinsurance.
OPERATING RESULTS
-------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
(In millions of dollars)
-------------------------------------------------------------------
Net earned premiums $1,176 $944 $898
Benefits and expenses 1,369 1,005 991
Restructuring and other related charges - 1 -
-------------------------------------------------------------------
Underwriting loss (193) (62) (93)
Net investment income 161 163 153
Other revenues 4 5 7
Other expenses - 11 5
-------------------------------------------------------------------
Pre-tax operating income (loss) (28) 95 62
Income tax benefit (expense) 15 (27) (11)
-------------------------------------------------------------------
NET OPERATING INCOME (LOSS) $(13) $68 $51
===================================================================
RATIOS
Loss and loss adjustment expenses 84.9% 74.9% 74.6%
Expenses 31.5 31.7 35.8
-------------------------------------------------------------------
COMBINED 116.4% 106.6% 110.4%
===================================================================
SUMMARY
Net operating income in 1999 was adversely affected by $122 million in after-tax
catastrophe losses, compared with $50 million in after-tax catastrophe losses in
1998. The 1999 results also include $23 million in after-tax reserve
strengthening related to excess workers' compensation reinsurance. Premium
growth for the year was the result of new business and expansion of profitable
treaty relationships.
PREMIUMS
Earned premiums increased $232 million, or 24.6%, versus 1998. This growth
occurred in both foreign and domestic markets in the professional and standard
lines of business. Growth was experienced via expansion of treaty relationships
with existing clients, the continued development of new product lines and growth
in global facultative operations and the Canadian branch.
Earned premiums in 1998 increased by $46 million, or 5.1%, compared with 1997.
The increase in 1998 premiums was primarily a function of adverse premium
development of prior year estimates recorded in 1997.
UNDERWRITING RESULTS
CNA Re's 1999 combined ratio increased by 9.8 points compared to 1998, primarily
as a result of a 10.0 point increase in the loss ratio. As previously noted, the
underwriting results for 1999 were dramatically impacted by the series of
European windstorms, Hurricane Floyd and other international catastrophes, which
contributed to an aggregate 9.4 point increase in 1999's loss ratio relative to
1998.
The improvement in underwriting results of $31 million in 1998, as compared with
1997, was driven by a 4.1 point decline in the expense ratio. The decrease in
underwriting expenses in 1998 as compared with 1997 was principally due to the
start-up costs associated with expansion into facultative reinsurance and the
establishment of branch offices abroad during 1997.
20 1999 ANNUAL REPORT
GLOBAL OPERATIONS
BUSINESS OVERVIEW
Global Operations provides products and services to U.S.-based customers,
customers expanding overseas and foreign customers. Product distribution is
primarily through brokers and independent agents. The major product lines
include marine, commercial and contract surety, warranty and specialty products,
as well as commercial property and casualty.
Global Operations is composed of five principal groups.
MARINE
On July 1, 1998, CNA completed the acquisition of Maritime Insurance Co., Ltd.
(Maritime Ltd.), based in the U.K., and its Canadian subsidiary, Eastern Marine
Underwriters (EMU), strengthening CNA's position as a global marine insurer. In
1999, CNA launched the marketing brand, CNA Maritime, which unites three
industry leaders to serve global ocean marine needs. Marine Office of America
Corp. (MOAC), a leading provider of ocean marine insurance in the U.S., offers
hull, cargo, primary and excess marine liability, offshore energy, marine claims
and recovery products and services. Business is sold through national brokers,
regional marine specialty brokers and independent agencies, which work closely
with MOAC's ten branch offices located throughout the U.S. Maritime Ltd. is a
leading marine cargo and related marine insurance specialist with markets
extending across Europe and throughout the world. EMU serves the Canadian
market. As foreign subsidiaries, Maritime Ltd. and EMU are included in the
results of, and are managed by, the International business unit. Growth is
expected to result from leveraging the relationships with CNA's domestic
producers, implementing e-commerce, and providing customers with services and
products throughout the world.
SURETY
On October 1, 1997, Global Operations completed the merger of CNA's surety
operations with Capsure Holdings Corp.'s subsidiaries, Western Surety Company
and Universal Surety of America to form CNA Surety Corporation (CNA Surety). CNA
owns approximately 63% of CNA Surety.
CNA Surety, which is traded on the New York Stock Exchange (SUR), is the largest
publicly traded provider of surety bonds, with approximately 9% of that market.
Among its U.S. competitors, CNA Surety has the most extensive distribution
system and one of the most diverse surety product lines, offering small, medium
and large contract and commercial surety bonds. CNA Surety provides surety and
fidelity bonds in all 50 states through a combined network of approximately
37,000 independent agencies. Growth is expected to come from CNA Surety's broad
product and distribution resources and international expansion.
WARRANTY
CNA's warranty operation (Warranty) is the fourth largest warranty underwriter
in the U.S., providing extended service contracts, warranties and related
insurance products that protect the consumer or business from the financial
burden associated with the breakdown, under-performance or maintenance of a
product. Warranty's key market segments consist of vehicle, retail, home,
commercial and original equipment manufacturer. Each market segment distributes
its product via a sales force employed or contracted through a program
administrator.
CNA National Warranty Corporation sells vehicle warranty services in the U.S.
and Canada. In July 1998, Warranty expanded into the home warranty segment with
the acquisition of a 90% interest in Home Security of America, Inc., one of the
largest home warranty administrators in the U.S. Also, in January 1998 the
Company acquired a joint venture interest in Specialty Underwriters, a provider
of innovative equipment maintenance management services to companies worldwide.
As these entities are not licensed insurance companies, they purchase coverages
from various CNA affiliates to back the warranty products they sell.
Warranty expects growth from cross marketing efforts with other CNA businesses,
increasing product distribution via the CNA independent agency force and
introducing several warranty products in the international marketplace.
INTERNATIONAL
International is responsible for coordinating and managing the direct business
of the foreign property/casualty operations of CNA. This business identifies and
capitalizes on strategic indigenous opportunities outside the U.S. by continuing
to build its own capabilities and by initiating acquisitions, strategic
alliances and start-up operations that allow for expansion into targeted
markets. In addition, International provides U.S.-based customers that are
expanding their operations overseas with a single source for their commercial
insurance needs. To this end, International has placed underwriters within CI
branches.
International currently oversees operations in Europe, Latin America, Canada and
Asia. In Europe, CNA formed CNA Insurance Company (Europe) Limited (CIE) in
1996, which is based in London. CIE has since opened offices in France, Germany
and the Netherlands and has purchased a managing general agent in Denmark.
Through its network of offices, International intends to build on the successes
of several CNA specialty products (including travel and accident, warranty and
financial lines insurance) and introduce those products across Europe.
International also includes the results of U.K. based Maritime Ltd.
In Latin America, the Company acquired a 70% interest in Omega A.R.T. in 1997, a
workers' compensation company domiciled in Argentina. Omega ranks as the fourth
largest workers' compensation company in Argentina based on premium volume.
CNA FINANCIAL CORPORATION 21
CNA Canada, formed in 1998, sells a broad array of property/casualty and
specialty insurance products through brokers and managing general agents. The
results of EMU are also included in International.
The short to mid-term growth opportunities for International are in the more
mature foreign insurance markets, such as Europe and Canada, and in specialty
insurance products. In the longer term, emphasis will be on the emerging
insurance markets in Latin America and Asia.
FIRST INSURANCE COMPANY OF HAWAII
First Insurance Company of Hawaii, Ltd. (FICOH) is the oldest domestic insurer
in the state of Hawaii, dating back to 1911. FICOH is also the largest
commercial insurance company and the second largest property/casualty insurance
company in the state. FICOH offers commercial and personal lines solely in the
state of Hawaii. Distributed through independent agencies, the business mix has
historically been approximately 65% commercial and 35% personal lines.
On November 1, 1999, Tokio Marine & Fire Insurance Co. Ltd. (Tokio) and CNA
executed an agreement to increase Tokio's ownership share from 40% to 50%,
resulting in equal ownership by CNA and Tokio. Additionally, on November 1,
1999, Tokio merged their Hawaii-based operations into FICOH. CNA retains control
over FICOH's daily operations. CNA views this transaction as a positive step in
the ongoing strategic relationship between CNA and Tokio.
CNA's partnership with Tokio is expected to generate growth opportunities and
facilitate international expansion. Additionally, CNA foresees growth
opportunities through collaborative partnerships between FICOH and other CNA
businesses.
OPERATING RESULTS
-----------------------------------------------------------------
Year Ended December 31 1999 1998 1997
(In millions of dollars)
-----------------------------------------------------------------
Net earned premiums $1,010 $941 $854
Benefits and expenses 1,037 991 858
Restructuring and other related charges - 1 -
-----------------------------------------------------------------
Underwriting loss (27) (51) (4)
Net investment income 132 110 117
Other revenues 120 82 29
Other expenses 100 80 26
-----------------------------------------------------------------
Pre-tax operating income 125 61 116
Income tax expense (33) (18) (35)
Minority interest (28) (25) (29)
-----------------------------------------------------------------
NET OPERATING INCOME $64 $18 $52
=================================================================
Ratios
Loss and loss adjustment expenses 56.9% 62.2% 57.4%
Expenses 45.5 42.8 43.0
Dividends 0.3 0.4 0.1
-----------------------------------------------------------------
COMBINED 102.7% 105.4% 100.5%
=================================================================
SUMMARY
Global Operations' 1999 net operating income increased $46 million over 1998
levels. Underwriting loss improved primarily due to improved loss experience in
Surety, International and MOAC. MOAC and International have benefited from a
change in the mix of business that has reduced exposure to catastrophes and
large property losses. Increased net investment income for 1999 was primarily
due to the inclusion of a full year's results for Maritime Ltd. The increase in
other revenues predominantly reflects growth in non-insurance operations,
discussed further below.
PREMIUMS
Earned premiums increased $69 million, or 7.3%, from 1998 levels. International
contributed $56 million of the increase, the majority of which was attributable
to a full year's premiums from Maritime Ltd. Surety contributed increased
premium of $29 million, due to generally favorable domestic economic conditions
for public construction and expansion internationally. Warranty premiums
increased $24 million over 1998, mainly due to robust sales of new automobiles.
Partially offsetting this growth was a decrease in premiums in MOAC of $49
million due to competitive marine market conditions.
Earned premiums in 1998 increased by $87 million, or approximately 10.2%,
compared with 1997. This increase was primarily attributable to the effects of
acquisitions and mergers, including Omega, Maritime Ltd. and CNA Surety, which
added approximately $165 million. Offsetting this growth was the sale of a book
of business and MOAC's strategic decision to exit unprofitable non-core lines of
business.
UNDERWRITING RESULTS
Underwriting results improved $24 million from 1998 due to a decrease in the
combined ratio of 2.7 points. This was primarily due to improved loss ratios in
MOAC, Surety and CNA International partially offset by an increase in the loss
ratio in Warranty. The improvement in the MOAC and International loss ratios was
due to a change in the mix of business that reduced exposure to catastrophes and
large property losses. The decrease in Surety's loss ratio was due to favorable
loss development of $13 million in 1999 compared to $4 million in 1998. The
increase in the loss ratio in Warranty was due to unfavorable loss experience in
its automotive business.
Global Operations' underwriting results declined in 1998 by $47 million as
compared with 1997 due to deterioration in the loss ratio of 4.8 points. The
deterioration was due to a net unfavorable change in loss development of $64
million and higher catastrophe losses of $21 million. The change in net
unfavorable development of $64 million was comprised of approximately $111
million unfavorable year-over-year change related to Surety, MOAC and
discontinued pools, offset in part by favorable year-over-year change of
approximately $47 million related principally to the International and Warranty
businesses.
22 1999 ANNUAL REPORT
OTHER REVENUES AND EXPENSES
Other revenues were $120 million in 1999, an increase of $38 million over 1998
results. The growth was primarily attributable to non-insurance warranty
revenues of $98 million, which compares favorably to 1998 and 1997 revenues of
$77 million and $28 million, respectively. Non-insurance results included
warranty sales associated with CNA National Warranty Corporation, Home Security
of America, and Specialty Underwriters. Revenues related to this business grew
approximately 27% over 1998.
CNA FINANCIAL CORPORATION 23
RISK MANAGEMENT
BUSINESS OVERVIEW
Risk Management (RM) markets and sells insurance products and services to large
U.S.-based companies. These customers have a minimum of $1 million or more in
casualty claims each year. It is estimated that there are approximately 8,500
targeted companies within this market segment. RM is one of 11 significant
competitors and has a very strong reputation and presence, particularly as a
writer of casualty insurance lines.
RM includes two groups.
RISK TRANSFER Risk Transfer writes property/casualty lines of insurance. The
casualty insurance business focuses on workers' compensation, commercial auto
liability, general liability through traditional and innovative financial risk
products, and excess coverage needs. The excess products provide umbrella,
excess workers' compensation and high excess coverages.
Over the last two years, domestic and global property capabilities have been
increased, providing primary, inland marine and excess property facilities.
Global property includes a strategic alliance with Protection Mutual to address
the needs of the highly protected risk customer. Global property also includes
Northrock Insurance Company Limited, a wholly owned subsidiary in Bermuda,
offering property excess of loss insurance coverages.
RSKCoSM Formed in 1998, RSKCoSM provides total risk management services
(integrated and single component) related to claims, loss control, cost
management and information services to the commercial insurance marketplace.
RSKCo'sSM capabilities include:
CLAIM SERVICES: Services that allow customers to select from a single source the
desired level of service-from an integrated claims package to any component
service.
LOSS CONTROL: Pre-loss prevention services include industrial hygiene,
laboratory, ergonomics, field consulting and training, property, environmental
and transportation loss control. Driver training is provided through Smith
System Driver Improvement Institute, Inc., a wholly owned subsidiary.
COST MANAGEMENT: Post-loss cost control services through case management,
medical bill review, preferred provider organizations and other unique
partnerships to reduce lost work days through rapid response, quality care and
effective coordination.
INFORMATION SERVICES: These services include data access, reporting tools,
information and benchmarking analysis, consulting and custom reporting services.
OPERATING RESULTS
----------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
(In millions of dollars)
----------------------------------------------------------------------
Net earned premiums $801 $823 $776
Benefits and expenses 936 1,018 974
----------------------------------------------------------------------
Underwriting loss (135) (195) (198)
Net investment income 154 144 158
Risk management services revenues 316 230 194
Risk management services expenses 307 227 216
Non-insurance restructuring and other
related charges 10 88 -
----------------------------------------------------------------------
Pre-tax operating income (loss) 18 (136) (62)
Income tax benefit 1 48 25
----------------------------------------------------------------------
NET OPERATING INCOME (LOSS) $19 $(88) $(37)
======================================================================
Ratios
Loss and loss adjustment expenses 94.3% 89.1% 101.8%
Expenses 22.6 30.7 24.3
Dividends - 3.9 -0.6
----------------------------------------------------------------------
COMBINED 116.9% 123.7% 125.5%
======================================================================
SUMMARY
Despite reserve strengthening, overall results rebounded to net operating
income. Positively influencing results were underwriting expense savings,
reinsurance programs, the impact of favorable regulatory changes in the basis on
which certain insurance-related assessments are calculated, and reduced
restructuring-related charges compared to those recorded in 1998. Earned
premiums decreased primarily due to greater use of reinsurance, program redesign
and disciplined underwriting of new and renewal business.
PREMIUMS
Earned premiums for Risk Management declined $22 million or 2.7% in 1999, as
compared with 1998. This decrease resulted from Risk Management's decision to
take advantage of a favorable reinsurance market and cede a larger portion of
its direct premiums, the redesign of existing risk management programs and lost
business as a result of pricing actions taken in a difficult market.
Earned premiums in 1998 increased by $47 million, or 6.1%, as compared with
1997. The increase is due to growth of $30 million in the property facility
business which was introduced in the latter part of 1997, underlying momentum in
Risk Management's core primary casualty business, and new business growth.
24 1999 ANNUAL REPORT
UNDERWRITING RESULTS
Risk Management's underwriting loss decreased $60 million in 1999 as the
combined ratio for 1999 decreased 6.8 points due to decreases in the expense and
dividend ratios of 8.1 points and 3.9 points, respectively, partially offset by
an increase in the loss ratio of 5.2 points. The increase in the loss ratio was
principally the result of adverse loss development in prior year reserves, which
was primarily related to asbestos exposures, offset in part by the beneficial
effects of reinsurance agreements executed in 1999. Risk Management's expense
ratio benefited 4.9 points from regulatory changes in the basis on which certain
insurance-related assessments are calculated. The decrease in the dividend ratio
is due to favorable development in dividend reserves.
Underwriting losses in 1998 remained consistent with 1997 as the aforementioned
increase in premiums of $47 million was offset by a like increase in benefits
and expenses as customers moved to guaranteed cost insurance.
Restructuring and other related charges in 1999 and 1998, as discussed on page
31 and Note N to the Consolidated Financial Statements, were $10 million and $88
million, respectively.
Risk management services 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.
CNA FINANCIAL CORPORATION 25
GROUP OPERATIONS
BUSINESS OVERVIEW
Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. Its products and services are primarily
distributed through brokers. In addition, Group Operations provides health
insurance to federal employees, retirees and their families; managed care and
self-funded medical excess insurance; medical provider network management and
administration services; and reinsurance for life and health insurers.
Group Operations includes five principal groups.
SPECIAL BENEFITS Special Benefits provides group term life insurance, short and
long term disability, statutory disability, long term care and accident
products. Products are marketed through a nationwide operation of 31 sales
offices, third party administrators, managing general agents and insurance
consultants.
PROVIDER MARKETS Provider Markets is comprised of two major businesses. CNA
Health Partners provides comprehensive managed care services to employers
offering self-funded medical plans and to healthcare provider networks,
including provider organizations that manage capitated risks. Services offered
include network development and management, medical management, medical claims
administration, consulting services and management services. Group Reinsurance
writes assumed reinsurance on health, life and other related products written on
a group basis, as well as excess risk coverages related to health care.
LIFE REINSURANCE Life Reinsurance reinsures individual life and health products
marketed by unaffiliated life insurance companies throughout North America.
Sales are through an internal sales force. See page 39 for further discussion.
FEDERAL MARKETS Federal Markets is the second largest provider of health
insurance benefits to federal employees, and operates through the Mail Handlers
Benefit Plan under the Federal Employees Health Benefit Plan (FEHBP). In
addition to insuring approximately one million members, Federal Markets is
responsible for all claim management activities under the plan, such as large
case management, hospital and provider bill negotiations, fraud detection
activities and vendor contracts.
HEALTH BENEFITS Health Benefits markets direct mail specialty products such as
accidental death and dismemberment, term life and dental insurance to bank
customers and federal employees.
OPERATING RESULTS
-----------------------------------------------------------------
Year Ended December 31 1999 1998 1997
(In millions of dollars)
-----------------------------------------------------------------
Net earned premiums $3,571 $3,733 $3,936
Net investment income 130 133 117
Other revenues 40 24 17
-----------------------------------------------------------------
Total operating revenues 3,741 3,890 4,070
Benefits 3,053 3,171 3,408
Expenses 699 763 680
Restructuring and other related charges 5 39 -
-----------------------------------------------------------------
Pre-tax operating loss (16) (83) (18)
Income tax benefit 10 35 10
-----------------------------------------------------------------
NET OPERATING LOSS $(6) $(48) $(8)
=================================================================
SUMMARY
Group Operations experienced $42 million of improved operating results in 1999
over 1998. Key components of the improvement include better underwriting results
in Special Benefits' life and disability product lines, the exit of selected
medical markets and lower restructuring and other related charges, partially
offset by adverse losses and reserve development in the personal accident
business.
PREMIUMS
Earned premiums declined in 1999 by $162 million, or 4.3%, from 1998. Health
Benefits premiums declined $344 million, almost entirely due to the exit of
selected medical markets in late 1998. Approximately half of the Health Benefits
decline was offset by premium growth in Federal Markets of $70 million
reflecting medical claim trends, and growth in Life Reinsurance and Special
Benefits of $60 million and $53 million, respectively.
During 1998, premiums decreased by approximately 5.2% or $203 million as
compared with 1997. The decrease was attributable, in part, to a $166 million
decrease in the medical lines of coverage in Health Benefits, resulting from the
decision to exit certain markets. Additionally, due to changes in coverage
terms, FEHBP premiums decreased by $90 million. These decreases were offset, in
part, by premium growth of $65 million across almost all other lines of
business.
OPERATING RESULTS
Pre-tax operating loss in 1999 improved by $67 million compared to 1998. Health
Benefits pre-tax operating income improved $81 million, due to the exit from the
employer health and affinity lines of business in 1998 and due to the
restructuring and other related charges recorded in 1998. Offsetting these
improvements was a decline in Special Benefits' pre-tax operating income of $19
million due to adverse losses and reserve development in personal accident
business, partially offset by improved underwriting results on life and
disability products.
26 1999 ANNUAL REPORT
Pre-tax operating loss in 1998 increased by $65 million as compared with 1997.
The increase was primarily due to restructuring and other related charges of $39
million related to the decision to exit the insured comprehensive medical
portion of the employer and affinity markets. The majority of the inforce
business was sold effective January 1, 1999. Earned premiums for these lines of
business was approximately $400 million in 1998. In addition, Special Benefits
1998 accident coverages experienced $30 million in increased losses, both from
adverse claim developments and unusually high claim activity in the traditional
accident insurance line.
CNA FINANCIAL CORPORATION 27
LIFE OPERATIONS
BUSINESS OVERVIEW
Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers and various other independent insurance consultants.
Life Operations is composed of four principal groups.
INDIVIDUAL LIFE Individual Life offers primarily level premium term life
insurance, universal life insurance and related products. New sales of term life
have placed CNA as first or close to first in the market in each of the last
three years.
RETIREMENT SERVICES Retirement Services markets annuities and investment
products and services to both retail and institutional customers.
LONG TERM CARE Long Term Care products provide reimbursement for covered nursing
home and home health care expenses incurred due to physical or mental
disability.
OTHER OPERATIONS Other Life Operations businesses include viatical settlements
and developing operations in certain international markets.
See page 39 for further discussion.
OPERATING RESULTS
----------------------------------------------------------------
Year Ended December 31 1999 1998 1997
(In millions of dollars)
----------------------------------------------------------------
SALES VOLUME
Individual Life $ 873 $761 $645
Retirement Services 1,824 986 1,035
Long Term Care 343 299 251
International 78 50 41
Other 105 91 45
----------------------------------------------------------------
TOTAL $3,223 $2,187 $2,017
================================================================
Net earned premiums $936 $823 $797
Net investment income 556 525 501
Other revenues 123 115 105
----------------------------------------------------------------
Total operating revenues 1,615 1,463 1,403
Benefits 1,122 998 950
Expenses 277 295 266
Restructuring and other related charges - 7 -
----------------------------------------------------------------
Pre-tax operating income 216 163 187
Income tax expense (71) (58) (66)
----------------------------------------------------------------
NET OPERATING INCOME $145 $105 $121
================================================================
SUMMARY
Life Operations experienced strong growth in revenues and profitability in 1999.
Premium growth was primarily due to strong sales in retirement-related and long
term care products, as well as an increasing base of direct premiums for life
products. Net operating income growth was achieved primarily in Retirement
Services, Individual Life and in the viatical settlements business.
SALES
Sales volume increased to $3.2 billion in 1999, up 47.4% from 1998, principally
due to increased sales of Retirement Services products. Sales volume in 1998 was
8.4% higher than 1997. Sales volume is a cash-based measure which includes
premium and annuity considerations, investment deposits and other sales activity
that are not reported as premiums under generally accepted accounting
principles. The 1999 increase represents strong sales in Retirement Services and
a growing base of premiums for Life and Long Term Care. Despite an increased use
of reinsurance, net premium revenues have also shown strong growth, increasing
13.7% in 1999 and 3.3% in 1998.
Individual Life sales volume of $873 million represents a 14.7% increase over
1998's $761 million. Individual Life earned premiums were $306 million in 1999,
down 4.7% from $321 million in 1998. The primary reason for this decrease was a
reinsurance treaty that was completed in late 1998 that lowered the Company's
life insurance retention levels. Individual Life premiums in 1998 decreased from
$373 million in 1997, driven primarily by increased use of reinsurance.
28 1999 ANNUAL REPORT
Sales volume for Retirement Services increased to $1.8 billion in 1999 from $1.0
billion in 1998, primarily related to increased sales of institutional
investment products. Variable annuity sales increased 87% to $110 million.
Retirement Services earned premiums were $216 million in 1999, up 22.2% from
1998 premium of $177 million. 1998 earned premiums were essentially unchanged
from 1997 levels. The decreased sales volume from 1997 to 1998 was primarily due
to the discontinuance of fixed individual annuities and the lower volume of
guaranteed investment contracts sold in institutional markets due to the
interest rate and stock market environments in 1998.
Long Term Care sales volume of $343 million in 1999 represents a 14.7% increase
over the 1998 level of $299 million. Long Term Care premiums increased 16.6% in
1998 and 22.2% or $61 million in 1999 to reach $336 million.
International sales climbed to $78 million in 1999, for a second consecutive
year of growth, fueled primarily by retirement annuity sales in Chile. Viatical
sales volume has also continued to experience year-to-year growth, to reach $105
million in 1999. Viatical sales volume is measured as amounts paid to insureds,
along with other related costs, in return for assignment of their life insurance
policies.
OPERATING RESULTS
Life Operations continues to show strong performance in the individual life
market, where net operating income increased $7 million in 1999 to $83 million,
because of expense savings and improved mortality experience. Also, effective
use of reinsurance has reduced Life Operations exposure to volatility in its
results. Net operating income for Retirement Services for 1999 of $37 million
increased $16 million, or 76%, from 1998. This was primarily due to favorable
investment performance in the portfolio supporting Retirement Services' Index
500 product, and improved sales and economies of scale in the trust and banking
services operation. Net operating income from the viatical settlements business
improved by $12 million due primarily to expense reductions and the recent entry
into the profitable high net worth market.
CNA FINANCIAL CORPORATION 29
CORPORATE
Corporate results consist of interest expense on corporate borrowings, certain
run-off insurance operations, asbestos claims related to Fibreboard Corporation
(Fibreboard), financial guarantee insurance contracts, and certain non-insurance
operations, including the operations of AMS Services, Inc. (AMS), an information
technology and agency software development subsidiary. See Notes F and O to the
Consolidated Financial Statements.
The operating loss for 1999 was $202 million, approximately $10 million better
than 1998. The improvement was primarily attributable to decreased losses from
AMS of $20 million (each on an after-tax basis), partially offset by increased
losses from run-off insurance operations. In the fourth quarter of 1999, the
Company sold most of its interest in AMS.
Operating losses for 1998 increased by $99 million compared with 1997. This
increase was primarily attributed to a net unfavorable change in loss
development on asbestos claims related to Fibreboard of approximately $46
million after-tax, an increase in operating losses attributable to AMS, a
decrease in investment income and an increase in interest expense.
30 1999 ANNUAL REPORT
RESTRUCTURING AND OTHER RELATED CHARGES
On August 5, 1998, CNA announced estimates of the financial implications of its
initiatives to achieve world-class performance. "World-class performance," as
defined by the Company, refers to the Company's intention to position each of
its strategic business units (SBU) as a market leader by sharpening its focus on
customers and employing new technology to work smarter and faster. In the third
quarter of 1998, the Company finalized and approved a plan to restructure its
operations. The restructuring plan focused on a gross reduction in the
then-current workforce of approximately 4,500 employees resulting in a net
reduction of approximately 2,400 employees, the consolidation of certain
processing centers, the closing of various facilities, and the exiting of
certain businesses. The details of the restructuring and other related charges
recognized in 1998 and 1999 are discussed in Note N to the Consolidated
Financial Statements. The initial expectation from management was that the
Company's initiatives would result in a reduction of approximately 2 points in
the Company's expense ratio due to savings of approximately $300 to $350 million
on an annualized basis.
As of December 31, 1999, the Company had completed essentially all aspects of
its restructuring plan. Management estimates the Company has achieved annualized
run-rate expense savings of $381 million. "Annualized run-rate expense savings,"
as defined by the Company, refers to the difference between the normalized
current expense ratio and a base-line expense ratio applied to a base-line
measure of revenue, generally written premiums. Approximately $70 million of the
annualized run-rate savings relate to the Personal Insurance business
transferred to Allstate. See Note O to the Consolidated Financial Statements for
a discussion of the Personal Insurance transaction. The normalization of the
current expense ratio involves adjusting the expense ratio, exclusive of
restructuring and other related charges, for other expenses that are not
expected to recur or persist in the restructured operating platform. Because
many of the expenses to which these adjustments relate are included in the
results of operations determined in accordance with generally accepted
accounting principles, the annualized run-rate expense savings cannot be
interpreted as the difference in expenses incurred in 1999 compared to 1998.
Management expects that the effects of the restructured operating platform will
be reflected in the 2000 results.
The table below presents the remaining accrued restructuring and other related
charges as of December 31, 1999 and management's estimate of the timing of its
payout.
ACCRUED RESTRUCTURING AND OTHER RELATED CHARGES
-------------------------------------------------------------------------------
EMPLOYEE
TERMINATION
AND RELATED LEASE BUSINESS
BENEFIT TERMINATION EXIT
(In millions of dollars) COSTS COSTS COSTS TOTAL
-------------------------------------------------------------------------------
Accrued costs at December 31, 1999 $4 $27 $15 $46
===============================================================================
2000 $4 $12 $13 $29
2001 - 6 2 8
2002 - 4 - 4
2003 - 2 - 2
2004 - 1 - 1
Thereafter - 2 - 2
-------------------------------------------------------------------------------
Total future payments $4 $27 $15 $46
===============================================================================
CNA FINANCIAL CORPORATION 31
INVESTMENTS
The components of net investment income for the years ended December 31, 1999,
1998 and 1997 are presented in the following table
NET INVESTMENT INCOME
Year Ended December 31
(In millions of dollars) 1999 1998 1997
---------------------------------------------------------------------
Fixed maturity securities:
Bonds:
Taxable $1,509 $1,490 $1,522
Tax-exempt 267 340 288
Redeemable preferred stocks - 2 7
Equity securities 36 33 37
Mortgage loans and real estate 4 5 10
Policy loans 11 11 6
Short-term investments 188 241 321
Securities lending transactions, net 26 10 9
Other invested assets 101 67 56
---------------------------------------------------------------------
2,142 2,199 2,256
Investment expenses (41) (53) (47)
---------------------------------------------------------------------
NET INVESTMENT INCOME $2,101 $2,146 $2,209
=====================================================================
Lower net investment income in 1999 compared to 1998 is due to lower investment
bases in the fixed maturity securities and short-term investments segments of
the portfolio, which collectively declined $3.5 billion. Portions of these
portfolios were liquidated in connection with the Personal Insurance transaction
with Allstate and to fund payments from the Fibreboard escrow. See Notes F and O
to the Consolidated Financial Statements. Additionally, the yield realized on
fixed maturity securities was lower in 1999 than in 1998. The bond segment of
the investment portfolio yielded 6.1% in 1999 compared to 6.4% in 1998 and 1997.
Partially offsetting these declines in 1999 were increases in income from
expansion of the securities lending program and other invested assets. Lower net
investment income in 1998 compared to 1997 is attributable to a lower average
level of assets invested in interest bearing securities.
The components of net realized investment gains for the years ended December 31,
1999, 1998 and 1997 are presented in the following table:
NET REALIZED INVESTMENT GAINS
Year Ended December 31
(In millions of dollars) 1999 1998 1997
---------------------------------------------------------------------
Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds $ (177) $ 265 $ 249
Corporate and other taxable bonds (78) 67 142
Tax-exempt bonds (44) 90 49
Asset-backed bonds (13) 39 36
Other 1 6 (24)
---------------------------------------------------------------------
Total fixed maturity securities (311) 467 452
Equity securities 366 38 103
Derivative securities 39 12 (7)
Other invested assets 214 178 205
---------------------------------------------------------------------
Total net realized investment gains 308 695 753
Allocated to participating policyholders 7 (14) (15)
Income tax expense (123) (247) (260)
---------------------------------------------------------------------
NET REALIZED INVESTMENT GAINS $ 192 $ 434 $ 478
=====================================================================
Significant investment gains were realized in 1999 on the Company's investments
in Global Crossing, Ltd., and Canary Wharf Group plc; aggregate realized
investment gains on these positions were approximately $342 million. Partially
offsetting these gains in 1999 were realized losses in the tax-exempt portion of
the fixed maturity securities segment of the portfolio. The value of the
Company's investments declined in 1999 due to increases in interest rates and,
as previously mentioned, there were portfolio liquidations in connection with
the Personal Insurance transaction with Allstate and payments to the Fibreboard
escrow. Other realized investment gains in 1999 include gains from the Company's
investments in limited partnerships and the AMS transaction, partially offset by
the loss on the Personal Insurance transaction. See Note O to the Consolidated
Financial Statements.
Other realized gains for the year ended December 31, 1997, includes a $95
million gain related to the CNA Surety transaction. See Note O to the
Consolidated Financial Statements.
32 1999 ANNUAL REPORT
The following table details the carrying value of CNA's general and separate
account investments as of the end of each of the last two years:
GENERAL AND SEPARATE ACCOUNT INVESTMENTS
------------------------------------------------------------------------
December 31
(In millions of dollars) 1999 % 1998 %
------------------------------------------------------------------------
GENERAL ACCOUNT INVESTMENTS
Fixed maturity securities:
Bonds:
Taxable $22,722 64% $23,658 64%
Tax-exempt 4,396 12 6,321 17
Redeemable preferred stocks 130 - 94 -
Equity securities:
Common stocks 3,344 9 1,665 5
Non-redeemable preferred stocks 266 1 305 1
Mortgage loans and real estate 47 - 62 -
Policy loans 192 1 177 -
Other invested assets 1,108 3 858 2
Short-term investments 3,355 10 4,037 11
------------------------------------------------------------------------
TOTAL GENERAL ACCOUNT INVESTMENTS $35,560 100% $37,177 100%
========================================================================
SEPARATE ACCOUNT INVESTMENTS
Fixed maturity securities:
Taxable bonds $ 3,260 72% $ 4,155 81%
Equity securities:
Common stocks 240 5 264 5
Non-redeemable preferred stocks 21 1 33 1
Other invested assets 493 11 218 4
Short-term investments 489 11 473 9
------------------------------------------------------------------------
TOTAL SEPARATE ACCOUNT INVESTMENTS $ 4,503 100% $ 5,143 100%
========================================================================
The Company's general and separate account investment portfolios consist
primarily of publicly traded government bonds, asset-backed securities,
mortgage-backed securities, municipal bonds, and corporate bonds.
Total separate account investments at fair value were approximately $4.5 billion
and $5.1 billion at December 31, 1999 and 1998, respectively, with taxable fixed
maturity securities representing approximately 72.4% and 80.8% of the totals,
respectively. Approximately 52.8% and 64.3% of separate account investments at
December 31, 1999 and 1998, respectively, are used to fund guaranteed investment
contracts for which Continental Assurance Company guarantees principal and a
specified return to the contractholders. The duration of fixed maturity
securities included in the guaranteed investment contract portfolio is matched
approximately with the corresponding payout pattern of the liabilities of the
guaranteed investment contracts.
A primary objective in the management of the fixed maturity portfolio is to
maximize total return relative to underlying liabilities and appropriate market
benchmarks. In achieving this goal, assets may be sold to take advantage of
market conditions, other investment opportunities and credit and tax
considerations. This activity will produce realized gains and losses depending
on then-current interest rates.
The Company's investment policies for both the general and separate accounts
emphasize high credit quality and diversification by industry, issuer and issue.
Assets supporting interest rate sensitive liabilities are segmented within the
general account to facilitate asset/liability duration management.
The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 94.2% and 93.3% of which are rated as investment grade at
December 31, 1999 and 1998, respectively. The following table summarizes the
ratings of CNA's general account bond portfolio at carrying value:
GENERAL ACCOUNT BOND RATINGS
------------------------------------------------------------------------
December 31
(In millions of dollars) 1999 % 1998 %
------------------------------------------------------------------------
U.S. government and affiliated securities $ 8,781 32% $ 9,443 31%
Other AAA rated 9,692 36 11,595 39
AA and A rated 4,465 16 4,884 16
BBB rated 2,598 10 2,061 7
Below investment grade 1,582 6 1,996 7
------------------------------------------------------------------------
TOTAL $ 27,118 100% $29,979 100%
========================================================================
The following table summarizes ratings of CNA's guaranteed investment contract
portion of the separate account bond portfolio at carrying value:
GUARANTEED SEPARATE ACCOUNT BOND RATINGS
------------------------------------------------------------------------
December 31
(In millions of dollars) 1999 % 1998 %
------------------------------------------------------------------------
U.S. government and affiliated securities $ 52 2% $ 167 5%
Other AAA rated 1,514 65 1,977 61
AA and A rated 356 15 476 15
BBB rated 335 14 339 11
Below investment grade 85 4 269 8
------------------------------------------------------------------------
TOTAL $ 2,342 100% $ 3,228 100%
========================================================================
In the above tables approximately 95.4% and 91.5% of the general account bond
portfolio and 96.9% and 95.7% of the guaranteed investment contract bond
portfolio were U.S. government agencies or were rated by Standard & Poor's or
Moody's Investors Service at December 31, 1999 and 1998, respectively. The
remaining bonds were rated by other rating agencies, outside brokers or Company
management.
High yield securities are bonds rated as below investment grade (below BBB) by
bond rating agencies and other unrated securities which, in the opinion of
management, are below investment grade. High yield securities generally involve
a greater degree of risk than
CNA FINANCIAL CORPORATION 33
investment grade securities. However, expected returns should compensate for the
added risk. This risk is also considered in the interest rate assumptions in the
underlying insurance products. CNA's concentration in high yield bonds,
including guaranteed separate account business, was 4.7% and 6.1% of total
investments as of December 31, 1999 and 1998, respectively.
Included in CNA's fixed maturity securities at December 31, 1999 (general and
guaranteed investment contract portfolios) are $8.6 billion of asset-backed
securities, at fair value, consisting of approximately 12.8% in U.S. government
agency issued pass-through certificates, 56.7% in collateralized mortgage
obligations (CMOs), 20.5% in corporate asset-backed obligations and 10.0% in
corporate mortgage-backed pass-through certificates. The majority of CMOs held
are actively traded in liquid markets and are priced by broker-dealers.
CMOs are subject to prepayment risks that tend to vary with changes in interest
rates. During periods of declining interest rates, CMOs generally prepay faster
as the underlying mortgages are prepaid and refinanced by the borrowers in order
to take advantage of the lower rates. Conversely, during periods of rising
interest rates, prepayments generally slow, which may result in a decrease in
yield or a loss as a result of the slower prepayments. CNA limits the risks
associated with interest rate fluctuations and prepayments by concentrating its
CMO investments in planned amortization classes with relatively short principal
repayment windows. CNA avoids investments in complex mortgage derivatives
without readily ascertainable market prices. At December 31, 1999, the fair
value of asset-backed securities was approximately $249 million lower than the
amortized cost compared with net unrealized gains of approximately $163 million
at December 31, 1998.
Short-term investments at December 31, 1999 and 1998 primarily consisted of
commercial paper and money market funds. The components of the general account
short-term investments portfolio are presented in the following table:
SHORT-TERM INVESTMENTS
-------------------------------------------------------
December 31
(In millions of dollars) 1999 1998
-------------------------------------------------------
Commercial paper $ 1,988 $ 2,405
U.S. Treasury securities 41 506
Money market funds 904 401
Other 422 725
-------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS $ 3,355 $ 4,037
=======================================================
CNA invests in certain derivative financial instruments primarily to reduce its
exposure to market risk (principally interest rate, equity price and foreign
currency risk).
CNA considers the derivatives in its general account to be held for purposes
other than trading. Derivative securities, except for interest rate swaps
associated with certain corporate borrowings, are recorded at fair value at the
reporting date, and changes in fair value are reported in realized investment
gains and losses. The interest rate swaps on corporate borrowings are accounted
for using accrual accounting with the related income or expense recorded as an
adjustment to interest expense; adjustments to fair value are not recognized.
Certain derivatives in the separate accounts are held for trading purposes.
These derivatives relate to an indexed group annuity contract for institutional
investors, which guarantees the Standard & Poor's 500 Composite Stock Price
Index (S&P 500) rate of return plus 25 basis points annually. Deposits are
received from the customer and held for a three-year period with no payout until
the end of the period. CNA mitigates the risk associated with the contract
liability by a combination of purchasing S&P 500 futures contracts in a notional
amount equal initially to the original customer deposit and investing the
remaining cash primarily in high quality investments. The number of futures
contracts is adjusted regularly to approximate the liability to the
contractholder. Changes in fair value of separate account derivatives held for
trading purposes are reported as a component of net investment income.
The Company's largest equity holding in a single issue is Global Crossing, Ltd.
(Global Crossing) common stock. As of December 31, 1999, the Company owned 36.4
million shares of Global Crossing valued at $1,822 million, which represented
4.6% of Global Crossing's outstanding common stock. Unrealized gains associated
with this security were approximately $1,764 million at December 31, 1999.
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.
The Company also has a significant equity investment in Canary Wharf Group plc.
The carrying value of this investment was $622 million as of December 31, 1999.
Unrealized gains on this investment were $621 million as of December 31, 1999.
34 1999 ANNUAL REPORT
MARKET RISK
Market risk is a broad term related to economic losses due to adverse changes in
the fair value of a financial instrument. According to the Securities and
Exchange Commission (SEC) disclosure rules, discussions regarding market risk
focus on only one element of market risk: price risk. Price risk relates to
changes in the level of prices due to changes in interest rates, equity prices,
foreign exchange rates or other factors that relate to market volatility of the
rate, index or price underlying the financial instrument. The Company's primary
market risk exposures are due to changes in interest rates, although the Company
has certain exposures to changes in equity prices and foreign currency exchange
rates.
Active management of market risk is integral to the Company's operations. The
Company may manage its exposure to market risk, within defined tolerance ranges
by: 1) changing the character of future investments purchased or sold, 2) using
derivatives to offset the market behavior of existing assets and liabilities, or
assets expected to be purchased and liabilities expected to be incurred, or 3)
rebalancing its existing asset and liability portfolios.
For purposes of this disclosure, market risk sensitive instruments are to be
divided into two categories: instruments entered into for trading purposes and
instruments entered into for purposes other than trading. With the exception of
financial instruments supporting the Company's S&P 500 separate account product,
the Company does not generally hold or issue financial instruments for trading
purposes.
INTEREST RATE RISK The Company has exposure to economic losses due to interest
rate risk arising from changes in the level or volatility of interest rates. The
Company attempts to mitigate its exposure to interest rate risk through active
portfolio management. The Company may also reduce this risk by utilizing
instruments such as interest rate swaps, interest rate caps, commitments to
purchase securities, options, futures and forwards. This exposure is also
mitigated by the Company's asset/liability matching strategy.
EQUITY PRICE RISK The Company is exposed to equity price risk as a result of its
investment in equity securities and equity derivatives. Equity price risk
results from changes in the level or volatility of equity prices which affect
the value of equity securities or instruments which derive their value from such
securities or indexes. CNA attempts to mitigate its exposure to such risks by
limiting its investment in any one security or index.
FOREIGN EXCHANGE RATE RISK Foreign exchange rate risk arises from the
possibility that changes in foreign currency exchange rates will impact the
value of financial instruments. The Company has foreign exchange rate exposure
when it buys or sells foreign currencies or financial instruments denominated in
a foreign currency. The Company's foreign transactions are primarily denominated
in Canadian Dollars, British Pounds, German Deutsche Marks, Chilean Pesos,
Argentinean Pesos and Japanese Yen. This exposure is mitigated by the Company's
asset/liability matching strategy and through the use of forward contracts for
those instruments that are not matched.
SENSITIVITY ANALYSIS CNA monitors its sensitivity to interest rate risk by
evaluating the change in its financial assets and liabilities relative to
fluctuations in interest rates. The evaluation is made using an instantaneous
change in interest rates of varying magnitudes on a static balance sheet to
determine the effect such a change in rates would have on the recorded market
value of the Company's investments and the resulting effect on stockholders'
equity. The range of changes chosen reflects the Company's view of changes which
are reasonably possible over a one-year period. The selection of the range of
values chosen to represent changes in interest rates should not be construed as
the Company's prediction of future market events, but rather an illustration of
the impact of such events.
The sensitivity analysis estimates the change in the market value of the
Company's interest-sensitive assets and liabilities that were held on December
31, 1999 and 1998 due to instantaneous parallel shifts in the year-end yield
curve of 100 and 150 basis points with all other variables held constant. The
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Accordingly, the analysis may not be
indicative of, is not intended to provide, and does not provide a precise
forecast of the effect of changes of market interest rates on the Company's
income or stockholders' equity. Further, the computations do not contemplate any
actions CNA would undertake in response to changes in interest rates.
A 100 and 150 basis point increase in market interest rates would result in a
pre-tax decrease in the financial instrument position of $1.4 billion and $2.1
billion, respectively, at December 31, 1999, compared to $1.7 billion and $2.6
billion, respectively, at December 31, 1998. Similarly, a 100 and 150 basis
point decrease in market interest rates would result in a pre-tax increase in
the net financial instrument position of $1.5 billion and $2.2 billion,
respectively, at December 31, 1999 compared to $1.6 billion and $2.4 billion at
December 31, 1998.
The Company's debt, including certain related interest rate swap agreements, as
of December 31, 1999 and 1998, is denominated in U.S. dollars. At December 31,
1999 and 1998, approximately 93% of the Company's long-term debt has been issued
at or effectively converted to fixed rates, and as such, interest expense would
not be impacted by interest rate shifts. The impact of a 100 and 150 basis point
increase in interest rates on the fixed rate debt would result in a decrease in
the market value of the debt by $132 million and $193 million, respectively, at
December 31, 1999, compared to $157 million and $229 million, respectively, at
December 31, 1998. The impact of
CNA FINANCIAL CORPORATION 35
a 100 and 150 basis point decrease in the interest rates would result in an
increase in the market value of fixed rate debt by $147 million and $225
million, respectively, at December 31, 1999, compared to $174 million and $268
million, respectively, at December 31, 1998. The impact of a 100 and 150 basis
point increase in interest rates on the variable rate debt at December 31, 1999
and 1998 would result in an additional $2 million and $3 million, respectively,
in interest expense per year. Similarly, a 100 and 150 basis point decrease in
interest rates would result in like decreases in interest expense per year.
Equity price risk was measured assuming an instantaneous 10% and 25% change in
the S&P 500 from its level as of December 31, 1999 and 1998, with all other
variables held constant. The Company's equity holdings were assumed to be
positively correlated with the S&P 500. At December 31, 1999, a 10% and 25%
decrease in the S&P 500 would result in a $505 million and $1.3 billion
decrease, respectively, compared to $320 million and $795 million decrease,
respectively, at December 31, 1998, in the market value of the Company's equity
investments. Of these amounts, $105 million and $261 million, respectively, in
the current year, and $92 million and $229 million, respectively, in the prior
year would be offset by decreases in liabilities to customers under variable
annuity contracts. Similarly, increases in the S&P 500 would result in like
increases in the market value of the Company's equity investments and increases
in liabilities to customers under variable annuity contracts.
The sensitivity analysis also assumes an instantaneous 10% and 20% change in the
foreign currency exchange rates versus the U.S. dollar from their levels at
December 31, 1999 and 1998, with all other variables held constant. At December
31, 1999, a 10% and 20% strengthening of the U.S. dollar versus other currencies
would result in decreases of $337 million and $673 million, respectively, in the
market value of certain financial instruments that are denominated in foreign
currencies, compared to $220 million and $441 million, respectively, at December
31, 1998. Weakening of the U.S. dollar versus all other currencies would result
in like increases in the market value of certain financial instruments that are
denominated in foreign currencies.
The following tables present the estimated effects on the market value of the
Company's financial instruments at December 31, 1999 and 1998, due to an
increase in interest rates of 100 basis points, a 10% decline in the S&P 500 ,
and a decline of 10% in foreign currency exchange rates.
[Enlarge/Download Table]
MARKET RISK SCENARIO 1
----------------------------------------------------------------------------------------
DECEMBER 31, 1999 MARKET INTEREST CURRENCY EQUITY
(In millions of dollars) VALUE RATE RISK RISK RISK
HELD FOR OTHER THAN TRADING PURPOSES
General account:
Fixed maturity securities $ 27,248 $ (1,268) $ (149) $ (14)
Equity securities 3,610 - (84) (361)
Short term investments 3,355 (2) (26) -
Interest rate caps 4 5 - -
Equity index futures - 19 - -
Other derivative securities 12 (8) (59) 3
----------------------------------------------------------------------------------------
TOTAL GENERAL ACCOUNT 34,229 (1,254) (318) (372)
----------------------------------------------------------------------------------------
Separate accounts:
Fixed maturity securities 2,927 (115) (16) (2)
Equity securities 240 - - (24)
Short term investments 59 - - -
Other derivative securities (1) (7) - -
----------------------------------------------------------------------------------------
TOTAL SEPARATE ACCOUNTS 3,225 (122) (16) (26)
----------------------------------------------------------------------------------------
TOTAL ALL SECURITIES HELD FOR
OTHER THAN TRADING PURPOSES 37,454 (1,376) (334) (398)
----------------------------------------------------------------------------------------
HELD FOR TRADING PURPOSES
----------------------------------------------------------------------------------------
Separate accounts:
Fixed maturity securities 333 (12) (1) -
Equity securities 19 - - (2)
Short term investments 430 - (2) -
Equity index futures - 2 - (105)
Other derivative securities - (1) - -
----------------------------------------------------------------------------------------
TOTAL ALL SECURITIES HELD FOR
TRADING PURPOSES 782 (11) (3) (107)
----------------------------------------------------------------------------------------
TOTAL ALL SECURITIES $ 38,236 $ (1,387) $ (337) $ (505)
========================================================================================
DEBT $ (2,881) $ 132 $ - $ -
========================================================================================
36 1999 ANNUAL REPORT
[Enlarge/Download Table]
MARKET RISK SCENARIO 1 (continued)
----------------------------------------------------------------------------------------
DECEMBER 31, 1998 MARKET INTEREST CURRENCY EQUITY
(In millions of dollars) VALUE RATE RISK RISK RISK
----------------------------------------------------------------------------------------
HELD FOR OTHER THAN TRADING PURPOSES
General account $ 36,066 $ (1,551) $ (199) $ (195)
Separate accounts 4,231 (163) (18) (31)
HELD FOR TRADING PURPOSES
separate accounts 698 (10) (3) (94)
----------------------------------------------------------------------------------------
TOTAL ALL SECURITIES $ 40,995 $ (1,724) $ (220) $ (320)
========================================================================================
DEBT $ (3,160) $ 157 $ - $ -
========================================================================================
The following tables present the estimated effects on the market value of the
Company's financial instruments at December 31, 1999 and 1998, due to an
increase in interest rates of 150 basis points, a 25% decline in the S&P 500
index, and a decline of 20% in foreign currency exchange rates.
[Enlarge/Download Table]
MARKET RISK SCENARIO 2
----------------------------------------------------------------------------------------
DECEMBER 31, 1999 MARKET INTEREST CURRENCY EQUITY
(In millions of dollars) VALUE RATE RISK RISK RISK
----------------------------------------------------------------------------------------
(In millions of dollars)
HELD FOR OTHER THAN TRADING PURPOSES
General account:
Fixed maturity securities $ 27,248 $ (1,878) $ (298) $ (35)
Equity securities 3,610 - (168) (902)
Short term investments 3,355 (3) (51) -
Interest rate caps 4 11 - -
Equity index futures - 29 - -
Other derivative securities 12 (13) (118) 9
----------------------------------------------------------------------------------------
TOTAL GENERAL ACCOUNT 34,229 (1,854) (635) (928)
----------------------------------------------------------------------------------------
Separate accounts:
Fixed maturity securities 2,927 (170) (32) (4)
Equity securities 240 - - (60)
Short term investments 59 - (1) -
Other derivative securities (1) (11) - -
----------------------------------------------------------------------------------------
TOTAL SEPARATE ACCOUNTS 3,225 (181) (33) (64)
----------------------------------------------------------------------------------------
TOTAL ALL SECURITIES HELD FOR
OTHER THAN TRADING PURPOSES 37,454 (2,035) (668) (992)
----------------------------------------------------------------------------------------
HELD FOR TRADING PURPOSES
Separate accounts:
Fixed maturity securities 333 (18) (1) (1)
Equity securities 19 - - (5)
Short term investments 430 - (4) -
Equity index futures - 3 - (261)
Other derivative securities - (2) - -
----------------------------------------------------------------------------------------
TOTAL ALL SECURITIES HELD FOR
TRADING PURPOSES $ 782 $ (17) $ (5) $ (267)
========================================================================================
TOTAL ALL SECURITIES $ 38,236 $ (2,052) $ (673) $ (1,259)
========================================================================================
DEBT $ (2,881) $ 193 $ - $ -
========================================================================================
HELD FOR OTHER THAN TRADING PURPOSES
General account $ 36,066 (2,349) (398) (483)
Separate accounts 4,231 (254) (36) (78)
HELD FOR TRADING PURPOSES
Separate accounts 698 (14) (7) (234)
----------------------------------------------------------------------------------------
TOTAL ALL SECURITIES $ 40,995 $ (2,617) $ (441) $ (795)
========================================================================================
DEBT $ (3,160) $ 229 $ - $ -
========================================================================================
CNA FINANCIAL CORPORATION 37
LIQUIDITY AND CAPITAL RESOURCES
The principal operating cash flow sources of CNA's property/casualty and life
insurance subsidiaries are premiums and investment income. The primary operating
cash flow uses are payments for claims, policy benefits and operating expenses.
For the year ended December 31, 1999, net cash used in operating activities was
$2.6 billion, compared with net cash used of $949 million and $193 million in
1998 and 1997, respectively.
The significant increase in net cash used in operating activities in 1999 is
principally attributable to (a) the net transfer of $1.1 billion in cash to
Allstate in connection with the transaction involving the Company's Personal
Insurance business and (b) a payment of $1.1 billion from escrow pursuant to the
settlement between the Company, Pacific Indemnity and Fibreboard known as the
Trilateral Agreement. See Notes O and F to the Consolidated Financial Statements
regarding these transactions. Excluding these significant, non-recurring
transactions, the Company would have reported net cash used in operating
activities in 1999 of approximately $400 million, significantly improved from
1998. Improvement in net cash used in operating activities is primarily due to
lower levels of paid operating expenses, which declined by more that 30%,
relative to the lower levels of net premiums collected, which declined by less
than 15%. Benefits paid, adjusted for the Allstate and Fibreboard payments, were
slightly higher in 1999 than 1998. Notwithstanding the improvement in 1999, the
Personal Insurance transaction had an adverse impact on net cash used in
operations because the Personal Insurance business has historically contributed
an inflow of operating cash. The transfer of this business on October 1, 1999
resulted in a reduction in net cash inflow of approximately $128 million in the
fourth quarter of 1999.
The Company had substantially lower operating cash flows in 1998 and 1997,
primarily due to increases in insurance receivables.
The Company is separated into three intercompany reinsurance pools: the
Continental Casualty Company Pool (CCC Pool), The Continental Insurance Company
Pool (CIC Pool) and the Continental Assurance Company Pool (CAC Pool). The CCC
Pool, CIC Pool and CAC Pool are comprised of 9, 15 and 2 legal insurance
entities, respectively, domiciled in a total of 13 states and doing business in
the 50 U.S. states territories, and in Canada (the Pool Companies). To the
extent a Pool Company's currently due claim liabilities may exceed its readily
available liquid assets, the Company may be called upon to contribute capital to
that company. Furthermore, such capital would likely be obtained in the form of
a dividend from another Pool Company, possibly in a different pool, which may or
may not require the approval of insurance regulators in the jurisdiction of the
dividend-paying company. Accordingly, management must continuously monitor the
capital allocation among the pools and the liquidity and capital resources of
the individual Pool Companies.
The National Association of Insurance Commissioners has completed the process of
codifying Statutory Accounting Practices (Codification) to promote
standardization of methods, and is encouraging each state to adopt Codification
as soon as possible, with a proposed implementation date of January 1, 2001.
Related statutory accounting changes are not expected to significantly impact
the Company's statutory capital requirements.
On April 19, 1999, a Registration Statement on Form S-3 filed with the SEC which
became effective, relating to $600 million in senior and subordinated debt,
junior debt, common stock, preferred stock and warrants. No securities have been
issued under this Registration Statement.
CNA has a $795 million revolving credit facility (the Facility) that expires in
May 2001. The amount available under the Facility is reduced by the amount of
CNA's outstanding commercial paper borrowings. As of December 31, 1999,
outstanding loans under the Facility were $77 million and outstanding commercial
paper was $675 million, compared to $235 million and $500 million, respectively,
as of December 31, 1998. 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 was 6.50%
and 5.89% at December 31, 1999 and 1998, respectively.
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.
The combined weighted-average cost of borrowings, including facility fees, on
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.
Additionally, as a result of these actions, the Company purchased and retired
approximately $30 million of its outstanding money market preferred stock in
February 2000, and announced its intention to purchase or redeem the remaining
outstanding shares.
On April 15, 1999, CNA retired $100 million of 8.25% senior notes.
38 1999 ANNUAL REPORT
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.
On December 23, 1998, CNA sold $200 million of preferred stock to its majority
shareholder, Loews Corporation. On June 30, 1999, CNA redeemed the preferred
stock at par plus accrued dividends.
In 1998, CNA issued $1 billion of senior notes under a $1 billion Registration
Statement on Form S-3 filed with the SEC on August 18, 1997. This shelf
registration incorporated $250 million of securities remaining available for
issuance from a prior shelf registration. Since filing this shelf registration,
CNA has issued in four separate offerings senior notes with an aggregate
principal amount of $1 billion. Proceeds from these debt issues were used to
repay or refinance existing debt, provide funds for acquisitions, and increase
the capital of Continental Casualty Company.
As previously mentioned, on February 15, 2000, Standard & Poor's lowered its
ratings on the Company's senior debt and preferred stock. At the same time, they
lowered the rating of the CCC Pool and affirmed all other ratings. Additionally,
Standard & Poor's changed the outlook for all the rated entities from negative
to stable.
On February 24, 2000 A.M. Best affirmed all ratings but assigned a negative
outlook. Also on February 24, 2000, Duff & Phelps reaffirmed all ratings but
moved the outlook on the CCC Pool rating to negative from stable. The CAC Pool
outlook remained at stable.
On March 8, 2000, the Company announced that it is exploring the sale of its
individual life insurance and life reinsurance businesses. The Company has
engaged the services of an investment banking firm to assist with this
transaction. As expected, several of the major rating agencies placed their
ratings of the CAC Pool under review as a result of this announcement. Each
rating agency has slightly different terms for this special review: Standard &
Poor's placed the rating on CreditWatch with developing implications; A.M. Best
placed the rating under review with developing implications; Duff & Phelps
placed the rating on Rating Watch - Uncertain, implying it could be upgraded or
downgraded in the future. When an insurance company experiences a significant
event which might be pertinent to its financial strength rating or claims-paying
ability rating, the major rating agencies generally place that company's rating
under special review. Such events may include merger, sale, recapitalization,
regulatory action, or other significant event.
On March 14, 2000, Moody's lowered all of the Company's ratings except for the
Company's commercial paper rating. Continental Assurance Company and Valley
Forge Life Insurance Company remain under review by Moody's - direction
uncertain. The outlook on all other rated entities remained at stable.
The table below represents ratings issued by A.M. Best, Moody's, Standard &
Poor's, and Duff & Phelps for the CCC Pool, the CIC Pool and the CAC Pool as of
March 14, 2000. Also rated as of March 14, 2000 were CNA's senior debt,
commercial paper and preferred stock and The Continental Corporation's
(Continental) senior debt.
[Enlarge/Download Table]
|------------------|---------------------|-------------------------------------------------|
| | INSURANCE RATINGS | DEBT AND PREFERRED STOCK RATINGS |
| |---------------------|------------------------------------|------------|
| | CCC CAC CIC | CNA |Continental |
| |---------------------|------------------------------------|------------|
| | | Commercial Preferred | |
| |Financial Strength |Senior Debt Paper Stock | Senior Debt|
| |---------------------|------------|------------|----------|------------|
|A.M. Best | A A A- | - | - | - | - |
|Moody's | A2 A2* A2 | Baa1 | P2 | baa1 | Baa2 |
|Standard & Poor's | A AA- A- | BBB | A2 | BB+ | BBB- |
| | | | | | |
| |---------------------| | | | |
| |CLAIMS PAYING ABILITY| | | | |
| |---------------------| | | | |
|Duff & Phelps | AA- AA - | A- | - | BBB+ | - |
|------------------|---------------------|------------|------------|----------|------------|
*Continental Assurance Company and Valley Forge Life Insurance Co. are rated
separately by Moody's and both have an A2 rating.
CNA FINANCIAL CORPORATION 39
YEAR 2000
CNA estimates that the total amount spent on Year 2000 readiness matters was $66
million. Prior to 1997, the Company did not specifically separate technology
charges for Year 2000 from other information technology charges. In addition,
while some hardware charges are included in the above figure, the Company's
hardware costs typically are included as part of ongoing technology updates and
not specifically as part of the Year 2000 project. All funds spent have been
financed from current operating funds.
The Company believes that it has successfully resolved the Year 2000 issue. Over
the year-end transition weekend, there were no problems observed that would
affect the normal processing of CNA business. Since that time, no significant
processing or other computer problems related to Year 2000 have arisen. CNA does
not expect any CNA systems processing problems related to Year 2000 going
forward that would have a material impact on the results of operations, cash
flows or equity of CNA.
Property/casualty insurance companies may have an underwriting exposure related
to the Year 2000 issue. Coverage, if any, will depend on the facts and
circumstances of the claim and the provisions of the policy. The Company has
received notices of a limited number of Year 2000-related policy claims. The
Company does not believe that the adverse impact, if any, in connection with
claims related to the Year 2000 will be material on the results of operations,
cash flows or equity of CNA.
40 1999 ANNUAL REPORT
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement requires that an entity recognize all
derivative investments as either assets or liabilities in the balance sheet and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement is effective for fiscal years beginning after June 15, 2000. CNA
is currently evaluating the effects of this Statement on its accounting and
reporting of derivative securities and hedging activities.
In October 1998, the American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position 98-7,
"Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." This guidance excludes long-duration life and health insurance
contracts from its scope. This Statement of Position is effective for financial
statements in the year 2000, with early adoption encouraged. CNA does not expect
the adoption to have a significant impact on the results of operations or equity
of the Company.
FORWARD-LOOKING STATEMENTS
The statements contained in this management discussion and analysis which are
not historical facts are forward-looking statements. When included in this
management discussion and analysis, the words "believe," "expects," "intends,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others, the
impact of competitive products, policies and pricing; product and policy demand
and market responses; development of claims and the effect on loss reserves; the
performance of reinsurance companies under reinsurance contracts with the
Company; general economic and business conditions; changes in financial markets
(interest rate, credit, currency, commodities and stocks); changes in foreign,
political, social and economic conditions; regulatory initiatives and compliance
with governmental regulations; judicial decisions and rulings; the effect on the
Company of changes in rating agency policies and practices; the results of
financing efforts; changes in the Company's composition of operating segments;
the actual closing of contemplated transactions and agreements and various other
matters and risks (many of which are beyond the Company's control) detailed in
the Company's Securities and Exchange Commission filings. These forward-looking
statements speak only as of the date of this management discussion and analysis.
The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.
CNA FINANCIAL CORPORATION 41
CONSOLIDATED BALANCE SHEETS
BALANCE SHEETS
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
December 31, December 31,
(In millions of dollars, except share data) 1999 1998
----------------------------------------------------------------------------------------------------------
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
=====================================================================================================
See accompanying Notes to Consolidated Financial Statements.
42 1999 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
BALANCE SHEETS
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
December 31, December 31,
(In millions of dollars, except share data) 1999 1998
----------------------------------------------------------------------------------------------------------
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
=====================================================================================================
CNA FINANCIAL CORPORATION 43
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(In millions of dollars, except per share data) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
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
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
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
44 1999 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
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
--------------------------------------------------------------------------------------------------------------------
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
income............... 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
====================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CNA FINANCIAL CORPORATION 45
CONSOLIDATED FINANCIAL STATEMENTS
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
---------------------------------------------------------------------------
46 1999 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
---------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------
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 47
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
48 1999 ANNUAL REPORT
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.
CNA FINANCIAL CORPORATION 49
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
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------
Year ended December 31
(In millions of dollars) 1999 1998 1997
-------------------------------------------------------------------------------------------
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
===========================================================================================
50 1999 ANNUAL REPORT
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
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(In millions of dollars) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------------
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
============================================================================================
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
CNA FINANCIAL CORPORATION 51
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.
52 1999 ANNUAL REPORT
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 on the following
page.
CNA FINANCIAL CORPORATION 53
SUMMARY OF DERIVATIVE FINANCIAL STATEMENTS
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------
FAIR VALUE
------------------------
DECEMBER 31, 1999 CONTRACTUAL RECOGNIZED
(In millions of dollars) NOTIONAL AMOUNT ASSET (LIABILITY) GAIN (LOSS)
----------------------------------------------------------------------------------------------
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
==============================================================================================
SUMMARY OF DERIVATIVE FINANCIAL STATEMENTS (CONTINUED)
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------
FAIR VALUE
------------------------
DECEMBER 31, 1998 CONTRACTUAL/ RECOGNIZED
(In millions of dollars) NOTIONAL AMOUNT ASSET (LIABILITY) GAIN (LOSS)
----------------------------------------------------------------------------------------------
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
==============================================================================================
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
54 1999 ANNUAL REPORT
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
============================================================================
CNA FINANCIAL CORPORATION 55
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.
56 1999 ANNUAL REPORT
RECONCILIATION OF CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------
Year Ended December 31
(In millions of dollars) 1999 1998 1997
-------------------------------------------------------------------------------------------------
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
=================================================================================================
* 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
CNA FINANCIAL CORPORATION 57
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
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------
1999 1998
-------------------------------- -----------------------------
ENVIRONMENTAL Environmental
December 31 POLLUTION AND Pollution and
(In millions of dollars) OTHER MASS TORT ASBESTOS Other Mass Tort Asbestos
--------------------------------------------------------------------------------------------
Gross reserves $ 618 $ 946 $ 828 $1,547
Less ceded reserves (155) (262) (41) (91)
--------------------------------------------------------------------------------------------
NET RESERVES $ 463 $ 684 $ 787 $1,456
============================================================================================
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.
58 1999 ANNUAL REPORT
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 resolve (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
CNA FINANCIAL CORPORATION 59
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
considerable 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
=============================================================================
60 1999 ANNUAL REPORT
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
CNA FINANCIAL CORPORATION 61
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.
62 1999 ANNUAL REPORT
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
------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION 63
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.
64 1999 ANNUAL REPORT
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:
------------------------------------------------------------------
[Enlarge/Download Table]
SUMMARY OF CAPITAL STOCK
-----------------------------------------------------------------------------------------------------
Number of Shares
December 31 1999 1998
-----------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------
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
CNA FINANCIAL CORPORATION 65
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
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------
Year ended December 31
(In millions of dollars) 1999 1998 1997
-------------------------------------------------------------------------------------------
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
===========================================================================================
In the preceding 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
=================================================================
66 1999 ANNUAL REPORT
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
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
Agency
Year Ended December 31, 1999 Market Specialty Global Risk
(In millions of dollars) Operations Operations CNA Re Operations Management
----------------------------------------------------------------------------------------------------------
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)
==========================================================================================================
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)
=====================================================================
CNA FINANCIAL CORPORATION 67
SEGMENT RESULTS (CONTINUED)
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
Agency
Year Ended December 31, 1998 Market Specialty Global Risk
(In millions of dollars) Operations Operations CNA Re Operations Management
----------------------------------------------------------------------------------------------------------
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)
==========================================================================================================
---------------------------------------------------------------------
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)
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
Agency
Year Ended December 31, 1997 Market Specialty Global Risk
(In millions of dollars) Operations Operations CNA Re Operations Management
----------------------------------------------------------------------------------------------------------
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 $ -
===========================================================================================================
---------------------------------------------------------------------
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
=====================================================================
68 1999 ANNUAL REPORT
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
CNA FINANCIAL CORPORATION 69
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
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------
Employee
Termination and Lease
Related Benefit Writedown Termination Business
(In millions of dollars) Costs of Assets Costs Exit Costs Total
-----------------------------------------------------------------------------------------------
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
================================================================================================
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.
70 1999 ANNUAL REPORT
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.
CNA FINANCIAL CORPORATION 71
NOTE P - UNAUDITED QUARTERLY FINANCIAL DATA:
--------------------------------------------
UNAUDITED QUARTERLY FINANCIAL DATA
[Enlarge/Download Table]
------------------------------------------------------------------------------------------
(In millions of dollars,
except per share data) First Second Third Fourth Year
--------------------------------------------------------------------------------------------
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
==========================================================================================
72 1999 ANNUAL REPORT
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.
CNA FINANCIAL CORPORATION 73
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 over 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
74 1999 ANNUAL REPORT
DIRECTORS
------------------------------------------
Antoinette Cook Bush 1,2,3
Partner
Skadden, Arps, Slate, Meagher & Flom LLP
Dennis H. Chookaszian 2*,3
Chairman and Chief Executive Officer
mPower
Ronald L. Gallatin 1,2,3,4
Independent Consultant
Robert P. Gwinn 1,2,3,4
Retired Chairman
and Chief Executive Officer
Encyclopedia Britannica
Bernard L. Hengesbaugh 2,3
Chairman and Chief Executive Officer
CNA Insurance Companies
Walter F. Mondale 1,2,3
Partner
Dorsey & Whitney LLP
Edward J. Noha 2,3
Chairman of the Board
CNA Financial Corporation
Joseph Rosenberg 2,3
Senior Investment Strategist
Loews Corporation
James S. Tisch 2,3*
Chief Executive Officer and President
Loews Corporation
Laurence A. Tisch 2,3
Chief Executive Officer
CNA Financial Corporation
Co-Chairman of the Board
Loews Corporation
Preston R. Tisch 2,3
Co-Chairman of the Board
Loews Corporation
Marvin Zonis 1*,2,3,4
Professor of International
Political Economy
University of Chicago
Graduate School of Business
COMMITTEES OF THE BOARD:
-----------------------------------
1. Audit
2. Executive
3. Finance
4. Incentive Compensation
* indicates committee chairperson
OFFICERS
-----------------------------------
Laurence A. Tisch
Chief Executive Officer
CNA Financial Corporation
Bernard L. Hengesbaugh
Chairman and Chief Executive Officer
CNA Insurance Companies
Robert V. Deutsch
Senior Vice President
and Chief Executive Officer
CNA Financial Corporation
Jonathan D. Kantor
Senior Vice President,
General Counsel and Secretary
CNA Financial Corporation
Thomas F. Taylor
Executive Vice President
CNA Insurance Companies
CNA FINANCIAL CORPORATION 75
COMPANY INFORMATION
----------------------------------------------------------------
COMPANY HEADQUARTERS
CNA Financial Corporation
CNA Plaza
333 South Wabash Avenue
Chicago, Illinois 60685
312-822-5000
www.cna.com
STOCKHOLDER INFORMATION
----------------------------------------------------------------
CNA's common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange and the Pacific Exchange, and is traded on the Philadelphia Stock
Exchange. Its trading symbol is CNA.
SHARES OUTSTANDING
As of March 15, 2000, CNA had 184 million shares of common stock outstanding.
Approximately 86 percent of CNA's outstanding common stock is owned by Loews
Corporation. CNA had 2,634 stockholders of record at March 15, 2000.
COMMON STOCK INFORMATION
The table below shows the high and low closing sales prices for CNA's common
stock based on the New York Stock Exchange Composite Transactions. No dividends
have been paid on CNA's common stock in order to develop and maintain a strong
surplus position for CNA's insurance subsidiaries, which is necessary to support
growth in an increasingly competitive environment. CNA's ability to pay
dividends is influenced, in part, by dividend restrictions of its principal
operating insurance subsidiaries as described in Note K to the Consolidated
Financial Statements.
COMMON STOCK INFORMATION
--------------------------------------------------------------------
1999 1998
------------------------------------------
Quarter HIGH LOW High Low
--------------------------------------------------------------------
Fourth 42 1/8 33 15/16 44 11/16 34 1/2
Third 41 1/4 34 5/16 47 35 1/8
Second 45 5/16 35 1/16 53 5/16 45 1/2
First 41 33 51 42 1/16
--------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m. Central time on
Thursday, May 11, 2000, in Room 207N, CNA Plaza, 333 South Wabash Avenue,
Chicago.
Shareholders unable to attend are requested to exercise their right to vote by
proxy. Proxy materials will be mailed to shareholders prior to the meeting.
FORM 10-K
A copy of CNA Financial Corporation's annual report on Form 10-K, which is filed
with the Securities and Exchange Commission, will be furnished to shareholders
without charge upon written request to:
Jonathan D. Kantor
Senior Vice President,
General Counsel and Secretary
CNA Financial Corporation
CNA Plaza, 43 South
Chicago, Illinois 60685
INDEPENDENT AUDITORS
Deloitte & Touche LLP
180 North Stetson Avenue
Chicago, Illinois 60601
INVESTOR RELATIONS
Donald P. Lofe, Jr.
Group Vice President, Corporate Finance
CNA Financial Corporation
CNA Plaza, 22 South
Chicago, Illinois 60685
312-822-3993
TRANSFER AGENT AND REGISTRAR
----------------------------------------------------------------
First Chicago Trust Company,
a Division of EquiServe
P.O. Box 2500
Jersey City, New Jersey 07303-2500
TELEPHONE
Inside the United States
1-800-446-2617
Outside the United States
1-201-324-0498
TDD/TTY for hearing impaired
1-201-222-4955
(Operators are available Monday - Friday, 8:30 a.m. to 7:00 p.m. Eastern time.
An interactive automated system is available around the clock every day.)
INTERNET
http://www.equiserve.com
CERTIFICATE TRANSFERS BY MAIL
EquiServe
P.O. Box 2589
Jersey City, New Jersey 07303-2506
CERTIFICATE TRANSFERS BY PRIVATE COURIER
EquiServe
Transfer Department
525 Washington Boulevard
Jersey City, New Jersey 07310
CERTIFICATE TRANSFERS BY MESSENGER
EquiServe
c/o Securities Transfer
and Reporting Service, Inc.
100 William Street, Galleria
New York, New York 10038
76 1999 ANNUAL REPORT
APPENDIX
OMITTED GRAPH MATERIAL AND OTHER
Exhibit 13.1 - CNA Financial Corporation Annual Report:
* Bar graphs of:
- Revenues for the period 1989 and 1999.
- Assets for the period of 1989 through 1999.
- Stockholders' equity for the period 1989 through 1999.
- Book value per common share 1989 through 1999.
(See page 5 of Exhibit 13.1 for a table showing the data points used in the
above graphs.
The following is on outquote located in the margins from the "Letters to Our
Shareholders', found on pages 4 through 7 of the annual report.
"Completing our turn-around plan lays the essential underwriting and management
foundation for making our vision a bottom-line success."
Dates Referenced Herein and Documents Incorporated by Reference
1 Subsequent Filing that References this Filing
↑Top
Filing Submission 0000021175-00-000021 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Fri., May 17, 9:53:42.1am ET 
