- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-5823 -------------------- CNA FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-6169860 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CNA PLAZA CHICAGO, ILLINOIS 60685 (Address of principal executive offices) (Zip Code) (312) 822-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock New York Stock Exchange with a par value Chicago Stock Exchange of $2.50 per share Pacific Stock Exchange ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(G)OF THE ACT: None ------------------------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No.... As of March 1, 1996, 61,798,262 shares of common stock were outstanding and the aggregate market value of the common stock of CNA Financial Corporation held by non-affiliates was approximately $1,145 million. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the CNA Financial Corporation 1995 Annual Report to Shareholders are incorporated by reference into Parts I and II of this Report. Portions of the CNA Financial Corporation Annual Proxy Statement prepared for the 1996 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
CNA FINANCIAL CORPORATION FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, 1995 Item Page Number PART I Number ------ ------ 1 Business.............................................. 3 2 Properties............................................ 19 3 Legal Proceedings..................................... 20 4 Submission of Matters to a Vote of Security Holders..................................... 20 PART II 5 Market for the Registrant's Common Stock and Related Stockholder Matters.......................... 20 6 Selected Financial Data............................... 20 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 20 8 Financial Statements and Supplementary Data........... 20 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 20 PART III 10 Directors and Executive Officers of the Registrant.... 21 11 Executive Compensation................................ 21 12 Security Ownership of Certain Beneficial Owners and Management........................................ 21 13 Certain Relationships and Related Transactions........ 21 PART IV 14 Financial Statements, Schedules, Exhibits, and Reports on Form 8-K................................... 21 2
PART I ITEM 1. BUSINESS CNA was incorporated in 1967 as the parent company of Continental Casualty Company ("CCC"), incorporated in 1897, and Continental Assurance Company ("CAC"), incorporated in 1911. In 1975, CAC became a wholly-owned subsidiary of CCC. In late 1994, CNA reached an agreement to acquire all the outstanding common stock of The Continental Corporation ("Continental") through a cash merger for approximately $1.1 billion. On May 9, 1995, Continental shareholders approved the agreement and the merger was completed on May 10. As a result and upon consummation of the merger, Continental became a wholly owned subsidiary of CNA. The Continental Corporation, a New York corporation incorporated in 1968, is an insurance holding company. Its principal subsidiary, The Continental Insurance Company ("CIC") was organized in 1853. The principal business of Continental is the ownership of a group of property and casualty insurance companies. CNA's property and casualty insurance operations are conducted by CCC and its property and casualty insurance affiliates and CIC and its property and casualty insurance affiliates. Life insurance operations are conducted by CAC and its life insurance affiliates. CNA's principal business is insurance conducted through its insurance subsidiaries. As multiple-line insurers, the insurance companies underwrite property, casualty, life, and accident and health coverages. Their principal market for insurance is the United States. COMPETITION All aspects of the insurance business are highly competitive. CNA's insurance operations compete with a large number of stock and mutual insurance companies and other entities for both producers and customers and must continuously allocate resources to refine and improve insurance products and services. There are approximately 3,300 companies that sell property/casualty insurance in the United States, approximately 900 of which operate in all or most states. CNA's consolidated property/casualty subsidiaries (including CIC on a proforma basis) would have been ranked as the third largest property/casualty insurance organization in 1994 based upon statutory net written premium. There are approximately 1,800 companies selling life insurance (including health insurance and pension products) in the United States. CAC is ranked as the twenty-fourth largest life insurance organization based on 1994 consolidated statutory premium volume. DIVIDENDS BY INSURANCE SUBSIDIARIES The payment of dividends to CNA by its insurance affiliates without prior approval of the affiliate's domiciliary state insurance commissioners is limited to amounts determined by formula in accordance with the accounting practices prescribed or permitted by the state's insurance departments. This formula varies by state. The formula for the majority of the states is the greater of 10% of prior year statutory surplus or prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to date of payment. Some states, however, have an additional stipulation that dividends can't exceed prior year earned surplus. Based upon the various states formulas, approximately $860 million in dividends could be paid to CNA by its insurance affiliates in 1996 without prior approval. All dividends must be reported to the insurance department prior to declaration and payment. 3
REGULATION The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Each state has established supervisory agencies with broad administrative power relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, fixing minimum interest rates for accumulation of surrender values and maximum interest rates of policy loans, prescribing the form and content of statutory financial reports, and regulating solvency and the type and amount of investments permitted. Regulatory powers also extend to premium rate regulations which require that rates not be excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries discussed above, intercompany transfers of assets may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial position of the insurance affiliates making the transfer. There has been a growing legislative trend, particularly for personal lines products and workers compensation, directly impacting insurance rate development, rate application and the ability of insurers to cancel or renew insurance policies. Insurers are also required by the states to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage which must be provided to such involuntary risks. CNA's insurance subsidiaries' share of these involuntary risks is mandatory and generally a function of its respective share of the voluntary market by line of insurance in each state. In recent years, insolvencies of a few large insurers previously believed to be on solid financial ground by many rating agencies and state regulators led to increased scrutiny of state regulated insurer solvency requirements by certain members of the U.S. Congress. Had Congress formally adopted initiatives in the 103rd Congress, insurers would have been subject to federal solvency regulation. In response to this challenge, the National Association of Insurance Commissioners (NAIC) developed industry minimum Risk-Based Capital (RBC) requirements, established a formal state accreditation process designed to more closely regulate for solvency, minimized the diversity of approved statutory accounting and actuarial practices, and increased the annual statutory statement disclosure requirements. The RBC formulas are designed to identify an insurer's minimum capital requirements based upon the inherent risks (e.g., asset default, credit and underwriting) of its operations. In addition to the minimum capital requirements, the RBC formula and related regulations identify various levels of capital adequacy and corresponding actions that the state insurance departments should initiate. The level of capital adequacy below which insurance departments would take action is defined as the Company Action Level. As of December 31, 1995, all of CNA's life insurance affiliates and property/casualty affiliates have adjusted capital amounts in excess of Company Action Levels.
The NAIC also maintains the Insurance Regulatory Information System ("IRIS"), which assists the state insurance departments in overseeing the financial condition of both life and property/casualty insurers through application of a number of financial ratios. These ratios have a range of results characterized as "usual" by the NAIC. The NAIC IRIS user guide regarding these ratios specifically states that "Falling outside the usual range is not considered a failing result..." and "...in some years it may not be unusual for financially sound companies to have several ratios with results outside the usual range." It is important, therefore, that IRIS ratio test results be reviewed carefully in conjunction with all other financial information. CCC had no IRIS ratios with unusual values in 1995. The one ratio with an unusual value in 1994 was the two year overall operating ratio. The three IRIS ratios with unusual values in 1993 were the two year overall operating, investment yield, and the two year reserve development ratios. Catastrophe losses and reserve increases associated with Fibreboard Corporation litigation (see Note J of the Consolidated Financial Statements) recorded in 1992 and 1993 triggered the unusual values for the operating ratios generated in 1993 and 1994 and the reserve development ratios generated in 1993. Additionally, lower interest rates in 1993, coupled with a proportionately large short-term investment portfolio, triggered the unusual value for the investment yield ratio. 4
REGULATION-(CONTINUED) CIC had three IRIS ratios with unusual values in 1995. These ratios were change in writings, two-year overall operating ratio, and the two-year reserve development to surplus. The overall decline in premiums written is attributable to CIC's efforts to shift its business mix towards more profitable lines. The two-year overall operating and the two-year reserve development to surplus ratios were adversely impacted by the establishment of environmental reserves of $400 million for incurred but not reported losses in 1994 and $200 million in other loss reserve development, principally in workers' compensation. Further, in 1994, results were adversely affected by catastrophe losses. CAC had no IRIS ratios with unusual values in 1995 or 1994. CAC had two unusual values for IRIS ratios in 1993, which were net gain to total income and change in net written premium. CAC's reported statutory net income was adversely affected in 1993 by depressed investment earnings. The unusual value for the change in premium ratio primarily related to decreases in the Separate Account annuity products fund deposits. The potential for health care reform had been widely publicized and debated in 1994. Although these legislative reforms failed in 1994, and none were enacted in 1995, some Federal or state health care reform could emerge in the future. Federal regulation of the insurance industry and repeal of the McCarran-Ferguson anti-trust exemptions for the insurance industry were widely discussed topics in the 103rd Congress but have not been of interest in the first session of the 104th Congress in 1995, and are not anticipated to be of interest in the second session in 1996. Although the courts and legislatures are often asked to expand liability, there is a growing trend among business and professional organizations to wage campaigns, which in several instances have been successful, aimed at limiting their liability risks. A number of states have adopted some "tort reform" measures which, among other things, limit non-economic and punitive damages and otherwise limit damage awards in product liability and malpractice cases. Illinois and Texas adopted substantial tort reform in 1995 limiting non-economic damages and the amount of punitive damages in all civil actions. Arizona, Colorado, Connecticut, Indiana, Michigan, Montana, New Jersey, North Carolina, North Dakota, Oklahoma, Oregon, South Dakota and Wisconsin all adopted some measure of tort reform. Environmental 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. See Note K of the Consolidated Financial Statements for further discussion. REINSURANCE CNA assumes and cedes insurance with other insurers and reinsurers. CNA utilizes reinsurance arrangements to limit its maximum loss, to provide greater diversification of risk and to minimize aggregate exposures. The reinsurance coverages are tailored to the specific risk characteristics of each product line with CNA's retained amount varying by type of coverage. Generally, reinsurance coverage for property risks is on an excess of loss, per risk basis. Liability coverages are generally reinsured on a quota share basis in excess of CNA's retained risk.
The ceding of insurance does not discharge the primary liability of the original insurer. CNA places reinsurance with other carriers only after careful review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claim settlement performance. Further, for carriers that are not authorized reinsurers in its states of domicile, CNA receives collateral primarily in the form of bank letters of credit, securing a large portion of the recoverables. Such collateral totaled approximately $1.12 billion and $165 million at December 31, 1995 and 1994, respectively. CNA's largest recoverable from a single reinsurer, including prepaid reinsurance premiums, was approximately $435 million and $348 million with Lloyd's of London at December 31, 1995 and 1994, respectively. 5
EMPLOYEE RELATIONS CNA has approximately 25,000 full-time equivalent employees and has experienced satisfactory labor relations. CNA has never had work stoppages due to labor disputes. CNA has comprehensive benefit plans for substantially all of its employees, including retirement plans, savings plans, disability programs, group life programs, and group health care programs. BUSINESS SEGMENTS Information as to CNA's business segments is set forth in Note L of the Consolidated Financial Statements, incorporated by reference in Item 8, herein. PROPERTY/CASUALTY BUSINESS CNA's property/casualty operations market commercial and personal lines of property/casualty insurance through independent agents and brokers. CNA and its property/casualty insurance subsidiaries write primarily commercial lines coverages. Customers include large national corporations, small- and medium-sized businesses, groups and associations, and professionals. Coverages are written primarily through traditional insurance contracts under which risk is transferred to the insurer. Many large commercial account policies are written under retrospectively-rated contracts which are experience-rated. Premiums for such contracts may be adjusted, subject to limitations set by contract, based on loss experience of the insureds. Other experience-rated policies include provisions for adjustments to dividends based on loss experience. Experience-rated contracts reduce but do not eliminate risk to the insurer. Approximately 12% of CNA's property/casualty insurance is written on an experience-rated basis. CNA also provides loss control, policy administration and claim administration services under service contracts for fees. Such services are provided primarily in the workers' compensation market where retention of more risk by the employer through self-insurance or high-deductible programs has become increasingly prevalent. Commercial business includes such lines as workers' compensation, general liability, professional and specialty, multiple peril, and accident and health coverages. Professional and specialty coverages include liability coverage for architects and engineers, lawyers, accountants, medical and dental professionals; directors and officers liability; and other specialized coverages. CNA also assumes commercial risks from other insurers. The major components of CNA's commercial business are workers' compensation, general liability, and professional and specialty coverages, which accounted for 19%, 19% and 18%, respectively, of 1995 premiums earned. CNA is required by the various states in which it does business to provide coverage for risks that would not otherwise be considered under CNA's underwriting standards. CNA's share of involuntary risks is mandatory and generally a function of its respective share of the voluntary market by line of insurance in each state. Premiums for involuntary risks result from mandatory participation in residual markets.
CNA also markets personal lines of insurance, primarily automobile and homeowners' coverages sold to individuals under monoline and package policies. The Continental merger made CNA the market leader in package personal lines products. 6
PROPERTY/CASUALTY BUSINESS-(CONTINUED) The following table sets forth supplemental data on a GAAP basis, except where indicated, for the property/casualty business: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 (a) 1994 1993 1992 1991 (In millions of dollars) - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> COMMERCIAL PREMIUMS EARNED General liability......................... $ 1,648.9 $ 1,261.1 $ 1,154.5 $ 1,176.0 $ 1,292.6 Professional and specialty................ 1,557.7 1,010.1 798.9 741.5 763.9 Workers' compensation..................... 1,475.8 1,426.3 1,501.5 1,669.2 1,920.4 Multiple peril............................ 869.9 389.0 368.5 374.9 397.2 Reinsurance and other..................... 973.9 773.5 712.2 556.0 482.0 Accident and health....................... 699.1 557.1 428.3 352.6 294.2 ---------- ---------- ---------- --------- --------- $ 7,225.3 $ 5,417.1 $ 4,963.9 $ 4,870.2 $ 5,150.3 ========== ========== ========== ========= ========= PERSONAL PREMIUMS EARNED Personal lines packages................... $ 781.6 $ 562.6 $ 510.7 $ 447.3 $ 335.6 Monoline automobile and property coverages 325.4 314.2 343.5 395.0 470.7 Accident and health....................... 107.8 88.9 85.6 88.6 88.8 ---------- ---------- ---------- --------- --------- $ 1,214.8 $ 965.7 $ 939.8 $ 930.9 $ 895.1 ========== ========== ========== ========= ========= INVOLUNTARY RISKS PREMIUMS EARNED (B) Workers' compensation..................... $ 178.2 $ 350.0 $ 292.3 $ 451.4 $ 499.5 Private passenger auto.................... 79.7 46.4 23.2 52.5 39.2 Commercial passenger auto................. 19.9 54.3 50.3 44.9 66.6 Property and multiple peril............... 5.9 5.0 5.5 3.7 4.6 ---------- ---------- ---------- --------- --------- $ 283.7 $ 455.7 $ 371.3 $ 552.5 $ 609.9 ========== ========== ========== ========= ========= NET INVESTMENT INCOME AND OTHER INCOME Commercial................................ $ 1,713.1 $ 1,145.2 $ 979.8 $ 1,087.3 $ 1,131.3 Personal.................................. 230.4 177.6 156.1 165.3 160.1 Involuntary risks......................... 104.3 88.1 75.7 83.6 78.5 ---------- ---------- ---------- --------- --------- $ 2,047.8 $ 1,410.9 $ 1,211.6 $ 1,336.2 $ 1,369.9 ========== ========== ========== ========= ========= UNDERWRITING LOSS Commercial................................ $ (920.8) $ (945.7) $ (1,535.6) $(2,505.9) $ (707.1) Personal.................................. (101.9) (185.2) (99.7) (152.8) (172.1) Involuntary risks......................... (98.8) (70.3) (156.5) (340.9) (345.5) ----------- ----------- ----------- ---------- ---------- $ (1,121.5) $ (1,201.2) $ (1,791.8) $(2,999.6) $(1,224.7) =========== =========== =========== ========== ========== </TABLE>
<TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 (a) 1994 1993 1992 1991 (In millions of dollars) - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> TRADE RATIOS (C) Loss ratio................................ 77.9% 81.9% 96.2% 116.7% 88.1% Expense ratio............................. 29.4 28.3 27.2 26.2 25.8 Combined ratio (before policyholder 107.3 110.2 123.4 142.9 113.9 dividends)................................ Policyholder dividend ratio............... 3.0 4.8 3.9 1.9 2.5 TRADE RATIOS - STATUTORY BASIS (C) Loss ratio................................ 78.6% 82.2% 96.4% 116.3% 88.2% Expense ratio............................. 29.2 27.8 27.1 25.6 25.6 Combined ratio (before policyholder 107.8 110.0 123.5 141.9 113.8 dividends)................................ Policyholder dividend ratio............... 2.1 3.8 3.1 2.4 2.7 OTHER DATA - STATUTORY BASIS (D) Capital and surplus....................... $ 5,695.9 $ 3,367.3 $ 3,598.4 $ 3,135.8 $ 3,927.5 Written to surplus ratio.................. 1.7 2.0 1.7 2.0 1.7 - ---------------------------------------------------------------------------------------------------------------- (a) Premiums earned, net investment income and other income, and underwriting loss includes the results of The Continental Corporation since May 10, 1995. (b) Property/casualty involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers, and other involuntary charges. (c) GAAP trade ratios reflect the results of Continental Casualty Company and its property/casualty insurance subsidiaries for the whole year, along with the results of the Continental Insurance Company since May 10, 1995. Statutory trade ratios reflect the results of Continental Casualty Company, its property/casualty insurance subsidiaries and Continental Insurance Company for the entire year of 1995. Prior year ratios have not been restated to include Continental. Trade ratios are industry measures of property/casualty underwriting results. The loss ratio is the percentage of incurred claim and claim adjustment expenses to premiums earned. Under generally accepted accounting principles, the expense ratio is the percentage of underwriting expenses, including the change in deferred acquisition costs, to premiums earned. Under statutory accounting practices, the expense ratio is the percentage of underwriting expenses (with no deferral of acquisition costs) to premiums written. </TABLE> 7
PROPERTY/CASUALTY BUSINESS-(CONTINUED) The combined ratio, before policyholder dividends, is the sum of the loss and expense ratios. The policyholder dividend ratio is the ratio of dividends incurred to premiums earned. (d) Other Data is determined on the basis of statutory accounting practices and reflects a capital contribution from CNA of $475 million in 1993. In addition, dividends of $325 million, $175 million, $150 million, $100 million and $130 million were paid to CNA by Continental Casualty Company in 1995, 1994, 1993, 1992 and 1991, respectively. Property/casualty insurance subsidiaries have received reimbursement from CNA for general management and administrative expenses, unallocated loss adjustment expenses and investment expenses of $197.0, $169.6, $167.5, $141.1, and $133.8 million in 1995, 1994, 1993, 1992 and 1991, respectively. The following table displays the distribution of domestic written premium by state: --------------------------------------------------------------------------- Gross Written Premium by State % of Total ----------------------------------- Year Ended December 31 1995 1994 1993 --------------------------------------------------------------------------- New York...................... 10.3 8.6 8.4 California.................... 9.7 11.4 12.1 Texas......................... 6.5 6.5 6.2 Pennsylvania.................. 5.4 5.7 5.9 Illinois...................... 5.2 4.9 5.1 New Jersey.................... 4.6 3.2 3.3 Florida....................... 4.1 4.6 4.1 All other states (a).......... 48.8 43.2 43.1 Reinsurance assumed: Voluntary..................... 3.4 5.9 6.9 Involuntary................... 2.0 6.0 4.9 ----- ----- ----- 100.0 100.0 100.0 =========================================================================== (a) No other state accounts for more than 3.0% of gross written premium. The growth and profitability of CNA's property/casualty insurance business is dependent on many factors, including competitive and regulatory influences, the efficiency and costs of operations, underwriting quality, the level of natural disasters, and investment results. CNA's property/casualty operations continued to show significant improvement in profitability during 1995, reflecting both improved investment income and improved underwriting results. Contributing to the improved underwriting results were continued favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) in the workers' compensation line. Legislative reforms have cut costs in some states, residual market losses have dropped, and the insurance regulators have sharpened their focus on workers' compensation fraud.
In an effort to maintain growth, CNA has intensified efforts in the political arena to achieve a more predictable and equitable insurance marketing climate. Among CNA's marketing strategies are to emphasize responsible pricing over premium growth and to aggressively adapt to changes in certain markets such as those in which self-insurance has become important. CNA has also initiated wide-scale cost management measures. CNA has continued actions to reduce or stabilize its costs of doing business, including costs of health care, fraud and tort liability. Programs include managed health care programs and intensified efforts of fighting fraud. 8
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES Property/casualty claim and claim expense reserves, except reserves for structured settlements, workers' compensation lifetime claims and accident and health disability claims are based on undiscounted (a) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations, (b) estimates of unreported losses based upon past experience, (c) estimates of losses on assumed insurance, and (d) estimates of future expenses to be incurred in settlement of claims. In establishing these estimates, consideration is given to current conditions and trends as well as past Company and industry experience. Structured settlements have been negotiated for certain property/casualty insurance claims. Structured settlements are agreements to provide periodic payments to claimants, which are fixed and determinable as to the amount and time of payment. Certain structured settlements are funded by annuities purchased from CAC. Related annuity obligations are carried in future policy benefits reserves. Obligations for structured settlements not funded by annuities are carried at the present value of future benefits. Such reserves, discounted at interest rates ranging from 6.25% to 7.5%, totaled $897.4 million and $839.0 million at December 31, 1995 and 1994, respectively. Ultimate payouts under all structured settlements at December 31, 1995 and 1994, will approximate $3.0 billion and $2.4 billion, respectively. Reserving practices under both statutory accounting practices and generally accepted accounting principles allow discounting of claim reserves related to workers' compensation lifetime claims and accident and health disability claims. Reserve discounting for these types of claims is common industry practice. These claim reserves are discounted at interest rates ranging from 3.5% to 6.0% with mortality and morbidity assumptions reflecting the Company's and current industry experience. At December 31, 1995 and 1994, such discounted reserves totaled $2.7 billion and $1.1 billion, respectively. Ultimate payouts for these claims are estimated to be $3.6 billion and $1.5 billion at December 31, 1995 and 1994, respectively. 9
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES (CONT.) The loss reserve development table below illustrates the change over time of reserves established for property/casualty claims and claims expense at the end of various calendar years. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to that reserve liability. The third section, reading down, shows re-estimates of the original recorded reserve as of the end of each successive year which is the result of CNA's expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserve to the reserve originally established, and indicates whether or not the original reserve was adequate or inadequate to cover the estimated costs of unsettled claims. The loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> - -------------------------------------------------------------------------------------------------------------------- SCHEDULE OF PROPERTY/CASUALTY LOSS RESERVE DEVELOPMENT CALENDAR YEAR ENDED 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995* 1995 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- Gross reserves for unpaid claim and claim expenses............$ -- $ -- $ -- $ -- $ -- $16,530 $17,712 $20,034 $20,812 $21,639 $ 9,713 $31,044 Ceded recoverable... -- -- -- -- -- 3,440 3,297 2,867 2,491 2,705 3,650 6,089 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net reserves for unpaid claim and claim expenses............ 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 6,063 24,955 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- NET PAID (CUMULATIVE)AS OF: One year later...... 1,594 1,335 1,763 2,040 2,670 3,285 3,411 3,706 3,629 3,656 1,392 -- Two years later..... 2,932 2,383 2,961 3,622 4,724 5,623 6,024 6,354 6,143 -- -- -- Three years later... 3,022 3,197 4,031 4,977 6,294 7,490 7,946 8,121 -- -- -- -- Four years later.... 3,642 3,963 5,007 6,078 7,534 8,845 9,218 -- -- -- -- -- Five years later.... 4,175 4,736 5,801 6,960 8,485 9,726 -- -- -- -- -- -- Six years later..... 4,735 5,339 6,476 7,682 9,108 -- -- -- -- -- -- -- Seven years later... 5,233 5,880 7,061 8,142 -- -- -- -- -- -- -- -- Eight years later... 5,668 6,382 7,426 -- -- -- -- -- -- -- -- -- Nine years later.... 6,116 6,690 -- -- -- -- -- -- -- -- -- -- Ten years later..... 6,379 -- -- -- -- -- -- -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------- </TABLE>
<TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- SCHEDULE OF PROPERTY/CASUALTY LOSS RESERVE DEVELOPMENT CALENDAR YEAR ENDED 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995* 1995 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- NET RESERVES RE-ESTIMATED AS OF: <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> End of initial year. 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 6,063 24,955 One year later...... 5,047 6,642 8,086 9,737 11,336 12,984 16,032 17,757 18,250 18,922 6,197 -- Two years later..... 5,573 6,763 8,345 9,781 11,371 14,693 16,810 17,728 18,125 -- -- -- Three years later... 5,788 6,989 8,424 9,796 13,098 15,737 16,944 17,823 -- -- -- -- Four years later.... 6,170 7,166 8,516 11,471 14,118 15,977 17,376 -- -- -- -- -- Five years later.... 6,422 7,314 10,196 12,496 14,395 16,441 -- -- -- -- -- -- Six years later..... 6,566 9,022 11,239 12,742 14,811 -- -- -- -- -- -- -- Seven years later... 8,317 10,070 11,480 13,167 -- -- -- -- -- -- -- -- Eight years later... 9,365 10,317 11,898 -- -- -- -- -- -- -- -- -- Nine years later.... 9,635 10,755 -- -- -- -- -- -- -- -- -- -- Ten years later..... 10,074 -- -- -- -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total net (deficiency) redundancy.......... (5,201) (4,512) (3,853) (3,615) (3,544) (3,351) (2,961) (656) 196 12 (134) -- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Reconciliation to Gross Re-estimated Reserves: Net reserves re-estimated 16,441 17,376 17,823 18,125 18,922 6,197 -- Re-estimated ceded recoverable 3,029 2,925 2,546 2,522 2,760 3,650 -- ------ ------ ------ ------ ------ ----- ---- Total gross re-estimated reserves 19,470 20,301 20,369 20,647 21,682 9,847 -- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Net (Deficiency) Redundancy Related to: Asbestos claims..... (2,937) (2,973) (2,925) (2,868) (2,769) (2,631) (2,583) (894) (294) (258) -- -- Environmental claims (957) (957) (943) (937) (910) (899) (853) (806) (360) (181) (60) -- Total asbestos and ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- ----- ---- environmental..... (3,894) (3,930) (3,868) (3,805) (3,679) (3,530) (3,436) (1,700) (654) (439) (60) Other............... (1,307) (582) 15 190 135 179 475 1,044 850 451 (74) -- Total net ------ ------ ------ ------ ------ ------ ------ ------ ---- ---- ----- ---- (deficiency) redundancy.......... (5,201) (4,512) (3,853) (3,615) (3,544) (3,351) (2,961) (656) 196 12 (134) -- - ---------------------------------------------------------------------------------------------------------------------- *Represents Continental reserves acquired on May 10, 1995 and subsequent development thereon, through December 31, 1995. This balance combined with balances reflected in the 1994 column determine development recorded for the consolidated CNA property/casualty subsidiaries. </TABLE> 10
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES (CONT.) Reserve Development - ------------------- The table below provides a reconciliation between beginning and ending claim and claim expense reserve balances for 1995, 1994 and 1993. Not included in the table below is premium development related to certain insurance policies subject to retroactive premium adjustments which are based on various factors, including loss experience. As a result, CNA also recorded premium and dividend development related to prior years [increasing/(decreasing) premium] of $(173), $29 and $(127) million in 1995, 1994 and 1993, respectively. <TABLE> <CAPTION> <S> <C> <C> <C> - ----------------------------------------------------------------------------------------------------------- CHANGES IN RESERVES FOR PROPERTY/CASUALTY CLAIMS AND CLAIM EXPENSES YEAR ENDED DECEMBER 31 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- (In millions of dollars) Reserves at beginning of year: Gross................................................................ $21,639 $20,812 $20,034 Ceded reinsurance.................................................... 2,705 2,491 2,867 - ----------------------------------------------------------------------------------------------------------- Net reserves at beginning of year............................. 18,934 18,321 17,167 The Continental Corporation reserves at acquisition - net............ 6,063 --- --- - ----------------------------------------------------------------------------------------------------------- Total net reserves 24,997 18,321 17,167 - ----------------------------------------------------------------------------------------------------------- Net incurred claims and claim expenses: Provision for insured events of current year...................... 6,787 5,611 5,388 Increase (decrease) in provision for insured events of prior years** 122 (71) 590 Amortization of discount.......................................... 106 100 94 - ----------------------------------------------------------------------------------------------------------- Total net incurred 7,015 5,640 6,072 - ----------------------------------------------------------------------------------------------------------- Net payments attributable to: Current year events............................................... 2,000 1,388 1,202 Prior year events................................................. 5,048 3,629 3,706 Amortization of discount.......................................... 9 10 10 - ----------------------------------------------------------------------------------------------------------- Total net payments 7,057 5,027 4,918 - ----------------------------------------------------------------------------------------------------------- Net reserves at end of year.......................................... 24,955 18,934 18,321 Ceded reinsurance at end of year................................... 6,089 2,705 2,491 - ----------------------------------------------------------------------------------------------------------- GROSS RESERVES AT END OF YEAR* $ 31,044 $21,639 $20,812 =========================================================================================================== *Excludes life claim and claim expense reserves and intercompany eliminations of $988 million, $926 million, and $858 million as of December 31, 1995, 1994 and 1993, respectively, included in the Consolidated Balance Sheet. **Includes $500 for Fibreboard in 1993. See Note J of the Consolidated Financial Statements in the Annual Report to Shareholders. </TABLE> 11
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES (CONT.) CNA, consistent with sound insurance reserving practices, regularly adjusts its reserve estimates in subsequent reporting periods as new facts and circumstances emerge that indicate the previous estimates need to be modified. These adjustments, referred to as "reserve development," are inevitable given the complexities of the reserving process and are recorded in the statement of operations in the period the need for the adjustments becomes apparent. The property/casualty underwriting losses include net adverse (favorable) reserve development of $122 million, $(71) million and $590 million for the years 1995, 1994 and 1993, respectively. This reserve development reflects the effects of CNA's ongoing evaluation of reserve levels and is comprised of the following components: - -------------------------------------------------------------------------------- DEVELOPMENT- ADVERSE (FAVORABLE) DECEMBER 31 1995 1994 1993 (In millions of dollars) - -------------------------------------------------------------------------------- Environmental............... $241 $181 $446 Asbestos.................... 258 37 601 Other....................... (377) (289) (457) - -------------------------------------------------------------------------------- TOTAL $122 $(71) $590 ================================================================================ Asbestos and Environmental Claims - --------------------------------- CNA believes its reserves for environmental and asbestos claims are appropriately established based upon known facts and current case law. However, due to inconsistencies of court coverage decisions, the number of waste sites subject to clean-up, the standards for clean-up and liability, and other factors, the ultimate exposure to CNA for these claims may vary materially from the amounts currently recorded, resulting in a potential increase in the claim reserves recorded. In addition, issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct of the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based upon newly available data. Due to uncertainties and factors described above, CNA believes it is not practicable to develop a meaningful range for any such additional reserves that may be required. See Note K of the Consolidated Financial Statements for further discussion of environmental and asbestos reserves. Adverse 1995 environmental reserve development of $241 million includes $60 million related to Continental and results from CNA's on-going monitoring of current settlement patterns, current pending cases and potential future claims. 1995 adverse asbestos reserve development of $258 million is based on management's assessment of the effects of 1995 payments and settlement activity as well as an on-going review of pending asbestos cases and related legal decisions.
Other 1995 reserve development, which nets to $377 million of favorable reserve development, is principally due to favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business. The 1993 environmental development includes an allocation of reserves for incurred but not reported environmental claims of $340 million. The 1993 asbestos development includes $500 million related to Fibreboard. See Note J of the Consolidated Financial Statements. 12
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES--(CONTINUED) The following table summarizes, for 1995 and 1994, the reserve development for environmental and asbestos claims. Claims activity for Continental is included for the period May 10, 1995 through December 31, 1995. <TABLE> <CAPTION> <S> <C> <C> <C> <C> - ---------------------------------------------------------------------------------------------------------------------- RESERVE SUMMARY DECEMBER 31 1995 1994 ------------------------------------- ------------------------------------- ENVIRONMENTAL ASBESTOS ENVIRONMENTAL ASBESTOS (In millions of dollars) - ---------------------------------------------------------------------------------------------------------------------- Gross reserves: Reported claims............ $ 336.9 $1,963.3 $ 89.1 $1,954.1 Unreported claims.......... 839.7 358.3 427.0 114.0 ---------- -------- ------ -------- 1,176.6 2,321.6 516.1 2,068.1 Less reinsurance recoverables....... (146.7) (97.4) (10.4) (129.4) - ---------------------------------------------------------------------------------------------------------------------- NET RESERVES $1,029.9 $2,224.2 $505.7 $1,938.7 ====================================================================================================================== </TABLE> The following tables summarize claim activity for environmental and asbestos claims. <TABLE> <CAPTION> <S> <C> <C> <C> - -------------------------------------------------------------------------------------------------------------------- CHANGES IN ENVIRONMENTAL RESERVES YEAR ENDED DECEMBER 31 1995 1994 1993 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- Net reserves at beginning of year........... $505.7 $432.6 $58.6 Continental net reserves at May 10, 1995.... 410.0 -- -- ------- ------- ------- Total net reserves...................... 915.7 432.6 58.6 ------- ------- ------- Plus: Reserve strengthening................ 240.9 180.6 445.9 ------- ------- ------- Less: Gross payments....................... 188.2 131.8 75.0 Reinsurance recoveries............... (61.5) (24.3) (3.1) ------- ------- ------- Net payments......................... 126.7 107.5 71.9 - -------------------------------------------------------------------------------------------------------------------- NET RESERVES AT END OF YEAR $1,029.9 $505.7 $432.6 ====================================================================================================================
- -------------------------------------------------------------------------------------------------------------------- CHANGES IN ASBESTOS RESERVES YEAR ENDED DECEMBER 31 1995 1994 1993 (In millions of dollars) - -------------------------------------------------------------------------------------------------------------------- Net reserves at beginning of year........... $1,938.7 $2,080.0 $1,682.8 Continental net reserves May 10, 1995....... 203.5 -- -- Total net reserves...................... 2,142.2 2,080.0 1,682.8 ------- ------- ------- Plus: Reserve strengthening................ 258.0 36.8 601.4 ------- ------- ------- Less: Gross payments....................... 239.8 245.9 204.3 Reinsurance recoveries............... (63.8) (67.8) (0.1) ------- ------- ------- Net payments......................... 176.0 178.1 204.2 - -------------------------------------------------------------------------------------------------------------------- NET RESERVES AT END OF YEAR $2,224.2 $1,938.7 $2,080.0 ==================================================================================================================== </TABLE> 13
LIFE BUSINESS CNA's life insurance operations market individual and group insurance products through licensed agents, most of whom are independent contractors, who sell life and/or group insurance for CNA and for other companies on a commission basis. Individual insurance products include life and annuity products, which are sold to individuals and small businesses. The individual life products currently being marketed consist primarily of term, universal and participating life policies and annuities. The individual accident and health policies currently being marketed are long-term disability products. Individual annuity products consist of both single premium annuities and periodic payment annuities. Group insurance products include life, accident and health and pension products which are sold to employers, employer associations and trusts, ranging in size from small local employers to large multinational corporations. The group accident and health plans are primarily major medical and hospitalization. Most of the major medical and hospitalization plans are written under experience-rated contracts or contracts to provide claim administrative services only. The growth in premium and in-force is attributable to new term and permanent life products, as well as annuities. CNA's products are designed and priced using assumptions management believes to be reasonably conservative for mortality, morbidity, persistency, expense levels and investment results. Underwriting practices that management believes are prudent are followed in selecting the risks that will be insured. Further, actual experience related to pricing assumptions is monitored closely so that prospective adjustments to these assumptions may be implemented as necessary. CNA mitigates the risk related to persistency by including contractual surrender charge provisions in its ordinary life and annuity policies in the first five to ten years, thus providing for the recovery of acquisition expenses. The investment portfolios supporting interest sensitive products, including universal life and individual annuities, are managed separately to minimize disintermediation and interest rate risk. Profitability in the health insurance business continues to be impacted by intense competition and rising medical costs. CNA has aggressively pursued expense reduction through increases in automation and other productivity improvements. Further, increasing costs of health care have resulted in a continued market shift away from traditional forms of health coverage toward managed care products and experience-rated plans. CNA's ability to compete in this market will be increasingly dependent on its ability to control costs through managed care techniques, innovation, and quality customer-focused service in order to properly position CNA in the evolving health care environment. Although comprehensive health care reforms were not enacted in 1995, some health care initiatives could emerge in 1996. CNA has urged a meaningful role for the private sector in any proposed plan. The present health care system is clearly in need of reform, and CNA has emphasized that the competitive strengths of the insurance industry must be an integral part of a workable solution. 14
LIFE BUSINESS--(CONTINUED) The following table sets forth supplemental data for the life insurance business: <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (In millions of dollars) - ------------------------------------------------------------------------------------------------------------------ INDIVIDUAL PREMIUMS Life and annuities....................... $ 497.1 $ 369.4 $ 312.1 $ 294.7 $ 287.9 Accident and health...................... 32.7 32.6 30.9 27.1 24.3 --------- --------- --------- --------- --------- $ 529.8 $ 402.0 $ 343.0 $ 321.8 $ 312.2 ========= ========= ========= ========= ========= GROUP PREMIUMS Life..................................... $ 167.7 $ 138.7 $ 107.2 $ 100.7 $ 90.8 Accident and health (a).................. 2,189.8 2,111.2 1,983.0 1,957.5 1,887.0 Annuities................................ 145.1 26.3 9.0 57.7 24.3 --------- --------- --------- --------- --------- $ 2,502.6 $ 2,276.2 $ 2,099.2 $ 2,115.9 $ 2,002.1 ========= ========= ========= ========= ========= NET INVESTMENT INCOME AND OTHER INCOME Individual............................... $ 247.3 $ 193.8 $ 154.2 $ 163.0 $ 162.5 Group.................................... 198.1 166.4 142.8 156.6 185.4 --------- --------- --------- --------- --------- $ 445.4 $ 360.2 $ 297.0 $ 319.6 $ 347.9 ========= ========= ========= ========= ========= INCOME EXCLUDING REALIZED CAPITAL GAINS, BEFORE INCOME TAX Individual............................... $ 65.4 $ 47.3 $ 14.5 $ 22.5 $ 13.8 Group.................................... 94.9 87.1 51.9 56.1 76.0 --------- --------- --------- --------- --------- $ 160.3 $ 134.4 $ 66.4 $ 78.6 $ 89.8 ========= ========= ========= ========= ========= GROSS LIFE INSURANCE IN FORCE Individual (b)........................... $ 113,901 $ 80,560 $ 76,835 $ 75,569 $ 71,539 Group.................................... 52,146 46,873 35,413 29,643 27,139 --------- --------- --------- --------- --------- $ 166,047 $ 127,433 $ 112,248 $ 105,212 $ 98,678 ========= ========= ========= ========= ========= OTHER DATA - STATUTORY BASIS(C) Capital and surplus...................... $ 1,127.6 $ 1,054.6 $ 1,022.0 $ 1,003.0 $ 968.4 Capital and surplus-percent of total liabilities..................... 28.2% 29.4% 30.1% 33.4% 29.9% Participating policyholders-percent of gross life insurance in force 0.6 0.9 1.1 1.2 1.6 - ------------------------------------------------------------------------------------------------------------------ </TABLE>
<TABLE> <CAPTION> <S> <C> (a) Group accident and health premiums include contracts involving U.S. government employees and their dependents amounting to approximately $1.9, $1.8, $1.7, $1.6, and $1.5 billion in 1995, 1994, 1993, 1992, and 1991, respectively. (b) Lapse ratios, for individual life insurance, as measured by surrenders and withdrawals as a percentage of average ordinary life insurance in force were 9.4%, 9.7%, 9.7%, 8.6%, and 10.4%, in 1995, 1994, 1993, 1992, and 1991, respectively. (c) Other Data is determined on the basis of statutory accounting practices. Life insurance subsidiaries have received reimbursement from CNA for general management and administrative expenses and investment expenses of $21.3, $24.7, $25.6, $24.5, and $25.7 million in 1995, 1994, 1993, 1992, and 1991, respectively. Statutory capital and surplus as a percent of total liabilities is determined after excluding Separate Account liabilities and reclassifying the Asset Valuation and Interest Maintenance Reserves (statutorily defined as created reserves) as surplus. </TABLE> 15
LIFE BUSINESS - (CONTINUED) Guaranteed Investment Contracts - ------------------------------- CAC writes the majority of its group pension products as guaranteed investment contracts in a fixed Separate Account, which is permitted by Illinois insurance statutes. CAC guarantees principal and a specified return to guaranteed investment contractholders. This guarantee affords the contractholders additional security, in the form of CAC's general account surplus, which supports the principal and interest payments. CNA manages the liquidity and interest rate risks on the guaranteed investment contract portfolio by matching the duration of fixed maturity securities included in the guaranteed investment contract portfolio with the corresponding payout pattern of the contracts, and assessing market value surrender charges on the majority of the contracts. The table below shows a comparison of the duration of assets and contracts, weighted average investment yield, weighted average interest crediting rates, and withdrawal characteristics of the guaranteed investment contract portfolio. - -------------------------------------------------------------------------------- December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Duration in years: Assets..................................... 3.12 3.23 2.68 Contracts.................................. 2.98 2.99 2.73 ---- ---- ----- Difference................................. 0.14 0.24 (0.05) ==== ==== ===== Weighted average investment yield............. 7.58% 7.67% 7.11% Weighted average interest crediting rates..... 7.45% 7.53% 7.74% Withdrawal characteristics: With market value adjustment.................. 92% 79% 81% Non-withdrawable........................... 8 15 13 Without market value adjustment............ 0 6 6 - -------------------------------------------------------------------------------- Total 100% 100% 100% ================================================================================ As shown above, the investment yield at December 31, 1995 and 1994 was more than the average crediting rate. The investment yields at December 31, 1993 was less than the average crediting rate. This resulted from the reinvestment of proceeds from security sales that generated substantial gains, at rates that were lower than those of the securities sold. However, because the security sales created a larger asset base to reinvest, the aggregate future cash flows from interest and principal were substantially unchanged and sufficient to meet the contract obligations. 16
INVESTMENTS CNA's general account investment portfolio is managed to maximize after-tax investment return, while minimizing credit risks with investments concentrated in high quality securities to support its insurance underwriting operations. CNA has the capacity to hold its fixed maturity portfolio to maturity. However, securities may be sold as part of CNA's asset/liability strategies or to take advantage of investment opportunities generated by changing interest rates, prepayments, tax and credit considerations, or other similar factors. Accordingly, the fixed maturity securities are classified as available-for-sale. CNA's portfolio is managed based on the following investment strategies: i) diversification is used to limit exposures to any one issue or issuer, and ii) in general, the public market is used in order to provide liquidity. Historically, CNA has maintained short-term assets at a level that provided for liquidity to meet its short-term obligations, principally anticipated claim payments. At December 31, 1995, short-term investments primarily consisted of U.S. Treasury bills and high-grade commercial paper. The major components of the short-term investment portfolio were $800 million of collateral for securities sold under agreements to repurchase, $1.0 billion in an escrow account (see Note A of the Consolidated Financial Statements) and approximately $1.9 billion of other short-term investments. The following summarizes CNA's distribution of general account investments at fair value: ---------------------------------------------- ---------- ---------- ---------- DISTRIBUTION OF INVESTMENTS-GENERAL ACCOUNT DECEMBER 31 1995 1994 1993 (In millions of dollars) ---------------------------------------------- ---------- ---------- ---------- Fixed maturities: Tax-exempt bonds......................... $ 3,603 $ 3,770 $ 5,015 Taxable bonds............................ 26,725 16,629 12,145 Redeemable preferred stocks.............. 116 429 448 Equity securities: Common stocks............................ 915 755 508 Non-redeemable preferred stocks.......... 3 - - Mortgage loans and real estate.............. 122 47 62 Policy loans................................ 177 176 174 Other invested assets....................... 500 101 67 Short-term investments...................... 3,725 5,036 6,944 ---------------------------------------------- ---------- ---------- ---------- Total investments at fair value $35,886 $26,943 $25,363 ===============================================================================
CNA's general account fixed income portfolio has consistently been of high quality as illustrated in the following table using the Standard & Poor's ratings convention (see Note on page 17). ------------------------------------------------------------------------------- BOND PORTFOLIO QUALITY - GENERAL ACCOUNT DECEMBER 31 1995 1994 1993 ------------------------------------------------------------------------------- AAA........................................ 78% 82% 77% AA......................................... 5 6 8 A.......................................... 6 5 7 BBB........................................ 5 2 5 Below BBB.................................. 6 5 3 ------------------------------------------------------------------------------- Total 100% 100% 100% =============================================================================== CNA's Separate Account investment portfolio is managed to specifically support the underlying insurance products (see the discussion of guaranteed investment contracts on page 16 above). Approximately 85% or $5.0 billion of Separate Account investments are used to fund guaranteed investment contracts; the remaining investments are used to fund variable products. 17
INVESTMENTS (CONTINUED) Approximately 96% of the guaranteed investment contracts investment portfolio is comprised of taxable fixed income securities. The quality of the guaranteed investment contracts fixed maturity portfolio is as follows (see Note below): - -------------------------------------------------------------------------------- BOND PORTFOLIO QUALITY - GUARANTEED INVESTMENT PORTFOLIO DECEMBER 31 1995 1994 1993 - -------------------------------------------------------------------------------- AAA............................................. 54% 49% 44% AA.............................................. 5 5 6 A............................................... 14 13 18 BBB............................................. 7 9 13 Below BBB....................................... 20 24 19 - -------------------------------------------------------------------------------- Total 100% 100% 100% ================================================================================ Note: The bond ratings shown in the two tables above are primarily from Standard & Poor's (93% of the general account portfolio and 95% of the guaranteed investment portfolio in 1995). In the case of private placements and other unrated securities, comparable internal ratings are developed by CNA. These ratings are derived by management using information available on the issuer to assess the credit risk. Reference also may be made to similar instruments of the issuer that are rated by Standard & Poor's. High yield securities are bonds rated below investment grade by bond rating agencies, plus private placements and other unrated securities, which in CNA's opinion, are below investment grade (below BBB). High yield securities generally involve a greater degree of risk than that of investment grade securities. Expected returns should, however, compensate for the added risk. The risk is also considered in the interest rate assumptions in the underlying insurance products. Further, CNA's investment in real estate and mortgage loans amounted to less than one-half of one percent of its total assets, substantially below industry averages. As of December 31, 1995, CNA's concentration of high yield bonds including separate accounts was approximately 4.7% of total assets. At December 31, 1995 and 1994, high yield securities within the general and guaranteed investment portfolios were carried at fair value and amounted to $2.8 billion and $2.1 billion, respectively. Carrying values and fair values of high yield securities in the general account were $1.9 billion at December 31, 1995, compared to $1.0 billion at December 31, 1994. In 1995, the level of high yield investments within the guaranteed investment portfolio decreased $158 million to $944 million at year end. Market value exceeded amortized cost for high yield securities by approximately $53 million at December 31, 1995 compared to December 31, 1994 when amortized cost exceeded market value by $138 million.
Included in CNA's 1995 AAA-rated fixed income securities (general and guaranteed investment portfolios) are $8.5 billion of asset-backed securities, consisting of approximately 32% in collateralized mortgage obligations ("CMO's"), 57% in U.S. government agency issued pass-through certificates, and 11% in corporate asset-backed obligations. The majority of CMO's held are U.S. government agency issues which are actively traded in liquid markets and are priced monthly by broker-dealers. CNA limits the risks associated with interest rate fluctuations and prepayment by concentrating its CMO investments in planned amortization classes with relatively short principal repayment windows. CNA generally does not invest in complex mortgage derivatives without readily ascertainable market prices. CNA invests from time to time in certain derivative financial instruments to increase investment returns and to eliminate the impact of changes in interest rates on certain corporate borrowings. Financial instruments used for such purposes include interest rate swaps, put and call options, commitments to purchase securities, and short sale of common stock. The gross notional principal or contractual amounts of these instruments at December 31, 1995, totaled $2,769.8 million (including $1.2 billion of interest rate swaps associated with corporate borrowings) compared to $127.9 million at December 31, 1994. See Note F of the Consolidated Financial Statements for further discussion. 18
ITEM 2. PROPERTIES CNA Plaza, owned by Continental Assurance Company, serves as the home office for CNA and its insurance subsidiaries. An adjacent building (located at 55 E. Jackson Blvd.), jointly owned by Continental Casualty Company and Continental Assurance Company, is partially situated on grounds under leases expiring in 2058. Approximately 35% of the adjacent building is rented to non-affiliates. CNA's subsidiaries lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to the principal office buildings owned or leased by CNA's subsidiaries: ------------------------------------------------------------------------- Amount Of Building Owned and Occupied or Leased by CNA or its Location Subsidiaries Principal Usage ------------------------------------------------------------------------- CNA Plaza 1,421,000 * Principal Executive 333 S. Wabash offices of CNA Chicago, Illinois 180 Maiden Lane 850,453* Property/Casualty New York, New York Insurance Offices 1 Continental Drive 490,993** Property/Casualty Cranbury, New Jersey Insurance Offices 55 E. Jackson Blvd. 323,040 * Principal Executive Chicago, Illinois offices of CNA 200 S. Wacker Drive 296,822** Property/Casualty Chicago, Illinois Insurance Offices 401 Penn Street 251,691* Property/Casualty Reading, Pennsylvania Insurance Offices 100 CNA Drive 251,363* Life Insurance Offices Nashville, Tennessee 7361 Calhoun Place 224,175** Life Insurance Offices Rockville, Maryland 1111 E. Broad St. 197,537** Property/Casualty Columbus, Ohio Insurance Offices 333 Glen Street 158,700** Property/Casualty Glen Falls, New York Insurance Offices; Residual Market Center 3501 State Highway 123,184** Data Processing No. 66 Facilities Neptune, New Jersey 15400 Calhoun Drive 106,848** Life Insurance Offices Rockville, Maryland
------------------------------------------------------------------------- Amount Of Building Owned and Occupied or Leased by CNA or its Location Subsidiaries Principal Usage ------------------------------------------------------------------------- 1431 Opus Place 100,991** Property,/Casualty, Downers Grove, Il. Surety Insurance Offices 1100 Ward Avenue, 95,450* First Insurance Honolulu, Hawaii Company of Hawaii, Ltd. Headquarters * Represents property owned by CNA or its subsidiaries. ** Represents property leased by CNA or its subsidiaries. 19
ITEM 3. LEGAL PROCEEDINGS Incorporated herein by reference from Note J of the Consolidated Financial Statements in the 1995 Annual Report to Shareholders. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from page 76 of the 1995 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from page 2 of the 1995 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from pages 12 through 25 of the 1995 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheet - December 31, 1995 and 1994 Statement of Consolidated Operations - Years Ended December 3l, 1995, 1994 and 1993 Statement of Consolidated Stockholders' Equity - Years Ended December 31, 1995, 1994 and 1993 Statement of Consolidated Cash Flows - Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Independent Auditors' Report The above Consolidated Financial Statements, the related Notes to the Consolidated Financial Statements and the Independent Auditors' Report are incorporated herein by reference from pages 26 through 74 of the 1995 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation l4A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required in Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K <TABLE> <CAPTION> <S> <C> <C> <C> Page (a) 1. FINANCIAL STATEMENTS: Number A separate index to the Consolidated Financial Statements is presented in Part II, Item 8.............................................................. 21 (a) 2. FINANCIAL STATEMENT SCHEDULES: Schedule I Summary of Investments...................................... 26 Schedule II Condensed Financial Information (Parent Company)............ 27 Schedule III Supplementary Insurance Information......................... 31 Schedule V Valuation and Qualifying Accounts and Reserves.............. 32 Schedule VI Supplemental Information Concerning Property/Casualty Insurance Operations........................................ 32
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the Consolidated Financial Statements or notes thereto. Independent Auditors' Report.................................................... 33 </TABLE> 21
PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (continued) <TABLE> <CAPTION> <S> <C> <C> <C> (a) 3. EXHIBITS: Exhibit Description of Exhibit Number ---------------------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Securities Purchase Agreement, dated as of December 6, 1994, by and between CNA Financial Corporation and The Continental Corporation (with exhibits thereto) (Exhibit 1 to Form 8-K dated December 9, 1994 incorporated herein by reference.)................................................................. 2.1 Merger Agreement, dated as of December 6, 1994, by and among CNA Financial Corporation, Chicago Acquisition Corp. and The Continental Corporation (Exhibit 2 to Form 8-K dated December 9, 1994 incorporated herein by reference.)................................................................. 2.2 (3) Articles of incorporation and by-laws: Certificate of Incorporation of CNA Financial Corporation, as amended May 6, 1987 (Exhibit 3.1 to 1987 Form 10-K incorporated herein by reference).......... 3.1 By-Laws of CNA Financial Corporation, as amended August 2, 1995................ 3.2* (4) Instruments defining the rights of security holders, including indentures: CNA Financial Corporation hereby agrees to furnish to the Commission upon request copies of instruments with respect to long-term debt, pursuant to Item 601(b) (4) (iii) of Regulation S-K............................ - (10) Material contracts: Continental Casualty Company "CNA" Annual Incentive Bonus Plan Provisions (Exhibit 10.1 to 1994 Form 10K incorporated herein by reference)............... 10.1 Employment Agreement between CNA Financial Corporation and Dennis H. Chookaszian, dated December 31, 1995................................. 10.2* Employment Agreement between CNA Financial Corporation and Philip L. Engel, dated December 31, 1995....................................... 10.3* Continuing Services Agreement between CNA Financial Corporation and Edward J. Noha, dated February 27, 1991 (Exhibit 6.0 to 1991................... Form 8-K, filed March 18, 1991, incorporated herein by reference.)............. 10.4 CNA Employees' Retirement Benefit Equalization Plan, as amended through January 1, 1993 (Exhibit 10.4 to 1992 Form 10-K incorporated herein by reference)..................................................................... 10.5 CNA Employees' Supplemental Savings Plan, as amended through January 1, 1993 (Exhibit 10.6 to 1992 Form 10-K incorporated herein by reference.)............. 10.6 </TABLE> 22
PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (continued) <TABLE> <CAPTION> <S> <C> <C> <C> (a) 3. EXHIBITS: Exhibit Description of Exhibit Number ---------------------- (10) Material contracts (continued): Federal Income Tax Allocation Agreement dated February 29, 1980 between CNA Financial Corporation and Loews Corporation (Exhibit 10.2 to 1987 Form 10-K incorporated herein by reference.)......... 10.7 Agreement between Fibreboard Corporation and Continental Casualty Company, dated April 9, 1993 (Exhibit A to 1993 Form 8-K filed April 12, 1993 incorporated herein by reference.).......................... 10.8 Settlement Agreement entered into on October 12, 1993 by and among Fibreboard Corporation, Continental Casualty Company, CNA Casualty of California, Columbia Casualty Company and Pacific Indemnity Company together the "Parties" (Exhibit 10.1 to September 30, 1993 Form 10-Q incorporated herein by reference.)......................................... 10.9 Continental-Pacific Agreement entered into October 12, 1993 between Continental Casualty Company and Pacific Indemnity Company (Exhibit 10.2 to September 30, 1993 Form 10-Q incorporated herein by reference.)............................................................. 10.10 Global Settlement Agreement among Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California, Columbia Casualty Company, Pacific Indemnity Company and the Settlement Class dated December 23, 1993 (Exhibit 10.11 to 1993 Form 10-K incorporated herein by reference).............................................................. 10.11 Glossary of Terms in Global Settlement Agreement, Trust Agreement, Trust Distribution Process and Defendant Class Settlement Agreement as of December 23, 1993 (Exhibit 10.12 to 1993 Form 10-K incorporated herein by reference).............................................................. 10.12 Fibreboard Asbestos Corporation Trust Agreement dated December 23, 1993 (Exhibit 10.13 to 1993 Form 10-K incorporated herein by reference)......... 10.13 Trust Distribution Process - Annex A to the Trust Agreement as of December 23, 1993 (Exhibit 10.14 to 1993 Form 10-K incorporated herein by reference).............................................................. 10.14 Defendant Class Settlement Agreement dated December 22, 1993 (Exhibit 10.15 to 1993 Form 10-K incorporated herein by reference).................. 10.15
Escrow Agreement among Continental Casualty Company, Pacific Indemnity Company and The First National Bank of Chicago dated December 23, 1993 (Exhibit 10.16 to 1993 Form 10-K incorporated herein by reference)......... 10.16 </TABLE> 23
PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (continued) <TABLE> <CAPTION> <S> <C> <C> <C> (a) 3. EXHIBITS: Exhibit Description of Exhibit Number ---------------------- (11) Computation of Net Income per Common Share......................................... 11.1* (12) Statements regarding computation of ratios: Computation of Ratio of Earnings to Fixed Charges.................................. 12.1* Computation of Ratio of Net Income, As Adjusted, to Fixed Charges.................. 12.2* (13) 1995 Annual Report................................................................. 13.1* (21) Subsidiaries of CNA................................................................ 21.1* (23) Consent of Deloitte & Touche LLP................................................... 23.1* (27) Financial Data Schedule............................................................ 27* (28) Information from reports furnished to state insurance regulatory authorities: Property/Casualty Reserve Reconciliation-Statutory Basis to Generally Accepted Accounting Principles..................................................... 28.1* Schedule P from CNA's property/casualty insurance subsidiaries 1995 Annual Statutory Statements provided to state insurance regulatory authorities............ 28.2 ** * Filed herewith ** Filed hard copy under Regulation S-T Rule 311(c) Form SE (b) REPORTS ON FORM 8-K: NONE </TABLE> 24
<TABLE> <CAPTION> SCHEDULE I CNA FINANCIAL CORPORATION SUMMARY OF INVESTMENTS - ------------------------------------------------------------------------------------------------------------------ DECEMBER 31 1995 1994 ------------------------------- ------------------------------- MARKET CARRYING MARKET CARRYING (in millions of dollars) COST VALUE VALUE COST VALUE VALUE - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Fixed maturities available-for-sale: Bonds: United States government and government agencies and authorities-taxable.... $17,903.4 $18,511.4 $18,511.4 $13,404.4 $12,704.2 $12,704.2 States, municipalities and political subdivisions-tax exempt............. 3,452.8 3,603.1 3,603.1 3,704.6 3,769.6 3,769.6 Foreign governments and political subdivisions........................ 1,509.3 1,543.3 1,543.3 662.9 653.4 653.4 Public utilities..................... 280.2 305.2 305.2 186.8 190.0 190.0 Convertibles and bonds with warrants attached............................ 252.2 260.8 260.8 271.9 257.5 257.5 All other corporate.................. 5,881.4 6,098.8 6,098.8 2,937.2 2,824.2 2,824.2 Redeemable preferred stocks.............. 106.1 122.1 122.1 419.3 428.8 428.8 -------- -------- -------- -------- -------- -------- Total fixed maturities 29,385.4 30,444.7 30,444.7 21,587.1 20,827.7 20,827.7 ======== ======== ======== ======== ======== ======== available-for-sale Equity securities available-for-sale: Common stocks: Public utilities..................... 17.7 23.5 23.5 26.2 26.3 26.3 Banks, trusts, and insurance companies 84.3 96.7 96.7 134.6 129.0 129.0 Industrial and other................. 631.8 795.0 795.0 567.9 599.5 599.5 Non -redeemable preferred stocks......... 2.5 2.5 2.5 7.6 - - -------- -------- -------- -------- -------- -------- Total equity securities available-for-sale................. 736.3 $917.7 917.7 736.3 $754.8 754.8 -------- ======== -------- -------- ======== -------- Mortgage loans.............................. 139.8 119.3 43.8 -------- -------- -------- Real estate: Investment properties.................... 6.6 3.0 6.3 3.0 Acquired in satisfaction of debt......... 0.2 0.1 0.2 0.1 -------- -------- -------- -------- Total real estate.................. 6.8 3.1 6.5 3.1 -------- -------- -------- -------- Policy loans................................ 177.1 177.2 176.3 176.3 Other invested assets....................... 483.5 499.9 103.4 101.1 Short-term investments...................... 3,724.5 3,724.5 5,036.1 5,036.1 - ------------------------------------------------------------------------------------------------------------------ Total investments $34,653.4 $35,886.4 $27,689.5 $26,942.9 ================================================================================================================== </TABLE> 25
<TABLE> <CAPTION> SCHEDULE II CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION FINANCIAL POSITION - -------------------------------------------------------------------------------------------------------- DECEMBER 31 1995 1994 (In millions of dollars) - -------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS: Investments in subsidiaries................................ $8,060.6 $4,082.1 Federal income taxes recoverable........................... 136.6 23.7 Deferred income taxes...................................... 785.2 1,475.2 Notes Receivable from affiliate............................ 205.0 --- ------- ------- Other...................................................... 7.9 3.8 ------- ------- Total assets....................................... 9,195.3 5,584.8 ------- ------- LIABILITIES: Debt....................................................... 2,222.4 896.4 Amounts due to affiliates.................................. 190.3 112.0 Other...................................................... 47.1 30.5 ------- ------- Total liabilities.................................. 2,459.8 1,038.9 Total stockholders' equity......................... 6,735.5 4,545.9 - -------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,195.3 $5,584.8 ======================================================================================================== </TABLE>
<TABLE> <CAPTION> <S> <C> <C> <C> RESULTS OF OPERATIONS - -------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 (In millions of dollars) - -------------------------------------------------------------------------------------------------------- REVENUES: Equity in income of subsidiaries before income tax: Operating income (loss)................................. $923.5 $389.1 $(467.6) Realized investment gains (losses)...................... 453.0 (256.8) 790.3 Net investment income...................................... 9.0 0.3 1.7 Other...................................................... (1.2) (3.7) (3.5) Realized investment gains (losses)......................... 3.1 (.3) 12.7 ------- ------- ------- 1,387.4 128.6 333.6 ------- ------- ------- EXPENSES: Administrative and general expenses........................ 219.7 193.1 198.9 Interest expense........................................... 125.3 69.6 41.3 ------- ------- ------- 345.0 262.7 240.2 ------- ------- Income (loss) before income tax..................... 1,042.4 (134.1) 93.4 Income tax (expense) benefit............................... (285.4) 170.6 174.1 - -------------------------------------------------------------------------------------------------------- NET INCOME $757.0 $ 36.5 $ 267.5 ======================================================================================================== See accompanying Notes to Condensed Financial Information. </TABLE> 26
<TABLE> <CAPTION> SCHEDULE II (CONTINUED) CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION CASH FLOW - ------------------------------------------------------------------------------------------------------------ DECEMBER 31 1995 1994 1993 (In millions of dollars) - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................. $ 757.0 $ 36.5 $ 267.5 -------- ------ ------ Adjustments to reconcile net income to net cash used in operating activities: Equity in earnings of unconsolidated affiliates........ (1,200.7) (98.0) (349.5) Realized (gains) losses................................ (3.1) 0.3 (12.6) Changes in: Accrued investment income............................. - 1.1 (0.1) Federal income taxes.................................. (112.9) 5.6 42.2 Deferred income taxes................................. 173.2 (115.0) (124.3) Other, net............................................ 86.7 (23.6) (17.7) -------- ------ ------ TOTAL ADJUSTMENTS.................................... (1,056.8) (229.6) (462.0) -------- ------ ------ NET CASH USED IN OPERATING ACTIVITIES................ (299.8) (193.1) (194.5) -------- ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of The Continental Corporation................... (1,125.5) - - Other acquisition.......................................... (13.0) - - Purchase of fixed maturities............................... (709.0) (195.7) (999.3) Proceeds from fixed maturities: Sales................................................... 501.2 19.6 984.5 Maturities.............................................. 200.6 192.4 - Net proceeds from the sale of equity securities............ (0.5) 4.0 - Change in short-term investments........................... 0.8 1.1 47.6 Change in other investments................................ 10.3 2.3 (4.2) Capital contribution to Continental Casualty Company....... - - (475.0) Other...................................................... (3.3) (1.0) - -------- ------ ------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.. (1,138.4) 22.7 (446.4) -------- ------ ------ </TABLE>
<TABLE> <CAPTION> CASH FLOW <S> <C> <C> <C> - ------------------------------------------------------------------------------------------------------------ DECEMBER 31 1995 1994 1993 (In millions of dollars) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to preferred shareholders................... (7.3) (4.5) (4.0) Dividend from Continental Casualty Company................. 325.8 175.0 150.0 Proceeds from issuance of long-term debt................... 1,325.0 - 494.9 Loan to The Continental Corporation........................ (205.0) - - -------- ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES............ 1,438.5 170.5 640.9 -------- ------ ------ NET INCREASE IN CASH................................ 0.3 0.1 - Cash at beginning of year..................................... 0.1 - - - ------------------------------------------------------------------------------------------------------------ CASH AT END OF YEAR........................................... $ 0.4 $ 0.1 $ - ============================================================================================================ Supplemental disclosures of cash flow information: Cash received (paid): Interest expense....................................... $(169.5) $ (70.5) $ (34.9) Federal income taxes................................... 102.5 53.1 (54.2) ============================================================================================================ </TABLE> <TABLE> <CAPTION> Supplemental disclosures of cash flow information relating to acquisitions: Noncash investing activities that are not reflected in the Statement of Cash Flows are listed below. - -------------------------------------------------------------------------------- The Continental December 31, 1995 Corporation Other - -------------------------------------------------------------------------------- <S> <C> <C> Fair value of assets acquired......... $ 15,258.5 $ 13.0 Liabilities assumed................... (14,133.0) - ---------- ------ Cash paid......................... $ 1,125.5 $ 13.0 ================================================================================ See accompanying Notes to Condensed Financial Information. </TABLE> 27
SCHEDULE II (Continued) CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION NOTES TO CONDENSED FINANCIAL INFORMATION a. Debt: - -------------------------------------------------------------------------------- DECEMBER 31 1995 1994 (In millions of dollars) - -------------------------------------------------------------------------------- Long-term Acquisition debt: Credit Facility, due May 10, 2000 $ 825.0 $ -- Commercial Paper (variable interest rates) 500.0 -- Senior Notes: 8 5/8%, due March 1, 1996* -- 249.4 8 7/8 %, due March 1, 1998 149.2 148.8 6 1/4%, due November 15, 2003 248.2 248.1 7 1/4% Debenture, due November 15, 2023 247.1 247.1 1.0% Urban Development Action Grant, due May 7, 2019 3.0 3.0 ------ ------ Total long-term debt 1,972.5 896.4 Short-term debt* 249.9 -- - -------------------------------------------------------------------------------- Total $ 2,222.4 $ 896.4 ================================================================================ * Included in short-term debt in 1995. To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt), CNA entered into a five-year $1.325 billion revolving credit facility involving 16 banks. The interest rate for the facility is based on the one, two, three, or six month London Interbank Offered Rate (LIBOR), plus 25 basis points. Additionally, there is a facility fee of 10 basis points annually. The average interest rate on the borrowings under the revolving credit facility at December 31, 1995 was 6.12%. Under the terms of the facility, CNA may prepay the debt without penalty. On August 10, 1995, to take advantage of favorable interest rates, CNA established a commercial paper program borrowing $500 million to replace a like amount of credit facility financing. The average interest rate on the commercial paper at December 31, 1995 was 6.05%. The commercial paper borrowings are classified as long-term as $500 million of the facility will support the commercial paper. Standard and Poor's and Moody's issued short-term debt ratings of A2 and P2, respectively, for CNA's commercial paper program.
As of March 1, 1996, the outstanding loans under the revolving credit facility were $825 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program. CNA entered into interest rate swap agreements with several banks which terminate from May to December, 2000. CNA entered into interest rate swap agreements with several banks which terminate from May to December, 2000. The effect of these interest rate swaps was to increase interest expense by $2 million for the year ended December 31, 1995. See Notes D and F of the Consolidated Financial Statements for further discussion. The weighted average interest rate (interest and facility fees) on the acquisition debt, which includes the revolving credit facility, commercial paper, and the effect of the interest rate swaps, was 6.50% on December 31, 1995. An additional $500 million of securities and/or preferred stock remain available for issuance under the shelf registration statement. 28
NOTES TO CONDENSED FINANCIAL INFORMATION (CONTINUED) b. CNA has reimbursed, or will reimburse, its subsidiaries for general management and administrative expenses, unallocated loss adjustment expenses and investment expense of $218.3 million, $194.3 million, and $193.1 million in 1995, 1994, and 1993, respectively. c. CNA contributed $475 million in capital to Continental Casualty Company in 1993. There were no capital contributions by CNA in 1995, or 1994. - -------------------------------------------------------------------------------- 29
<TABLE> <CAPTION> SCHEDULE III CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ----------------------------------------------------------------------------------------------- GROSS INSURANCE RESERVES -------------------------------------- CLAIM DEFERRED AND FUTURE POLICY- ACQUISITION CLAIM POLICY UNEARNED HOLDERS' (In millions of dollars) COSTS EXPENSE BENEFITS PREMIUMS FUNDS - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> DECEMBER 31, 1995 Property/Casualty Commercial............ $ 701.9 $27,309.3 $ 38.5 $ 3,607.0 $ 162.6 Personal.............. 258.2 1,426.5 259.9 868.9 - Involuntary risks..... 8.6 2,308.5 - 73.5 - Life: Individual............ 505.7 162.3 2,678.8 - 31.0 Group................. 18.9 473.0 538.7 - 511.4 ------ -------- ------ ------ ----- CNA Insurance....... $ 1,493.3 31,679.6 $ 3,515.9 $ 4,549.4 $ 705.0 ======= ======= ======= ===== Other and intercompany eliminations.......... 352.8 -------- $32,032.4 ======== DECEMBER 31, 1994 Property/Casualty: Commercial............ $ 395.2 $18,920.3 $ 28.5 $ 2,129.1 $ 128.4 Personal.............. 197.1 1,042.4 199.0 559.9 - Involuntary risks..... - 1,675.9 - 1.7 - Life: Individual............ 427.3 145.2 2,414.9 - 31.7 Group................. 6.8 439.4 407.4 - 472.4 ------ -------- ------- ------- ----- CNA Insurance....... $ 1,026.4 22,223.2 $ 3,049.8 $ 2,690.7 $ 632.5 ======= ======= ======= ===== Other and intercompany eliminations.......... 341.6 -------- $22,564.8 ======== </TABLE>
<TABLE> <CAPTION> SCHEDULE III (CONT.) CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ----------------------------------------------------------------------------------------------- GROSS INSURANCE RESERVES -------------------------------------- CLAIM DEFERRED AND FUTURE POLICY- ACQUISITION CLAIM POLICY UNEARNED HOLDERS' (In millions of dollars) COSTS EXPENSE BENEFITS PREMIUMS FUNDS - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> DECEMBER 31, 1993 Property/Casualty: Commercial............ $ 371.9 $18,157.4 $ 17.2 $ 2,001.2 $ 23.5 Personal.............. 190.2 1,013.0 151.8 536.2 - Involuntary risks..... - 1,641.6 - 18.6 - Life: Individual............ 416.7 143.6 2,178.0 - 32.0 Group................. 6.6 434.0 406.6 - 423.1 ------ -------- ------- ------- ----- CNA Insurance....... $ 985.4 21,389.6 $ 2,753.6 $ 2,556.0 $ 478.6 ======= ======= ======= ===== Other and intercompany eliminations.......... 280.6 -------- $21,670.2 ======== </TABLE>
<TABLE> <CAPTION> SCHEDULE III (CONT.) CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ------------------------------ ------------ ------------------------------------------------------------------- AMORTIZATION INSURANCE OF NET NET CLAIMS AND DEFERRED OTHER PREMIUM INVESTMENT POLICYHOLDERS' ACQUISITION OPERATING PREMIUMS (In millions of dollars) REVENUE INCOME BENEFITS COSTS EXPENSES WRITTEN - ------------------------------ ------------ ------------ -------------- ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> DECEMBER 31, 1995 Property/Casualty Commercial............ $7,225.3 $ 1,463.1 $ 5,995.2 $ 1,494.8 $ 915.3 $ 7,561.3 Personal.............. 1,214.8 132.4 891.6 271.4 228.5 1,254.3 Involuntary risks..... 283.7 104.3 234.0 16.7 145.8 310.5 Life: Individual............ 529.8 214.6 506.8 70.5 134.3 - Group................. 2,502.6 154.6 2,340.1 (9.9) 275.6 - -------- ------- ------- -------- ------- ------- CNA Insurance....... 11,756.2 2,069.0 9,967.7 $ 1,843.5 1,699.5 $ 9,126.1 ======== ======= Other and intercompany eliminations.......... (21.1) 7.6 (23.8) (19.7) -------- ------- ------- ------- $11,735.1 $ 2,076.6 $ 9,943.9 $ 1,679.8 ======== ======= ======= ======= DECEMBER 31, 1994 Property/Casualty: Commercial............ $5,417.1 $ 1,050.8 $ 4,845.8 $ 1,099.2 $ 512.3 $ 5,488.7 Personal.............. 965.7 101.5 833.2 229.6 164.1 1,037.3 Involuntary risks..... 455.7 88.1 339.6 - 186.4 438.7 Life: Individual............ 402.0 172.2 392.2 46.7 109.6 - Group................. 2,276.2 138.4 2,092.9 2.0 260.6 - -------- ------ ------- ------- ------- -------- CNA Insurance....... 9,516.7 1,551.0 8,503.7 $ 1,377.5 1,233.0 $ 6,964.7 ======= ======== Other and intercompany eliminations.......... (42.3) 0.2 (42.5) 2.4 ------- ------- ------- ------ $9,474.4 $ 1,551.2 $ 8,461.2 $ 1,235.4 ======= ======= ======= ======= </TABLE>
<TABLE> <CAPTION> SCHEDULE III (CONT.) CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION - ------------------------------ ------------ ------------------------------------------------------------------- AMORTIZATION INSURANCE OF NET NET CLAIMS AND DEFERRED OTHER PREMIUM INVESTMENT POLICYHOLDERS' ACQUISITION OPERATING PREMIUMS (In millions of dollars) REVENUE INCOME BENEFITS COSTS EXPENSES WRITTEN - ------------------------------ ------------ ------------ -------------- ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> DECEMBER 31, 1993 Property/Casualty: Commercial............ $4,964.0 $ 896.6 $ 5,171.9 $ 951.2 $ 459.7 $ 5,030.9 Personal.............. 939.8 87.5 756.0 221.2 130.9 984.2 Involuntary risks..... 371.2 75.7 336.3 - 191.5 367.2 Life: Individual............ 343.0 142.8 362.2 25.5 95.0 - Group................. 2,099.2 116.9 1,945.6 2.4 242.1 - -------- ------ ------- ------- ------- ------- CNA Insurance....... 8,717.2 1,319.5 8,572.0 $ 1,200.3 1,119.2 $ 6,382.3 ======= ======= Other and intercompany eliminations.......... (28.4) (5.2) (28.6) 0.5 -------- ------- ------- ------- $8,688.8 $ 1,314.3 $ 8,543.4 $ 1,119.7 ======= ======= ======= ======= </TABLE> 30
<TABLE> <CAPTION> SCHEDULE V CNA FINANCIAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES - ---------------------------------------------------------------------------------------------------------------- BALANCE BALANCE AT CHARGED TO CHARGED TO AT BEGINNING COSTS AND OTHER END OF (In millions of dollars) OF PERIOD EXPENSES AMOUNTS DEDUCTIONS PERIOD - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> YEAR ENDED DECEMBER 31, 1995 Deducted from assets: Allowance for doubtful accounts: Insurance receivables................. $ 127.5 $ 39.0 $ 143.5* $ 21.3 $ 288.7 ====== ====== ======= ====== ====== YEAR ENDED DECEMBER 31, 1994 Deducted from assets: Allowance for doubtful accounts: Insurance receivables................. $ 117.3 $ 18.6 $ - $ 8.4 $ 127.5 ====== ====== ====== ====== ====== YEAR ENDED DECEMBER 31, 1993 Deducted from assets: Allowance for doubtful accounts: Insurance receivables................. $ 110.4 $ 9.2 $ - $ 2.3 $ 117.3 ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------------------------------------------- * Includes Continental allowance at acquisition. </TABLE>
<TABLE> <CAPTION> SCHEDULE VI CNA FINANCIAL CORPORATION SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS - ------------------------------------------------------------------------------------------------------ CONSOLIDATED PROPERTY/ CASUALTY ENTITIES ---------------------------------------- YEAR ENDED DECEMBER 31 ---------------------------------------- (In millions of dollars) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Deferred acquisition costs............................... $ 968.7 $ 592.3 $ 562.0 Reserves for unpaid claims and claim expenses............ 31,044.3 21,638.6 20,812.0 Discount, if any, deducted above (based on interest rates ranging from 3.5% to 7.5%)......................... 2,426.9 1,951.3 1,886.5 Unearned premiums........................................ 4,549.4 2,690.7 2,556.0 Earned premiums.......................................... 8,723.8 6,838.5 6,275.0 Net investment income.................................... 1,699.8 1,240.4 1,059.8 Claim and claim expenses related to current year......... 6,787.3 5,610.8 5,387.9 Claim and claim expenses related to prior years.......... 121.8 (71.2) 590.0 Amortization of deferred acquisition costs............... 1,782.9 1,328.8 1,172.4 Paid claim and claim expenses............................ 7,057.5 5,026.6 4,917.9 Premiums written......................................... 9,126.1 6,964.7 6,382.3 - ------------------------------------------------------------------------------------------------------- </TABLE> 31
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders CNA Financial Corporation We have audited the consolidated financial statements of CNA Financial Corporation (an affiliate of Loews Corporation) and subsidiaries as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated February 14, 1996, which report includes an explanatory paragraph as to a change in accounting for certain investments in debt and equity securities in 1993; such consolidated financial statements and report are included in the Company's 1995 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of CNA Financial Corporation and subsidiaries listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein. S/DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois February 14, 1996 32
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CNA Financial Corporation By S/LAURENCE A. TISCH -------------------------------------------------------- Laurence A. Tisch Chief Executive Officer (Principal Executive Officer) By S/PETER E. JOKIEL -------------------------------------------------------- Peter E. Jokiel Senior Vice President and Chief Financial Officer Date: March 29, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE S/ANTOINETTE COOK BUSH Director | - ---------------------------------- | Antoinette Cook Bush | | S/DENNIS H. CHOOKASZIAN Director | - ---------------------------------- | Dennis H. Chookaszian | | S/PHILIP L. ENGEL Director | - ---------------------------------- | Philip L. Engel | | S/ROBERT P. GWINN Director | - ---------------------------------- | Robert P. Gwinn | | S/EDWARD J. NOHA Chairman of the Board | - ---------------------------------- and Director | Edward J. Noha | | S/JOSEPH ROSENBERG Director | - ---------------------------------- | Joseph Rosenberg | |- Dated: S/RICHARD L. THOMAS Director | March 29, 1996 - ---------------------------------- | Richard L. Thomas |
SIGNATURE TITLE S/JAMES S. TISCH Director | - ---------------------------------- | James S. Tisch | | S/LAURENCE A. TISCH Chief Executive Officer | - ---------------------------------- and Director | Laurence A. Tisch | | S/PRESTON R. TISCH Director | - ---------------------------------- | Preston R. Tisch | | S/MARVIN ZONIS Director | - ---------------------------------- | Marvin Zonis 33
<TABLE> <CAPTION> EXHIBIT 11.1 CNA FINANCIAL CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE - --------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (In millions of dollars, except per share data) - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Weighted average shares outstanding....................... 61.8 61.8 61.8 61.8 61.8 ==== ==== ==== ==== ==== Net income (loss) before cumulative effect of accounting changes...................................... $ 757.0 $ 36.5 $ 267.5 $(662.5) $ 612.5 Less preferred stock dividends............................ 6.9 5.3 4.0 4.2 6.8 ------ ------- ------ ------ ------ Net income (loss) before cumulative effect of accounting changes available to common stockholders.. 750.1 31.2 263.5 (666.7) 605.7 Cumulative effect on prior years of changes in accounting principles................................... - - - 331.9 - ------ ------ ------ ------ ---- Net income (loss) available to common stockholders..... $ 750.1 $ 31.2 $ 263.5 $(334.8) $ 605.7 ====== ====== ====== ====== ===== Earnings per share: Net income (loss) before cumulative effect of accounting changes...................................... $ 12.14 $ 0.51 $ 4.26 $ (10.79) $ 9.80 Cumulative effect on prior years of changes in accounting principles................................ - - - 5.37 - ------ ------ ------ ------- ---- Net income (loss) available to common stockholders..... $ 12.14 $ 0.51 $ 4.26 $ (5.42) $ 9.80 ======= ======= ======= ======= ======= - ---------------------------------------------------------- ----------------------------------------------------- </TABLE> 34
<TABLE> <CAPTION> EXHIBIT 12.1 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - -------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (In millions of dollars, except ratios) - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Income (loss) before income tax and cumulative effect of accounting changes......................... $1,042.4 $(134.0) $93.5 $(1,374.9) $555.9 Add: Interest expense.................................. 182.3 70.5 36.3 36.7 38.3 Interest element of operating lease rental........ 46.7 19.1 18.2 17.6 17.6 ------- ----- ----- -------- ----- Income before income tax and cumulative effect of accounting changes, as adjusted................. $1,271.4 $(44.4) $148.0 $(1,320.6) $611.8 ======= ===== ===== ======== ===== Fixed charges: Interest expense.................................. $182.3 $70.5 $36.3 $36.7 $38.3 Interest element of operating lease rental........ 46.7 19.1 18.2 17.6 17.6 ----- ---- ---- ---- ---- Fixed charges........................................ $229.0 $89.6 $54.5 $54.3 $55.9 ===== ==== ==== ==== ==== Ratio of earnings to fixed charges (1)............... 5.6 (0.5) 2.7 (24.3) 10.9 - -------------------------------------------------------------------------------------------------------------- (1) For purposes of computing this ratio, earnings consist of income before income taxes and cumulative effect of accounting changes plus fixed charges of consolidated companies. Fixed charges consist of interest and that portion of operating lease rental expense which is deemed to be an interest factor for such rentals. </TABLE>
<TABLE> <CAPTION> EXHIBIT 12.2 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED, TO FIXED CHARGES - --------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 (In millions of dollars, except ratios) - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net income (loss)................................ $ 757.0 $ 36.5 $ 267.5 $ (330.5) $ 612.5 Add: Interest expense, after tax................... 118.5 45.8 23.6 24.2 25.3 Interest element of operating lease rental, after tax................................... 30.3 12.4 11.8 11.7 11.6 ----- ----- ----- ----- ----- Net income (loss), as adjusted................... $ 905.8 $ 94.7 $ 302.9 $ (294.6) $ 649.4 ===== ===== ===== ===== ===== Fixed charges: Interest expense, after tax................... $ 118.5 $ 45.8 $ 23.6 $ 24.2 $ 25.3 Interest element of operating lease rental, after tax................................... 30.3 12.4 11.8 11.7 11.6 ----- ----- ----- ----- ----- Fixed charges.................................... $ 148.8 $ 58.2 $ 35.4 $ 35.9 $ 36.9 ====== ===== ===== ===== ===== Ratio of net income (loss), as adjusted, to fixed charges (1)........................... 6.1 1.6 8.6 (8.2) 17.6 - -------------------------------------------------------------------------------------------------------- (1) For purposes of computing this ratio, net income has been adjusted to include fixed charges of consolidated companies, after tax. Fixed charges consist of interest and that portion of operating lease rental expense which is deemed to be an interest factor for such rentals. </TABLE> 35
<TABLE> <CAPTION> EXHIBIT 21.1 SUBSIDIARIES OF CNA <S> <C> PLACE OF COMPANY INCORPORATION - ------- ------------- 1897 Corporation Delaware 1911 Corp. and 2 Subsidiaries Delaware AFCO Agent Service Corporation Delaware Agency Management Services, Inc. and 6 Subsidiaries Delaware Alexsis, Inc. and 4 Subsidiaries Maryland American Casualty Company of Reading, Pennsylvania (ACCO) Pennsylvania Bayside Management Company, Inc. California Bayside Reinsurance Company, Ltd. Bermuda Boston Old Colony Insurance Company Massachusetts California Central Trust Bank Corporation California CICAN I Investment Holding Company Canada CICAN II Investment Holding Company Canada Cinema Completions International, Inc. Delaware Claims Administration Corp. Maryland CNA (Bermuda) Services, Ltd. Bermuda CNA Automation, Inc. Illinois CNA Casualty of California California CNA Casualty of Illinois Illinois CNA Financial Corporation (CNA) Delaware CNA Management (International) Limited Jersey Channel Islands CNA Management Company Limited and 2 Subsidiaries United Kingdom CNA Real Estate Services, Inc. Illinois CNA Realty Corp. and 1 Subsidiary Delaware CNA Reinsurance Company Illinois CNA Risk Management Holding Company, Inc. Illinois CNA Services, Incorporated Illinois CNA Structured Settlements, Inc. Illinois Collateral Holding Subsidiaries Illinois Columbia Casualty Company Illinois Commercial Insurance Company of Newark, N.J. New Jersey Continental Assurance Company (CAC) Illinois Continental Casualty Company (CCC) Illinois Continental Center Associates New York Continental Corporate Realty Services, Inc. New York Continental Guaranty & Credit Corporation New York Continental Holding Corporation Delaware Continental Holdings Ltd. New South Wales Continental Insurance (International Agencies) Australia Pty Limited New South Wales Continental International Insurance, Limited Puerto Rico Continental Life (Europe) Limited United Kingdom Continental Life (International) Limited Guemsey Continental Lloyd's Insurance Company Texas Continental Loss Adjusting Services, Inc. Illinois Continental Maiden Lane, Inc. Delaware Continental Management Services, Ltd. United Kingdom 36
EXHIBIT 21.1 (CONT.) SUBSIDIARIES OF CNA Continental Pacific (Australia) Holding Limited Australia Continental Pacific Insurance Company (Australia) Limited New South Wales Continental Re Management, Inc. New York Continental Rehabilitation Resources, Inc. New Jersey Continental Reinsurance Corporation California Continental Reinsurance Corporation International Limited Bermuda Continental Reinsurance Corporation (U.K.) Limited United Kingdom Continental Reinsurance Management Company Limited United Kingdom Continental Reinsurance Management Holding Company Limited United Kingdom Continental Risk Services, Ltd. Bermuda Continental Risk Services (Barbados) Ltd. Barbados Continental Service Plan, Inc. New Jersey Continental Solution, Inc. Illinois Continental Subsidiary Corporation Delaware Continental Vision Financial Services, Inc. Delaware Convida Holdings Ltd and 1 Subsidiary Bahamas CPI Pension Services Inc. California Ctek, Inc. New Jersey Davies & Company Pty., Ltd. Australia East River Indemnity Company (Barbados), Ltd. Barbados East River Insurance Company Ltd. West Indies East River Insurance Company (Bermuda), Ltd. Bermuda Firemen's Insurance Company of Newark, New Jersey New Jersey First Benefit Services, Inc. California First Fire & Casualty Insurance Company of Hawaii, Inc. Hawaii First Indemnity Insurance of Hawaii, Inc. Hawaii First Insurance Company of Hawaii, Ltd. Hawaii Foundation Insurance Agency, Inc. New Jersey Galway Insurance Company California Global Management Consultants, Inc. New Jersey Hull & Cargo Surveyors, Inc. New York Hull & Cargo Surveyors, Inc. (Canada) British Columbia IDBI Managers, Inc. New York Kansas City Fire and Marine Insurance Company Missouri Larwin Developments, Inc. California LCI Finance Limited United Kingdom Lombard Continental Insurance Holdings Limited United Kingdom Marine Office of America Corporation New York Marine Office of America Corporation (Canada) Ontario Marine Office of America (Deutschland) GmbH Germany Marine Office of America Corporation Italia, Spa Italy Marine Office of America Corporation (U.K.) Ltd. United Kingdom Master Capital Corporation Delaware National Fire Insurance Company of Hartford (NFI) Connecticut National-Ben Franklin Insurance Company of Illinois Illinois Niagara Fire Insurance Company Delaware North Pearl Management, Inc. Texas Pacific Insurance Company California Pacific Underwriters, Inc. Texas Pension/Profit Sharing Systems, Inc. California Settlement Options, Inc. New Jersey TCC Acquisition Corp. Delaware 37
EXHIBIT 21.1 (CONT.) SUBSIDIARIES OF CNA TCC Holdings, Inc. Delaware TCC Properties, Inc. New York The Buckeye Union Insurance Company Ohio The Continental Corporation (CIC) New York The Continental Insurance Company New Hampshire The Continental Insurance Company of New Jersey New Jersey The Continental Insurance Company (Europe) Limited United Kingdom The Continental Insurance Company of Puerto Rico Puerto Rico The Continental Insurance Holdings (Europe) Limited United Kingdom The CPI Group, Inc. Delaware The Fidelity and Casualty Company of New York New Hampshire The Glens Falls Insurance Company Delaware The Hong Kong Fire Insurance Company, Ltd Hong Kong The Maiden Lane Syndicate Inc. New York The Mayflower Insurance Company, Ltd. Indiana The South Place Syndicate Inc. New York Transcontinental Insurance Company New York Transcontinental Technical Services, Inc. (ServCo) Illinois Transportation Insurance Company Illinois UAM Limited United Kingdom United States P & I Agency, Inc. New York Valley Forge Insurance Company Pennsylvania Valley Forge Life Insurance Company Pennsylvania Viaticus, Inc. Delaware Western National Warranty Corporation Arizona Zeuxis Corp. VIII Delaware </TABLE> 38
EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-50753 of CNA Financial Corporation and subsidiaries on Form S-3 of our report dated February 14, 1996, appearing in and incorporated by reference in the Annual Report on Form 10-K of CNA Financial Corporation and subsidiaries for the year ended December 31, 1995. S/DELOITTE & TOUCHE LLP Deloitte & Touche LLP Chicago, Illinois March 29, 1996 39
EXHIBIT 28.1 PROPERTY/CASUALTY RESERVE RECONCILIATION- STATUTORY BASIS TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES A reconciliation of property/casualty reserves as shown in CNA's property/casualty insurance subsidiaries 1995 annual statutory statements Schedule P to reserves for unpaid claims and claim expenses, as shown in the Annual Report on Form 10-K follows. Statutory claim and claim expense reserves are presented net of ceded reinsurance. Under generally accepted accounting principles such reserves are recorded "gross" of reinsurance with corresponding ceded reinsurance recoverables recorded as assets. <TABLE> <CAPTION> <S> <C> - ------------------------------------------------------------------------------------------------------ PROPERTY/CASUALTY RESERVE RECONCILIATION STATUTORY BASIS TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES DECEMBER 31 1995 (In millions of dollars) - ------------------------------------------------------------------------------------------------------ Total claims and claim expenses per Schedule P (net of reinsurance)................... $24,047 Non-domestic affiliates............................................................... 908 Ceded claims and claim expenses....................................................... 6,089 - ------------------------------------------------------------------------------------------------------ Reserve for claims and claim expenses--generally accepted accounting principles $31,044 ====================================================================================================== </TABLE> 40