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