ITEM 1. BUSINESS
CNA Financial Corporation (CNAF) 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. On May 10, 1995 (the acquisition date) CNAF acquired all the outstanding common stock of 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 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. As multiple-line insurers, CNA underwrites property, casualty, life and accident and health coverages, as well as pension products and annuities. Their 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 1996 statutory net written premium.
There are approximately 1,700 companies selling life insurance in the United States. CAC is ranked as the twenty-second largest life insurance organization based on 1996 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 the states' 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's surplus. Based upon the various state formulas, approximately $677 million in dividends can be paid to CNAF by its insurance affiliates in 1998 without prior approval. All dividends must be reported to the domiciliary insurance department prior to declaration and payment.
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. 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
REGULATION--(CONTINUED)
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.
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 Nation's tort reform 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, state courts have modified or overturned a significant number of these reforms. Additionally, new causes of action and theories of damages are more frequently proposed in state courts or legislatures. Continued unpredictability in the law means that insurance underwriting and rating is difficult in commercial lines, professional liability and some specialty coverages.
Environmental clean-up remains the subject of both federal and state regulation. Last year Congress and the Clinton Administration failed to reach an agreement on efforts to overhaul the federal Superfund hazardous waste program. The legislative stalemate was 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 we cannot predict 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. See Note E of the Consolidated Financial Statements of the 1997 Annual Report to Shareholders for further discussion, 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.
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, 1997, all of CNAF's property/casualty and life insurance affiliates have adjusted capital amounts in excess of Company Action Levels.
REINSURANCE
Information as to the CNA's reinsurance business is set forth in Note G of the Consolidated Financial Statements of the 1997 Annual Report to Shareholders, incorporated by reference in Item 8, herein.
EMPLOYEE RELATIONS
CNA has approximately 24,700 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 1997 Annual Report to Shareholders for further discussion, incorporated by reference in Item 8, herein.
BUSINESS SEGMENTS
Information as to the Company's business segments is set forth in Note M of the Consolidated Financial Statements of the 1997 Annual Report to Shareholders, incorporated by reference in Item 8, herein.
PROPERTY/CASUALTY BUSINESS
The property/casualty group is comprised of commercial business, personal lines of insurance, involuntary risks and other related businesses.
Customers of the commercial business 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 dividends based on loss experience. Experience-rated contracts reduce but do not eliminate risk to the insurer. Commercial lines also includes reinsurance assumed from other insurance companies and certain group accident and health insurance coverages.
Commercial business includes such lines as workers' compensation, general liability and commercial automobile, professional and specialty, multiple peril and accident and health coverages as well as reinsurance. 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. The major components of CNA's property/casualty commercial business are professional and specialty coverages, general liability and commercial automobile, and workers' compensation which accounted for 17%, 17% and 16%, respectively, of 1997 premiums earned.
The property/casualty group markets personal lines of insurance, primarily automobile and homeowners coverages sold to individuals under monoline and package policies.
Involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers, and other similar charges. CNA's share of involuntary risks is mandatory and generally a function of its share of the voluntary market by line of insurance in each state.
The property/casualty group also provides other related services including loss control, policy administration and claim administration services under service contracts for fees. Such services are provided primarily in the workers' compensation market.
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
The following table sets forth supplemental data on a GAAP basis, except where indicated, for the property/casualty business:
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
(c) GAAP trade ratios reflect the results of CCC and its property/casualty insurance subsidiaries for the entire year, along with the results of Continental since the acquisition date. Statutory trade ratios reflect the results of CCC and its property/casualty insurance subsidiaries and Continental since January 1, 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 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.
(d) Other data is determined on the statutory basis of accounting and reflects a capital contribution from CNAF of $475 million in 1993. In addition, dividends of $175 million, $545 million, $325 million, $175 million and $150 million were paid to CNAF by CCC in 1997, 1996, 1995, 1994 and 1993, respectively. Property/casualty insurance subsidiaries have received, or will receive, reimbursement from CNAF for general management and administrative expenses, unallocated loss adjustment expenses and investment expenses of $199 million, $195 million, $197 million, $170 million and $168 million in 1997, 1996, 1995, 1994 and 1993, respectively.
The following table displays the distribution of gross written premium: ------------------------------------------------------------------------- GROSS WRITTEN PREMIUM % OF TOTAL ------------------------------ YEAR ENDED DECEMBER 31 1997 1996 1995 ------------------------------------------------------------------------- New York................................... 9.9 9.3 10.3 California................................. 8.8 8.5 9.7 Texas...................................... 6.2 6.0 6.5 Pennsylvania............................... 5.1 4.9 5.4 Florida.................................... 4.8 4.2 4.1 Illinois................................... 4.4 5.3 5.2 New Jersey................................. 4.3 4.1 4.6 All other states, countries or political subdivisions (a)........................... 48.0 46.8 44.4 Reinsurance assumed: Voluntary................................ 9.7 9.1 7.8 Involuntary.............................. (1.2) 1.8 2.0 ------- ------- ------ 100.0 100.0 100.0 ========================================================================= (a) No other state, country or political subdivision accounts for more than 3.0% of gross written premium.
PROPERTY/CASUALTY BUSINESS--(CONTINUED)
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES
The following loss reserve development table 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 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.
PROPERTY/CASUALTY CLAIM AND CLAIM EXPENSES--(CONTINUED)
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.
PROPERTY/CASUALTY CLAIM AND CLAIM 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 1997 Annual Report to Shareholders, incorporated by reference in Item 8, herein.
Reserve Development - -------------------
Information as to CNA's reserve development is set forth in Note E of the Consolidated Financial Statements of the 1997 Annual Report to Shareholders, incorporated by reference in Item 8, herein.
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 other companies on a commission basis. Insurance products are also marketed through other distribution channels such as banks, direct marketing and the Internet. The individual insurance products consist primarily of term, universal life, and fixed and variable annuity products. Group insurance products include life, accident and health consisting primarily of major medical and hospitalization, and pension products, such as guaranteed investment contracts and annuities.
CNA's life insurance 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 surrender and interest rate risk.
Profitability in the health insurance business continues to be impacted by intense competition and rising medical costs. CNA has 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 life insurance subsidiaries 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 position CNA properly in the evolving health care environment.
LIFE BUSINESS--(CONTINUED)
The following table sets forth supplemental data on a GAAP basis, except where indicated for the life insurance business:
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.
The Company manages the liquidity and interest rate risks on the guaranteed investment contract portfolio by managing the duration of fixed maturity securities included in the investment portfolio supporting the guaranteed investment contracts 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 1997 1996 1995 - ------------------------------------------------------------------------------- Duration in years: Assets....................................... 3.74 3.12 3.12 Contracts.................................... 3.63 3.16 2.98 ---- ---- ---- Difference................................... 0.11 (0.04) 0.14 ==== ====== ====
Weighted average investment yield............... 6.81% 7.44% 7.58%
Weighted average interest crediting rates....... 6.78% 7.32% 7.45%
Withdrawal characteristics: With market value adjustment................. 97% 95% 92% Non-withdrawable............................. 3 5 8 - ------------------------------------------------------------------------------- Total 100% 100% 100% ===============================================================================
As shown above, the weighted average investment yield at December 31, 1997, 1996 and 1995 was more than the weighted average interest crediting rate. During 1997, general market interest rates were lower which led to an increase in the market value of CNA's fixed maturitiy securities. As a result of this increase, CNA was able to realize significant capital gains on its investment portfolio. However, the interest rates on fixed maturity securities purchased in this market had a lower yield which led to a narrowing of the spread between investment yields and crediting rates.
INVESTMENTS
Information as to the Company's investments is set forth in Note B of the Consolidated Financial Statements of the 1997 Annual Report to Shareholders, incorporated by reference in Item 8, herein.
ITEM 2.
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 28% 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 LOCATION BY CNA OR ITS 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 251,691* 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 219,285** Property/Casualty Chicago, Illinois Insurance Offices
1111 E. Broad St. 183,019** Property/Casualty Columbus, Ohio Insurance Offices
333 Glen Street 157,825** Property/Casualty Glen Falls, New York Insurance Offices
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
111 Congressional Blvd. 118,215** Property/Casualty Indianapolis, Indiana Insurance Offices
1431 Opus Place 106,151** Property/Casualty Downers Grove, Illinois Insurance Offices
2401 Pleasant Valley 102,376** Property/Casualty York, Pennsylvania Insurance Offices
* Represents property owned by CNAF or its subsidiaries. ** Represents property leased by CNAF or its subsidiaries. *** Property is owned by Continental and 46% of it is occupied by CNAF or its subsidiaries.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Information as to CNA's legal proceedings is set forth in Note F of the Consolidated Financial Statements of 1997 Annual Report to Shareholders, incorporated by reference in Item 8, herein.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from page 91 of the 1997 Annual Report to Shareholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from page 2 of the 1997 Annual Report to Shareholders.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated herein by reference from pages 14 through 38 of the 1997 Annual Report to Shareholders.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference under the heading Market Risk in the Management Discussion and Analysis of Financial Condition and Results of Operations of the 1997 Annual Report to Shareholders on pages 30 through 33.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheet - December 31, 1997 and 1996
Statement of Consolidated Operations - Year Ended December 3l, 1997, 1996 and 1995
Statement of Consolidated Stockholders' Equity - December 31, 1997, 1996 and 1995
Statement of Consolidated Cash Flows - Year Ended December 31, 1997, 1996 and 1995
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 40 through 90 of the 1997 Annual Report to Shareholders.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
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.
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.
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.
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (continued)
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (continued)
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (continued)
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. Investment 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 1997.
b. Long-term debt
------------------------------------------------------------------------- December 31 1997 1996 (In millions of dollars) ------------------------------------------------------------------------- Variable rate debt: Credit Facility.................................. $ 400 $ 400 Commercial Paper................................. 675 675 Senior Notes: 8 7/8 %, due March 1, 1998....................... 150 150 6 1/4%, due November 15, 2003.................... 249 248 6 3/4%, due November 15, 2006.................... 248 248 7 1/4% Debenture, due November 15, 2023............. 247 247 1.0% Urban Development Action Grant, due May 7, 2019. 3 3 -------------------------------------------------------------------------- Total $1,972 $1,971 =========================================================================
CNA Financial Corporation (CNAF)has in place a revolving credit facility that was used to finance the acquisition of The Continental Corporation.The interest rate on the facility 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 borrowings under the revolver at December 31, 1997 and 1996, respectively was 6.16% and 5.72%.
To take advantage of favorable interest rates, CNAF established a commercial paper program to replace borrowings under the revolving credit facility. The commercial paper borrowings are classified as long-term as $675 million of the committed bank facility will support the commercial paper program. The weighted average interest rate on commercial paper at December 31, 1997 was 6.05% compared to 5.67% at December 31, 1996.
At year end 1997, the outstanding loans under the revolving credit facility were $400 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program.
SCHEDULE II (continued)
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 of $950 million, which terminate from May 2000 to December 2000. These agreements provide that CNAF pay interest at a fixed rate, averaging 6.20% at December 31, 1997 and 1996, in exchange for the receipt of interest at the three month LIBOR rate. The
SCHEDULE II (continued)
CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION
NOTES TO CONDENSED FINANCIAL INFORMATION--(CONTINUED)
effect of these interest rate swaps was to increase interest expense by $4 million and $7 million for the years ended December 31, 1997 and 1996, respectively.
The weighted average interest rate (interest and facility fees) on the variable rate acquisition debt, which includes the revolving credit facility and commercial paper was 6.35% and 6.28% at December 31, 1997 and 1996, respectively. This rate reflects the effect of the interest rate swaps.
On August 18, 1997, CNAF filed a Registration Statement on Form S-3 with the Securities and Exchange Commission relating to $1 billion of senior and subordinated debt and preferred stock that became effective on October 22, 1997. This new shelf registration incorporated $250 million of securities remaining available for issuance from a prior shelf registration. On January 8, 1998, the Company issued $150 million principal amount of 6.45% senior notes due January 15, 2008 and $150 million principal amount of 6.95% senior notes due January 15, 2018.
The net proceeds were used to pay down bank loans drawn under the Company's revolving credit facility. Concurrent with the reduction in bank debt, the Company terminated $300 million in notional amount of interest rate swaps.
On March 2, 1998 CNAF paid at the due date $150 million of 8 7/8% senior notes with funds drawn against the revolving credit facility (unaudited).
c. Management and admininstrative expenses
CNAF has reimbursed, or will reimburse, its subsidiaries for general management and administrative expenses, unallocated loss adjustment expenses and investment expense of $217 million, $223 million and $218 million in 1997, 1996 and 1995, respectively.
d. Capital contributions
There were no contributions made by CNAF to the capital of its insurance and other subsidiaries in 1997, 1996 or 1995. - --------------------------------------------------------------------------------
*Premiums written relates to property/casualty companies only.
SCHEDULE V CNA FINANCIAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE VI CNA FINANCIAL CORPORATION SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
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, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 and have issued our report thereon dated February 18, 1998. Such consolidated financial statements and report are included in the Company's 1997 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 18, 1998
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 30, 1998
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 30, 1998 | /S/ROBERT P. GWINN Director | - ---------------------------------- | Robert P. Gwinn | | | /S/WALTER F. MONDALE Director | - -------------------------------- | Walter F. Mondale |
SIGNATURES--(CONTINUED)
SIGNATURE TITLE
/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 30, 1998 | /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 | |
EXHIBIT 11.1 CNA FINANCIAL CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE
EXHIBIT 12.1
CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT 12.2
CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED, TO FIXED CHARGES
EXHIBIT 21.1 PRIMARY SUBSIDIARIES OF CNA
PLACE OF INCORPORATION COMPANY
AMS Services, Inc. Delaware
Alexsis, Inc. Maryland
American Casualty Company of Reading, Pennsylvania (ACCO) Pennsylvania
Boston Old Colony Insurance Company Massachusetts
Claims Administration Corp. Maryland
CNA Casualty of California California
CNA Surety Corporation Delaware
Columbia Casualty Company Illinois
Commercial Insurance Company of Newark, N.J. New Jersey
Continental Assurance Company (CAC) Illinois
Continental Casualty Company (CCC) Illinois
Continental Lloyd's Insurance Company Texas
Continental Reinsurance Corporation California
Firemen's Insurance Company of Newark, New Jersey New Jersey
Kansas City Fire and Marine Insurance Company Missouri
National Fire Insurance Company of Hartford (NFI) Connecticut
National-Ben Franklin Insurance Company of Illinois Illinois
Niagara Fire Insurance Company Delaware
Pacific Insurance Company California
EXHIBIT 21.1 - (continued)
PRIMARY SUBSIDIARIES OF CNA--(continued)
PLACE OF INCORPORATION COMPANY
The Buckeye Union Insurance Company Ohio
The Continental Corporation, Inc. New York
The Continental Insurance Company New Hampshire
The Continental Insurance Company of New Jersey New Jersey
Convida Holdings, Ltd. Bahamas
The Fidelity and Casualty Company of New York New Hampshire
The Glens Falls Insurance Company Delaware
The Mayflower Insurance Company, Ltd. Indiana
Transcontinental Insurance Company New York
Transcontinental Technical Services, Inc. (ServCo) Illinois
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.
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 reports dated February 18, 1998, 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, 1997.
/S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP Chicago, Illinois March 30, 1998