þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to
___
| Delaware (State or other jurisdiction of incorporation or organization) | 36-6169860 (I.R.S. Employer Identification No.) |
Chicago, Illinois (Address of principal executive offices) | (Zip Code) |
| Title of each class | Name of each exchange on which registered | ||
| Common Stock with a par value of $2.50 per share | New York Stock Exchange Chicago Stock Exchange |
Yesüþ No...
Noo
Yesüo No...
Noþ
2006.
| Item | Page | |||||||
| Number | Number | |||||||
| PART I | ||||||||
| 1. | 3 | |||||||
| 1A. | 8 | |||||||
| 1B. | 15 | |||||||
| 2. | 15 | |||||||
| 3. | 15 | |||||||
| 4. | 15 | |||||||
| PART II | ||||||||
| 5. | 16 | |||||||
| 6. | 17 | |||||||
| 7. | 18 | |||||||
| 7A. | 60 | |||||||
| 8. | 65 | |||||||
| 9. | 139 | |||||||
| 9A. | 139 | |||||||
| 9B. | 139 | |||||||
| PART III | ||||||||
| 10. | 140 | |||||||
| 11. | 141 | |||||||
| 12. | 141 | |||||||
| 13. | 141 | |||||||
| 14. | 141 | |||||||
| PART IV | ||||||||
| 15. | 142 | |||||||
| Certificate of Amendment of Certificate of Incorporation | ||||||||
| Amendment to Employment Agreement | ||||||||
| Significant Subsidiaries | ||||||||
| Consent of Independent Registered Public Accounting Firm | ||||||||
| Certification | ||||||||
| Certification | ||||||||
| Certification | ||||||||
| Certification | ||||||||
CNA serves2006.
Insurance
During 2003, CNA completed a strategic review of its operations and decided to concentrate its efforts on the
On April 30, 2004, CNA sold its individual life insurance business. The business sold included term, universal and permanent life insurance policies and individual annuity products. CNA’s individual long term care and structured settlement businesses were excluded from the sale. Consideration from the sale was approximately $700 million. CNA recorded a realized investment loss of $389 million after-tax ($622 million pretax) in 2004.
On December 31, 2003, CNA sold the majority of its group benefits business. The business sold included group life and accident, short and long term disability and certain other products. CNA’s group long term care and specialty medical businesses were excluded from the sale. Consideration from the sale was approximately $530 million, resulting in an after-tax realized investment loss on the sale of $122 million ($163 million pretax), including an after-tax realized investment gain of $8 million ($13 million pretax) recorded in the second quarter of 2004.
CNA is continuing to service its existing group and individual long term care commitments and is managing these businesses as a run-off operation.
During 2003, the Company sold the renewal rights for most of the treaty business of CNA Re and withdrew from the assumed reinsurance business. CNA is managing the run-off of its retained liabilities.
On August 1, 2004, CNA sold the retirement plan trust and recordkeeping business portfolio of CNA Trust to Union Bank of California. Consideration from the sale was approximately $12 million, resulting in an after-tax realized investment gain on the sale of $5 million ($9 million pretax). On November 19, 2004, the charter of CNA Trust was sold to Nevada Security Bank for a nominal fee and CNA Trust is no longer a subsidiary of CNA.
As a result of the strategic review described above, in 2004 CNA changed how it manages its core operations and makes business decisions. Accordingly, the Company revised its reportable business segment structure to reflect these changes. CNA’s core operations, property and casualty operations, are now reported in two business segments: Standard Lines and Specialty Lines. CNA’sOur non-core operations are managed in two segments: Life and Group Non-Core and Corporate and Other Non-Core. Prior period segment disclosures have been conformed to the current year presentation.
3
Standard Lines includes standard property and casualty coverages, excess and surplus lines, and insurance and risk management products. CNA Global (formerly included in Specialty Lines), which consists of marine and global standard lines, is included in Standard Lines.
Specialty Lines includes professional financial and specialty property and casualty products and services.
Life and Group Non-Core includes the results of the life and group lines of business which have been sold or placed in run-off. This segment also includes Life Operations and Group Operations (formerly separate reportable segments) and certain run-off life and group operations formerly included in the Corporate and Other segment.
Corporate and Other Non-Core includes the results of several property and casualty and other lines placed in run-off, including CNA Re (formerly a stand alone property and casualty segment), and CNA Guaranty and Credit (formerly included in Specialty Lines). This segment also includes results related to the centralized adjusting and settlement of asbestos and environmental pollution and mass tort (APMT) claims, participation in voluntary insurance pools and other non-insurance operations.
In 2004, CNA conducted its operations through four operating segments: Standard Lines, Specialty Lines, Life and Group Non-Core and Corporate and Other Non-Core. These segments are managed separately because of differences in their product lines and markets. Discussions of each segment including the products offered, the customers served, the distribution channels used and competition are set forth in the MD&AManagement’s Discussion and Analysis (MD&A) included under Item 7 and in Note N of the Consolidated Financial Statements included under Item 8.
43
Insurance
On February 18, 2005, President Bush signed into law the Class Action Fairness Act of 2005, which, with limited exceptions, confers federal jurisdiction over any class action filed after its enactment involving a putative class of 100 or more members if all aggregated claims exceed $5 million and at least one claimant has diverse residence, for jurisdictional purposes, from at least one defendant. Federal jurisdiction under the Act may be mandatory, discretionary or disallowed depending on the composition and citizenship of the class members and certain defendants. The Act also applies to some individual personal injury lawsuits in which the claims of 100 or more plaintiffs against the same company have been joined for trial. Certain types of class actions are exempt from the jurisdictional provisions of the Act, including those against government defendants, those that involve only a claim regarding a company’s internal affairs and certain types of securities litigation. Closer scrutiny is required of class actions in which the benefit reaching the class consists of a coupon or voucher, especially where attorneys’ fees by class counsel have been requested as part of such a settlement, and a duty on defendants to notify federal and state officials of every class action settlement is imposed.
CNAF’s
Terrorism Insurance
Information related to terrorism insurance is set forth in the MD&A included under Item 7.
5
Reinsurance
Information on CNA’s reinsurance activities is set forth in the MD&A included under Item 7 and in Note H of the Consolidated Financial Statements included under Item 8.
Employee Relations
CNA has
64
| Years ended December 31 | 2004 | 2003 | 2002 | |||||||||||||||||||||
| (In millions, except ratio information) | 2006 | 2005 | 2004 | |||||||||||||||||||||
| Trade Ratios – GAAP basis (a) | ||||||||||||||||||||||||
| Trade Ratios — GAAP basis (a) | ||||||||||||||||||||||||
| Loss and loss adjustment expense ratio | 74.6 | % | 112.0 | % | 79.8 | % | 75.7 | % | 89.4 | % | 74.6 | % | ||||||||||||
| Expense ratio | 31.5 | 37.3 | 28.9 | 30.0 | 31.2 | 31.5 | ||||||||||||||||||
| Dividend ratio | 0.2 | 1.4 | 0.9 | 0.3 | 0.3 | 0.2 | ||||||||||||||||||
| Combined ratio | 106.3 | % | 150.7 | % | 109.6 | % | 106.0 | % | 120.9 | % | 106.3 | % | ||||||||||||
| Trade Ratios – Statutory basis (a) | ||||||||||||||||||||||||
| Trade Ratios — Statutory basis (preliminary) (a) | ||||||||||||||||||||||||
| Loss and loss adjustment expense ratio | 78.1 | % | 118.1 | % | 79.2 | % | 78.7 | % | 92.2 | % | 78.1 | % | ||||||||||||
| Expense ratio | 27.2 | 34.6 | 30.1 | 30.2 | 30.0 | 27.2 | ||||||||||||||||||
| Dividend ratio | 0.6 | 1.2 | 1.0 | 0.2 | 0.5 | 0.6 | ||||||||||||||||||
| Combined Ratio | 105.9 | % | 153.9 | % | 110.3 | % | ||||||||||||||||||
| Individual Life and Group Life Insurance Inforce (d) | ||||||||||||||||||||||||
| Combined ratio | 109.1 | % | 122.7 | % | 105.9 | % | ||||||||||||||||||
| Individual Life and Group Life Insurance Inforce | ||||||||||||||||||||||||
| Individual life | $ | 11,566 | $ | 330,805 | $ | 345,272 | $ | 9,866 | $ | 10,711 | $ | 11,566 | ||||||||||||
| Group life | 45,079 | 58,163 | 92,479 | 5,787 | 9,838 | 45,079 | ||||||||||||||||||
| Total | $ | 56,645 | $ | 388,968 | $ | 437,751 | $ | 15,653 | $ | 20,549 | $ | 56,645 | ||||||||||||
| Other Data – Statutory basis (b) | ||||||||||||||||||||||||
| Other Data — Statutory basis (preliminary) (b) | ||||||||||||||||||||||||
| Property and casualty companies’ capital and surplus (c) | $ | 6,998 | $ | 6,170 | $ | 6,836 | $ | 8,137 | $ | 6,940 | $ | 6,998 | ||||||||||||
| Life and group company(ies)’ capital and surplus | 1,178 | 707 | 1,645 | |||||||||||||||||||||
| Life company’s capital and surplus | 687 | 627 | 1,177 | |||||||||||||||||||||
| Property and casualty companies’ written premiums to surplus ratio | 1.0 | 1.1 | 1.3 | 0.9 | 1.0 | 1.0 | ||||||||||||||||||
| Life companies’ capital and surplus-percent to total liabilities | 56.0 | % | 13.0 | % | 21.0 | % | ||||||||||||||||||
| Life company’s capital and surplus-percent to total liabilities | 38.9 | % | 33.1 | % | 56.0 | % | ||||||||||||||||||
| Participating policyholders-percent of gross life insurance inforce | 1.4 | % | 0.5 | % | 0.4 | % | 4.4 | % | 3.5 | % | 1.4 | % | ||||||||||||
| (a) | Trade ratios reflect the results of |
| (b) | Other data is determined in accordance with SAP. Life and group statutory capital and surplus as a percent of total liabilities is determined after excluding separate account liabilities and reclassifying the statutorily required Asset Valuation Reserve to surplus. |
| (c) | Surplus includes the property and casualty companies’ equity ownership of the life |
75
| Percent of Total | Percent of Total | |||||||||||||||||||||||
| Years ended December 31 | 2004 | 2003 | 2002 | 2006 | 2005 | 2004 | ||||||||||||||||||
| California | 9.3 | % | 8.5 | % | 7.7 | % | 9.6 | % | 9.0 | % | 9.3 | % | ||||||||||||
| Florida | 7.9 | 7.1 | 7.1 | |||||||||||||||||||||
| New York | 7.9 | 7.3 | 7.2 | 7.3 | 7.9 | 7.9 | ||||||||||||||||||
| Florida | 7.1 | 7.6 | 6.7 | |||||||||||||||||||||
| Texas | 5.4 | 5.7 | 6.2 | 5.9 | 5.7 | 5.4 | ||||||||||||||||||
| New Jersey | 5.3 | 4.5 | 4.6 | 4.4 | 3.8 | 5.3 | ||||||||||||||||||
| Illinois | 5.1 | 9.3 | 9.1 | 4.1 | 4.2 | 5.1 | ||||||||||||||||||
| Pennsylvania | 4.7 | 4.2 | 4.5 | 3.4 | 4.2 | 4.7 | ||||||||||||||||||
| United Kingdom | 3.2 | 2.8 | 2.3 | |||||||||||||||||||||
| Missouri | 3.0 | 2.8 | 1.4 | |||||||||||||||||||||
| Massachusetts | 3.2 | 3.1 | 2.8 | 2.4 | 3.3 | 3.2 | ||||||||||||||||||
| All other states, countries or political subdivisions (a) | 52.0 | 49.8 | 51.2 | 48.8 | 49.2 | 48.3 | ||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
| (a) | No other individual state, country or political subdivision accounts for more than 3.0% of gross written premiums. |
86
| Calendar Year Ended | 1994 (a) | 1995 (b) | 1996 | 1997 | 1998 | 1999 (c) | 2000 | 2001 (d) | 2002 (e) | 2003 | 2004 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | 1996 | 1997 | 1998 | 1999 (a) | 2000 | 2001 (b) | 2002 (c) | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Originally reported gross reserves for unpaid claim and claim adjustment expenses | $ | 21,639 | $ | 31,044 | $ | 29,357 | $ | 28,533 | $ | 28,317 | $ | 26,631 | $ | 26,408 | $ | 29,551 | $ | 25,648 | $ | 31,282 | $ | 31,201 | $ | 29,559 | $ | 28,731 | $ | 28,506 | $ | 26,850 | $ | 26,510 | $ | 29,649 | $ | 25,719 | $ | 31,284 | $ | 31,204 | $ | 30,694 | $ | 29,459 | ||||||||||||||||||||||||||||||||||||||||||||
| Originally reported ceded recoverable | 2,705 | 6,089 | 5,660 | 5,326 | 5,424 | 6,273 | 7,568 | 11,798 | 10,583 | 13,997 | 13,788 | 5,385 | 5,056 | 5,182 | 6,091 | 7,333 | 11,703 | 10,490 | 13,847 | 13,682 | 10,438 | 8,078 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Originally reported net reserves for unpaid claim and claim adjustment expenses | $ | 18,934 | $ | 24,955 | $ | 23,697 | $ | 23,207 | $ | 22,893 | $ | 20,358 | $ | 18,840 | $ | 17,753 | $ | 15,065 | $ | 17,285 | $ | 17,413 | $ | 24,174 | $ | 23,675 | $ | 23,324 | $ | 20,759 | $ | 19,177 | $ | 17,946 | $ | 15,229 | $ | 17,437 | $ | 17,522 | $ | 20,256 | $ | 21,381 | ||||||||||||||||||||||||||||||||||||||||||||
| Cumulative net paid as of: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| One year later | $ | 3,656 | $ | 6,510 | $ | 5,851 | $ | 5,954 | $ | 7,321 | $ | 6,546 | $ | 7,686 | $ | 5,981 | $ | 5,373 | $ | 4,341 | $ | – | $ | 5,851 | $ | 5,954 | $ | 7,321 | $ | 6,547 | $ | 7,686 | $ | 5,981 | $ | 5,373 | $ | 4,382 | $ | 2,651 | $ | 3,442 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||
| Two years later | 7,087 | 10,485 | 9,796 | 11,394 | 12,241 | 11,935 | 11,988 | 10,355 | 8,727 | – | – | 9,796 | 11,394 | 12,241 | 11,937 | 11,992 | 10,355 | 8,768 | 6,104 | 4,963 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three years later | 9,195 | 13,363 | 13,602 | 14,423 | 16,020 | 15,247 | 15,291 | 12,912 | – | – | – | 13,602 | 14,423 | 16,020 | 15,256 | 15,291 | 12,954 | 9,747 | 7,780 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Four years later | 10,624 | 16,271 | 15,793 | 17,042 | 18,271 | 18,136 | 17,292 | – | – | – | – | 15,793 | 17,042 | 18,271 | 18,151 | 17,333 | 13,244 | 10,870 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Five years later | 12,577 | 17,947 | 17,736 | 18,568 | 20,779 | 19,586 | – | – | – | – | – | 17,736 | 18,568 | 20,779 | 19,686 | 17,775 | 13,922 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Six years later | 13,472 | 19,465 | 18,878 | 20,723 | 21,928 | – | – | – | – | – | – | 18,878 | 20,723 | 21,970 | 20,206 | 18,970 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Seven years later | 14,394 | 20,410 | 20,828 | 21,608 | – | – | – | – | – | – | – | 20,828 | 21,649 | 22,564 | 21,231 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eight years later | 15,024 | 22,237 | 21,567 | – | – | – | – | – | – | – | – | 21,609 | 22,077 | 23,453 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nine years later | 15,602 | 22,883 | – | – | – | – | – | – | – | – | – | 21,986 | 22,800 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ten years later | 16,158 | – | – | – | – | – | – | – | – | – | – | 22,642 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net reserves re-estimated as of: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| End of initial year | $ | 18,934 | $ | 24,955 | $ | 23,697 | $ | 23,207 | $ | 22,893 | $ | 20,358 | $ | 18,840 | $ | 17,753 | $ | 15,065 | $ | 17,285 | $ | 17,413 | $ | 24,174 | $ | 23,675 | $ | 23,324 | $ | 20,759 | $ | 19,177 | $ | 17,946 | $ | 15,229 | $ | 17,437 | $ | 17,522 | $ | 20,256 | $ | 21,381 | ||||||||||||||||||||||||||||||||||||||||||||
| One year later | 18,922 | 24,864 | 23,441 | 23,470 | 23,920 | 20,785 | 21,306 | 17,805 | 17,496 | 17,520 | – | 23,970 | 23,904 | 24,306 | 21,163 | 21,502 | 17,980 | 17,650 | 17,671 | 18,513 | 20,588 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Two years later | 18,500 | 24,294 | 23,102 | 23,717 | 23,774 | 22,903 | 21,377 | 20,368 | 18,095 | – | – | 23,610 | 24,106 | 24,134 | 23,217 | 21,555 | 20,533 | 18,248 | 19,120 | 19,044 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three years later | 18,088 | 23,814 | 23,270 | 23,414 | 25,724 | 22,780 | 23,890 | 20,945 | – | – | – | 23,735 | 23,776 | 26,038 | 23,081 | 24,058 | 21,109 | 19,814 | 19,760 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Four years later | 17,354 | 24,092 | 22,977 | 24,751 | 25,407 | 25,293 | 24,420 | – | – | – | – | 23,417 | 25,067 | 25,711 | 25,590 | 24,587 | 22,547 | 20,384 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Five years later | 17,506 | 23,854 | 24,105 | 24,330 | 27,456 | 25,703 | – | – | – | – | – | 24,499 | 24,636 | 27,754 | 26,000 | 25,594 | 22,983 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Six years later | 17,248 | 24,883 | 23,736 | 26,037 | 27,782 | – | – | – | – | – | – | 24,120 | 26,338 | 28,078 | 26,625 | 26,023 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Seven years later | 17,751 | 24,631 | 25,250 | 26,239 | – | – | – | – | – | – | – | 25,629 | 26,537 | 28,437 | 27,009 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eight years later | 17,650 | 26,023 | 25,437 | – | – | – | – | – | – | – | – | 25,813 | 26,770 | 28,705 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nine years later | 18,193 | 26,169 | – | – | – | – | – | – | – | – | – | 26,072 | 26,997 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ten years later | 18,230 | – | – | – | – | – | – | – | – | – | – | 26,305 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net (deficiency) redundancy | $ | 704 | $ | (1,214 | ) | $ | (1,740 | ) | $ | (3,032 | ) | $ | (4,889 | ) | $ | (5,345 | ) | $ | (5,580 | ) | $ | (3,192 | ) | $ | (3,030 | ) | $ | (235 | ) | $ | – | $ | (2,131 | ) | $ | (3,322 | ) | $ | (5,381 | ) | $ | (6,250 | ) | $ | (6,846 | ) | $ | (5,037 | ) | $ | (5,155 | ) | $ | (2,323 | ) | $ | (1,522 | ) | $ | (332 | ) | $ | — | |||||||||||||||||||||||||
| Reconciliation to gross re-estimated reserves: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net reserves re-estimated | $ | 18,230 | $ | 26,169 | $ | 25,437 | $ | 26,239 | $ | 27,782 | $ | 25,703 | $ | 24,420 | $ | 20,945 | $ | 18,095 | $ | 17,520 | $ | – | $ | 26,305 | $ | 26,997 | $ | 28,705 | $ | 27,009 | $ | 26,023 | $ | 22,983 | $ | 20,384 | $ | 19,760 | $ | 19,044 | $ | 20,588 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||
| Re-estimated ceded recoverable | 2,992 | 8,479 | 7,650 | 7,052 | 7,475 | 9,745 | 10,734 | 16,526 | 15,850 | 14,410 | – | 7,619 | 6,953 | 7,469 | 9,810 | 10,541 | 15,939 | 15,298 | 13,722 | 12,624 | 10,094 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total gross re-estimated reserves | $ | 21,222 | $ | 34,648 | $ | 33,087 | $ | 33,291 | $ | 35,257 | $ | 35,448 | $ | 35,154 | $ | 37,471 | $ | 33,945 | $ | 31,930 | $ | – | $ | 33,924 | $ | 33,950 | $ | 36,174 | $ | 36,819 | $ | 36,564 | $ | 38,922 | $ | 35,682 | $ | 33,482 | $ | 31,668 | $ | 30,682 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net (deficiency) redundancy related to: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asbestos claims | $ | (2,126 | ) | $ | (2,354 | ) | $ | (2,456 | ) | $ | (2,354 | ) | $ | (2,111 | ) | $ | (1,534 | ) | $ | (1,469 | ) | $ | (697 | ) | $ | (696 | ) | $ | (54 | ) | $ | – | $ | (2,461 | ) | $ | (2,361 | ) | $ | (2,120 | ) | $ | (1,544 | ) | $ | (1,479 | ) | $ | (707 | ) | $ | (707 | ) | $ | (65 | ) | $ | (11 | ) | $ | — | $ | — | |||||||||||||||||||||||||
| Environmental and mass tort claims | (727 | ) | (770 | ) | (715 | ) | (739 | ) | (520 | ) | (620 | ) | (610 | ) | (148 | ) | (151 | ) | (1 | ) | – | (807 | ) | (834 | ) | (618 | ) | (722 | ) | (716 | ) | (256 | ) | (263 | ) | (117 | ) | (116 | ) | (63 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Total asbestos, environmental and mass tort | (2,853 | ) | (3,124 | ) | (3,171 | ) | (3,093 | ) | (2,631 | ) | (2,154 | ) | (2,079 | ) | (845 | ) | (847 | ) | (55 | ) | – | (3,268 | ) | (3,195 | ) | (2,738 | ) | (2,266 | ) | (2,195 | ) | (963 | ) | (970 | ) | (182 | ) | (127 | ) | (63 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other claims | 3,557 | 1,910 | 1,431 | 61 | (2,258 | ) | (3,191 | ) | (3,501 | ) | (2,347 | ) | (2,183 | ) | (180 | ) | – | 1,137 | (127 | ) | (2,643 | ) | (3,984 | ) | (4,651 | ) | (4,074 | ) | (4,185 | ) | (2,141 | ) | (1,395 | ) | (269 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net (deficiency) redundancy | $ | 704 | $ | (1,214 | ) | $ | (1,740 | ) | $ | (3,032 | ) | $ | (4,889 | ) | $ | (5,345 | ) | $ | (5,580 | ) | $ | (3,192 | ) | $ | (3,030 | ) | $ | (235 | ) | $ | – | $ | (2,131 | ) | $ | (3,322 | ) | $ | (5,381 | ) | $ | (6,250 | ) | $ | (6,846 | ) | $ | (5,037 | ) | $ | (5,155 | ) | $ | (2,323 | ) | $ | (1,522 | ) | $ | (332 | ) | $ | — | |||||||||||||||||||||||||
97
| Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of $784 million as of December 31, 1999. |
| (b) | Effective January 1, 2001, |
| (c) | Effective October 31, 2002, |
CNA files
CNA
8
| • | increases in the number and size of claims relating to injuries from medical products; | |
| • | the effects of accounting and financial reporting scandals and other major corporate governance failures, which have resulted in an increase in the number and size of claims, including director and officer and errors and omissions insurance claims; | |
| • | class action litigation relating to claims handling and other practices; | |
| • | construction defect claims, including claims for a broad range of additional insured endorsements on policies; | |
| • | clergy abuse claims, including passage of legislation to reopen or extend various statutes of limitations; and | |
| • | mass tort claims, including bodily injury claims related to silica, welding rods, benzene, lead and various other chemical exposure claims. |
| • | coverage issues including whether certain costs are covered under the policies and whether policy limits apply; | |
| • | inconsistent court decisions and developing legal theories; | |
| • | increasingly aggressive tactics of plaintiffs’ lawyers; | |
| • | the risks and lack of predictability inherent in major litigation; | |
| • | changes in the volume of asbestos, environmental pollution and mass tort claims which cannot now be anticipated; | |
| • | continued increases in mass tort claims relating to silica and silica-containing products; | |
| • | the impact of the exhaustion of primary limits and the resulting increase in claims on any umbrella or excess policies we have issued; | |
| • | the number and outcome of direct actions against us; |
9
| • | our ability to recover reinsurance for these claims; and | |
| • | changes in the legal and legislative environment in which we operate. |
| • | whether cleanup costs are considered damages under the policies (and accordingly whether we would be liable for these costs); | |
| • | the trigger of coverage and the allocation of liability among triggered policies; | |
| • | the applicability of pollution exclusions and owned property exclusions; | |
| • | the potential for joint and several liability; and | |
| • | the definition of an occurrence. |
| • | inconsistency of court decisions and jury attitudes, as well as future court decisions; | |
| • | specific policy provisions; | |
| • | allocation of liability among insurers and insureds; | |
| • | missing policies and proof of coverage; | |
| • | the proliferation of bankruptcy proceedings and attendant uncertainties; | |
| • | novel theories asserted by policyholders and their legal counsel; | |
| • | the targeting of a broader range of businesses and entities as defendants; | |
| • | uncertainties in predicting the number of future claims and which other insureds may be targeted in the future; | |
| • | volatility in claim numbers and settlement demands; | |
| • | increases in the number of non-impaired claimants and the extent to which they can be precluded from making claims; | |
| • | the efforts by insureds to obtain coverage that is not subject to aggregate limits; | |
| • | the long latency period between asbestos exposure and disease manifestation, as well as the resulting potential for involvement of multiple policy periods for individual claims; | |
| • | medical inflation trends; |
10
| • | the mix of asbestos-related diseases presented; and | |
| • | the ability to recover reinsurance. |
11
| • | standards of solvency including risk-based capital measurements; | |
| • | restrictions on the nature, quality and concentration of investments; | |
| • | restrictions on our ability to withdraw from unprofitable lines of insurance; | |
| • | the required use of certain methods of accounting and reporting; |
12
| • | the establishment of reserves for unearned premiums, losses and other purposes; | |
| • | potential assessments for funds necessary to settle covered claims against impaired, insolvent or failed insurance companies; | |
| • | licensing of insurers and agents; | |
| • | approval of policy forms; and | |
| • | limitations on the ability of our insurance subsidiaries to pay dividends to us. |
13
14
CNA Center,
| Amount (Square | ||||||
| Feet) of Building | ||||||
| Owned and Occupied or Leased | ||||||
| Location | Principal Usage | |||||
| 904,990 | Principal executive offices of CNAF | |||||
| 401 Penn Street, Reading, Pennsylvania | 171,406 | Property and casualty insurance offices | ||||
| 2405 Lucien Way, Maitland, Florida | 147,815 | Property and casualty insurance offices | ||||
| 40 Wall Street, New York, New York | 110,131 | Property and casualty insurance offices | ||||
| 78,655 | Property and casualty insurance offices | |||||
| 600 N. Pearl Street, Dallas, Texas | 75,544 | |||||
| Property and casualty insurance offices | ||||||
| 1100 Cornwall Road, Monmouth Junction, New Jersey | 74,067 | Property and casualty insurance offices | ||||
| 48,696 | Property and casualty insurance offices | |||||
| 405 Howard Street, San Francisco, California | 47,195 | Property and casualty insurance offices | ||||
| 4150 N. Drinkwater Boulevard, Scottsdale, Arizona | 37,799 | Property and casualty insurance offices | ||||
None.
1115
CNAF’s
During 2003 CNAF sold $750 million of its participating convertible preferred stock, Series I Issue, to Loews. The preferred stock converted into 32,327,015 shares of CNAF common stock on April 20, 2004. The number of shares was determined utilizing a conversion price per share of common stock that was based on average market prices of CNAF common stock from November 17, 2003 through November 21, 2003. The terms of the Series I Issue were approved by a special committee of independent members of CNAF’s Board of Directors. Following conversion, Loews owned approximately 91% of CNAF’s outstanding common stock of approximately 256.0 million shares. The proceeds from the Series I Issue were applied by CNAF to increase the statutory surplus of CNAF’s principal insurance subsidiary, CCC. The issuance of the Series I Issue was exempt from registration under Section 4(2) of the Securities Act of 1933.
During 2002, CNAF sold $750 million of a then new issue of preferred stock, designated Series H Cumulative Preferred Issue (Series H Issue), to Loews. The terms of the Series H Issue were approved by a special committee of independent members of CNAF’s Board of Directors. The proceeds from the Series H Issue were applied by CNAF to increase the statutory surplus of CNAF’s principal insurance subsidiary, CCC.
The Series H Issue accrues cumulative dividends at an initial rate of 8% per year, compounded annually. It will be adjusted quarterly to a rate equal to 400 basis points above the ten-year U.S. Treasury rate beginning with the quarterly dividend after the first triggering event to occur of either (i) an increase by two intermediate rating levels of the financial strength rating of CCC from its rating at the time of issuance by any of A.M. Best Company, Standard & Poor’s or Moody’s Investor Services or (ii) one year following an increase by one intermediate rating level of the financial strength rating of CCC by any one of those rating agencies. Accrued but unpaid cumulative dividends cannot be paid on the Series H Issue unless and until one of the two triggering events described above has occurred. Beginning with the quarter following an increase of one intermediate rating level in CCC’s financial strength rating, however, current (but not accrued cumulative) quarterly dividends can be paid. As of February 21, 2005, there has not been any change to CCC’s financial strength rating from its rating at the time of issuance. As of December 31, 2004, the Company has $127 million of undeclared (and therefore unrecorded) accumulated dividends.
The Series H Issue is senior to CNAF’s common stock as to the payment of dividends and amounts payable upon any liquidation, dissolution or winding up. No dividends may be declared on CNAF’s common stock until all cumulative dividends on the Series H Issue have been paid. CNAF may not issue any equity securities ranking senior to or on par with the Series H Issue without the consent of a majority of its stockholders. The Series H Issue is non-voting and is not convertible into any other securities of CNAF. It may be redeemed only upon the mutual agreement of CNAF and a majority of the stockholders of the preferred stock. The issuance of the Series H Issue was exempt from registration under Section 4(2) of the Securities Act of 1933.
12
The table below shows the high and low closing sales prices for CNAF’sour common stock based on the New York Stock Exchange Composite Transactions.
| 2004 | 2003 | 2006 | 2005 | |||||||||||||||||||||||||||||
| High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||||
| Quarter: | ||||||||||||||||||||||||||||||||
| Fourth | $27.06 | $22.17 | $24.50 | $18.57 | $ | 40.32 | $ | 36.19 | $ | 34.91 | $ | 28.52 | ||||||||||||||||||||
| Third | 29.54 | 23.98 | 25.65 | 20.87 | 36.04 | 33.05 | 30.46 | 28.40 | ||||||||||||||||||||||||
| Second | 30.49 | 26.32 | 26.50 | 22.26 | 33.20 | 30.90 | 28.90 | 26.21 | ||||||||||||||||||||||||
| First | 28.65 | 24.52 | 27.35 | 21.21 | 33.60 | 29.88 | 29.79 | 25.84 | ||||||||||||||||||||||||
Additional information on CNAF’stotal return of our common stock, repurchases is includedthe Standard & Poor’s 500 Composite Stock Index (“S&P 500”) and the Standard & Poor’s 500 Property & Casualty Insurance Index for the five years ended December 31, 2006. The graph assumes that the value of the investment in Note L to the Consolidated Financial Statements included under Item 8.
| Company Index | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||||
| CNA Financial Corp. | 100 | 87.76 | 82.62 | 91.70 | 112.20 | 138.22 | ||||||||||||||||||
| S&P 500 Index | 100 | 77.90 | 100.25 | 111.15 | 116.61 | 135.03 | ||||||||||||||||||
| S&P Property & Casualty Insurance | 100 | 88.98 | 112.48 | 124.20 | 142.97 | 161.38 | ||||||||||||||||||
1316
The table should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data of this Form 10-K.
| As of and for the Years Ended December 31 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||||||
| As of and for the Years Ended | ||||||||||||||||||||||||||||||||||||||||
| December 31 | ||||||||||||||||||||||||||||||||||||||||
| (In millions, except per share data and ratios) | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||||||
Results of Operations: | ||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 9,930 | $ | 11,716 | $ | 12,286 | $ | 13,089 | $ | 15,408 | $ | 10,376 | $ | 9,862 | $ | 9,924 | $ | 11,715 | $ | 12,293 | ||||||||||||||||||||
| Income (loss) from continuing operations | $ | 441 | $ | (1,433 | ) | $ | 247 | $ | (1,592 | ) | $ | 1,177 | $ | 1,137 | $ | 243 | $ | 446 | $ | (1,419 | ) | $ | 263 | |||||||||||||||||
| Income (loss) from discontinued operations, net of tax | – | – | (35 | ) | 11 | 5 | (29 | ) | 21 | (21 | ) | 2 | (43 | ) | ||||||||||||||||||||||||||
| Cumulative effects of changes in accounting principles, net of tax | – | – | (57 | ) | (61 | ) | – | — | — | — | — | (57 | ) | |||||||||||||||||||||||||||
Net income (loss) | $ | 441 | $ | (1,433 | ) | $ | 155 | $ | (1,642 | ) | $ | 1,182 | $ | 1,108 | $ | 264 | $ | 425 | $ | (1,417 | ) | $ | 163 | |||||||||||||||||
Earnings (loss) per Share: | ||||||||||||||||||||||||||||||||||||||||
Basic Earnings (Loss) per Share: | ||||||||||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations | $ | 1.47 | $ | (6.58 | ) | $ | 1.10 | $ | (8.20 | ) | $ | 6.40 | $ | 4.17 | $ | 0.68 | $ | 1.49 | $ | (6.52 | ) | $ | 1.18 | |||||||||||||||||
| Income (loss) from discontinued operations, net of tax | – | – | (0.16 | ) | 0.06 | 0.03 | ||||||||||||||||||||||||||||||||||
| Cumulative effects of changes in accounting principles, net of tax | – | – | (0.26 | ) | (0.32 | ) | – | |||||||||||||||||||||||||||||||||
| Income (loss) from discontinued operations | (0.11 | ) | 0.08 | (0.09 | ) | 0.01 | (0.20 | ) | ||||||||||||||||||||||||||||||||
| Cumulative effects of changes in accounting principles | — | — | — | — | (0.26 | ) | ||||||||||||||||||||||||||||||||||
Earnings (loss) per share available to common stockholders | $ | 1.47 | $ | (6.58 | ) | $ | 0.68 | $ | (8.46 | ) | $ | 6.43 | ||||||||||||||||||||||||||||
Basic earnings (loss) per share available to common stockholders | $ | 4.06 | $ | 0.76 | $ | 1.40 | $ | (6.51 | ) | $ | 0.72 | |||||||||||||||||||||||||||||
Diluted Earnings (Loss) per Share: | ||||||||||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations | $ | 4.16 | $ | 0.68 | $ | 1.49 | $ | (6.52 | ) | $ | 1.18 | |||||||||||||||||||||||||||||
| Income (loss) from discontinued operations | (0.11 | ) | 0.08 | (0.09 | ) | 0.01 | (0.20 | ) | ||||||||||||||||||||||||||||||||
| Cumulative effects of changes in accounting principles | — | — | — | — | (0.26 | ) | ||||||||||||||||||||||||||||||||||
Diluted earnings (loss) per share available to common stockholders | $ | 4.05 | $ | 0.76 | $ | 1.40 | $ | (6.51 | ) | $ | 0.72 | |||||||||||||||||||||||||||||
Financial Condition: | ||||||||||||||||||||||||||||||||||||||||
| Total investments | $ | 39,231 | $ | 38,100 | $ | 35,293 | $ | 35,826 | $ | 36,059 | $ | 44,096 | $ | 39,695 | $ | 39,231 | $ | 38,100 | $ | 35,293 | ||||||||||||||||||||
| Total assets | 62,500 | 68,612 | 61,731 | 65,723 | 62,785 | 60,283 | 59,016 | 62,496 | 68,296 | 61,426 | ||||||||||||||||||||||||||||||
| Insurance reserves | 43,650 | 45,492 | 40,179 | 43,623 | 39,054 | 41,080 | 42,436 | 43,653 | 45,494 | 40,250 | ||||||||||||||||||||||||||||||
| Long and short term debt | 2,257 | 1,904 | 2,292 | 2,567 | 2,729 | 2,156 | 1,690 | 2,257 | 1,904 | 2,292 | ||||||||||||||||||||||||||||||
| Stockholders’ equity | 9,207 | 8,952 | 9,401 | 8,122 | 9,400 | 9,768 | 8,950 | 8,974 | 8,735 | 9,139 | ||||||||||||||||||||||||||||||
| Book value per share | $ | 32.55 | $ | 31.80 | $ | 38.68 | $ | 36.33 | $ | 51.29 | $ | 36.03 | $ | 31.26 | $ | 31.63 | $ | 30.95 | $ | 37.51 | ||||||||||||||||||||
Statutory Surplus: | ||||||||||||||||||||||||||||||||||||||||
Statutory Surplus (preliminary): | ||||||||||||||||||||||||||||||||||||||||
| Property and casualty companies (a) | $ | 6,998 | $ | 6,170 | $ | 6,836 | $ | 6,241 | $ | 8,373 | $ | 8,137 | $ | 6,940 | $ | 6,998 | $ | 6,170 | $ | 6,836 | ||||||||||||||||||||
| Life and group insurance company(ies) | 1,178 | 707 | 1,645 | 1,752 | 1,274 | 687 | 627 | 1,177 | 707 | 1,645 | ||||||||||||||||||||||||||||||
| (a) | Surplus includes the property and casualty companies’ equity ownership of the life and group company(ies)’ capital and surplus. |
1417
The following discussion highlights significant factors impacting the consolidated operations and financial condition of CNA Financial Corporation (CNAF) and its subsidiaries (collectively CNA or the Company). Based on 2003 statutory net written premiums, CNA is the fourteenth largest property and casualty company.
Loews Corporation (Loews) owned approximately 91% of the outstanding common stock and 100% of the preferred stock of CNAF as of December 31, 2004.
Data of this Form 10-K.
| Page No. | ||||
| Consolidated Operations | ||||
| 19 | ||||
| Critical Accounting Estimates | 22 | |||
| Reserves | 23 | |||
| Reinsurance | 29 | |||
| Terrorism Insurance | 30 | |||
| Restructuring | 30 | |||
| Segment Results | 30 | |||
| Standard Lines | 30 | |||
| Specialty Lines | 33 | |||
| Life and Group Non-Core | 36 | |||
| Corporate and Other Non-Core | 37 | |||
| Asbestos and Environmental Pollution and Mass Tort (APMT) Reserves | 39 | |||
| Investments | 45 | |||
| Net Investment Income | 45 | |||
| Net Realized Investment Gains (Losses) | 46 | |||
| Valuation and Impairment of Investments | 49 | |||
| Liquidity and Capital Resources | 53 | |||
| Cash Flows | ||||
| 53 | ||||
| Commitments, Contingencies, and Guarantees | 53 | |||
| 54 | ||||
| Regulatory Matters | ||||
| 54 | ||||
| Dividends from Subsidiaries | 55 | |||
| Loews | 55 | |||
| 55 | ||||
| Accounting Pronouncements | 56 | |||
| Forward-Looking Statements | 57 |
1518
| Years ended December 31 | ||||||||||||
| (In millions, except per share data) | 2006 | 2005 | 2004 | |||||||||
Revenues | ||||||||||||
| Net earned premiums | $ | 7,603 | $ | 7,569 | $ | 8,209 | ||||||
| Net investment income | 2,412 | 1,892 | 1,680 | |||||||||
| Other revenues | 275 | 411 | 283 | |||||||||
| Total operating revenues | 10,290 | 9,872 | 10,172 | |||||||||
Claims, Benefits and Expenses | ||||||||||||
| Net incurred claims and benefits | 6,025 | 6,975 | 6,434 | |||||||||
| Policyholders’ dividends | 22 | 24 | 11 | |||||||||
| Amortization of deferred acquisition costs | 1,534 | 1,543 | 1,680 | |||||||||
| Other insurance related expenses | 757 | 829 | 972 | |||||||||
| Restructuring and other related charges | (13 | ) | — | (3 | ) | |||||||
| Other expenses | 401 | 329 | 326 | |||||||||
| Total claims, benefits and expenses | 8,726 | 9,700 | 9,420 | |||||||||
| Operating income from continuing operations before income tax and minority interest | 1,564 | 172 | 752 | |||||||||
| Income tax (expense) benefit on operating income | (450 | ) | 105 | (126 | ) | |||||||
| Minority interest | (44 | ) | (24 | ) | (27 | ) | ||||||
| Net operating income from continuing operations | 1,070 | 253 | 599 | |||||||||
| Realized investment gains (losses), net of participating policyholders’ and minority interests | 86 | (10 | ) | (248 | ) | |||||||
| Income tax (expense) benefit on realized investment gains (losses) | (19 | ) | — | 95 | ||||||||
| Income from continuing operations | 1,137 | 243 | 446 | |||||||||
| Income (loss) from discontinued operations, net of income tax (expense) benefit of $7, $(2) and $(1) | (29 | ) | 21 | (21 | ) | |||||||
Net income | $ | 1,108 | $ | 264 | $ | 425 | ||||||
Basic Earnings per Share | ||||||||||||
| Income from continuing operations | $ | 4.17 | $ | 0.68 | $ | 1.49 | ||||||
| Income (loss) from discontinued operations | (0.11 | ) | 0.08 | (0.09 | ) | |||||||
| Basic earnings per share available to common stockholders | $ | 4.06 | $ | 0.76 | $ | 1.40 | ||||||
Diluted Earnings per Share | ||||||||||||
| Income from continuing operations | $ | 4.16 | $ | 0.68 | $ | 1.49 | ||||||
| Income (loss) from discontinued operations | (0.11 | ) | 0.08 | (0.09 | ) | |||||||
| Diluted earnings per share available to common stockholders | $ | 4.05 | $ | 0.76 | $ | 1.40 | ||||||
Weighted Average Outstanding Common Stock and Common Stock Equivalents | ||||||||||||
| Basic | 262.1 | 256.0 | 256.0 | |||||||||
| Diluted | 262.3 | 256.0 | 256.0 | |||||||||
Consolidated Operations
| Years ended December 31 | 2004 | 2003 | 2002 | |||||||||
| (In millions, except per share data) | ||||||||||||
Revenues | ||||||||||||
| Net earned premiums | $ | 8,209 | $ | 9,214 | $ | 10,213 | ||||||
| Net investment income | 1,674 | 1,647 | 1,730 | |||||||||
| Realized investment gains (losses), net of participating policyholders’ and minority interests | (248 | ) | 460 | (252 | ) | |||||||
| Other revenues | 295 | 395 | 595 | |||||||||
| Total revenues | 9,930 | 11,716 | 12,286 | |||||||||
Claims, benefits and expenses | ||||||||||||
| Insurance claims and policyholders’ benefits | 6,446 | 10,287 | 8,420 | |||||||||
| Amortization of deferred acquisition costs | 1,680 | 1,965 | 1,791 | |||||||||
| Other operating expenses | 1,183 | 1,686 | 1,621 | |||||||||
| Restructuring and other related charges | – | – | (37 | ) | ||||||||
| Interest | 124 | 130 | 150 | |||||||||
| Total claims, benefits and expenses | 9,433 | 14,068 | 11,945 | |||||||||
| Income (loss) from continuing operations before income tax and minority interest | 497 | (2,352 | ) | 341 | ||||||||
| Income tax (expense) benefit | (29 | ) | 913 | (68 | ) | |||||||
| Minority interest | (27 | ) | 6 | (26 | ) | |||||||
| Income (loss) from continuing operations | 441 | (1,433 | ) | 247 | ||||||||
| Loss from discontinued operations, net of tax of $9 | – | – | (35 | ) | ||||||||
| Income (loss) before cumulative effects of changes in accounting principle | 441 | (1,433 | ) | 212 | ||||||||
| Cumulative effect of change in accounting principles, net of tax of $7 | – | – | (57 | ) | ||||||||
Net income (loss) | $ | 441 | $ | (1,433 | ) | $ | 155 | |||||
Basic and diluted earnings (loss) per share: | ||||||||||||
| Income (loss) from continuing operations | $ | 1.47 | $ | (6.58 | ) | $ | 1.10 | |||||
| Income (loss) from discontinued operations, net of tax | – | – | (0.16 | ) | ||||||||
| Income (loss) before cumulative effect of change in accounting principles | 1.47 | (6.58 | ) | 0.94 | ||||||||
| Cumulative effect of change in accounting principle, net of tax | – | – | (0.26 | ) | ||||||||
Basic and diluted earnings (loss) per share available to common stockholders | $ | 1.47 | $ | (6.58 | ) | $ | 0.68 | |||||
Weighted average outstanding common stock and common stock equivalents | 256.0 | 227.0 | 223.6 | |||||||||
2004 Compared with 2003
Net results increased $1,874 million in 2004 as compared with 2003. This improvement in net results was due principally to decreased net unfavorable prior year development of $1,838 million after-tax ($2,827 million pretax), $356 million after-tax ($547 million pretax) decrease in the bad debt provisions for insurance and reinsurance receivables, $66 million after-tax ($101 million pretax) decrease in interest expenses related to additional cessions to corporate aggregate reinsurance treaties and $59 million after-tax ($90 million pretax) decrease in certain insurance related assessments. These favorable impacts to net income in 2004 were partially offset by increased catastrophe losses and decreased net realized investment results. The impact of catastrophes was $196 million after-tax ($301
1619
20
Unfavorable net prior year development of $125 million, including $241 million of unfavorable claim and claim adjustment expense reserve development and $116 million of favorable premium development, was recorded in 2004. Unfavorable net prior year development of $2,952 million, including $2,409 million of unfavorable claim and claim adjustment expense reserve development and $543 million of unfavorable premium development, was recorded in 2003.
company.
2003 Compared with 2002
Net results decreased $1,588 million in 2003 as compared with 2002. The decline in net results was due primarily to increased unfavorable net prior year development of $1,837 million after-tax ($2,826 million pretax), a $55 million after-tax ($84 million pretax) increase in catastrophe losses, a $65 million after-tax ($100 million pretax) increase in unallocated loss adjustment expense (ULAE) reserves and a $27 million after-tax ($42 million pretax) increase in dividend development. In addition, net results in 2003 included a $396 million after-tax ($610 million pretax) increasemore detail in the bad debt provision for insurance and reinsurance receivables, a $69 million after-tax ($104 million pretax) increase in insurance related assessments and increased interest expense of $90 million after-tax ($137 million pretax) related to additional cessions to the corporate aggregate and other reinsurance treaties. These items were partially offset by a $434 million after-tax ($712 million pretax) increase in net realized investment results and increased limited partnership income of $165 million after-tax ($254 million pretax). Net income in 2002 also included a $35 million after-tax ($44 million pretax) loss from discontinued operations and a $57 million after-tax ($64 million pretax) charge for the cumulative effect of a change in accounting principle.
Unfavorable net prior year development of $2,952 million, including $2,409 million of unfavorable claim and claim adjustment expense reserve development and $543 million of unfavorable premium development, was recorded in 2003. Unfavorable net prior year development of $126 million, including $35 million of unfavorable claim and claim adjustment expense reserve development and $91 million of unfavorable premium development, was recorded in 2002.
Net realized investment results increased $434 million after-tax in 2003 as compared with 2002. This change was due primarily to $209 million after-tax ($321 million pretax) of impairment losses for other-than-temporary declines in market values for fixed maturity and equity securities recorded in 2003 as compared to $578 million after-tax ($890 million pretax) recorded in 2002. Also contributing to this increase were improved realized results related to fixed maturity and derivative securities in 2003. These increases were partially offset by the $130 million after-tax ($176 million pretax) recorded loss on the salesegment discussions below. The remainder of the Group Benefits business. See the Investments section of this MD&A for further details.
17
The loss from discontinued operations of $35 million after-tax in 2002 related to the results of CNA Vida, CNA’s Chilean-based life insurer, which was sold during 2002.
The cumulative effect of a change in accounting principle in 2002 related to the adoption of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets (SFAS 142). During 2002, the Company completed its initial goodwill impairment testing and recorded a $57 million after-tax ($64 million pretax) impairment charge. The impairment charge consisted of a $43 million after-tax ($43 million pretax) charge in Standard Lines, a $5 million after-tax ($8 million pretax) charge in Specialty Lines, an $8 million after-tax ($12 million pretax) charge in Life and Group Non-Core, and a $1 million after-tax ($1 million pretax) charge in Corporate and Other Non-Core.
Net earned premiums decreased $999 million in 2003 as compared with the same period in 2002. The decrease in net earned premiums was primarily due primarily to the July 1, 2002 transfer of the National Postal Mail Handlers Union group benefits plan (the Mail Handlers Plan) to First Health Corporation. Net earned premiums for the Mail Handlers Plan were $1,151 million in 2002. Net earned premium was also impacted by increased ceded premiums to corporate aggregate and other reinsurance treaties resulting from unfavorable net prior year development recorded in 2003. Partially offsetting these adverse premium items were rate increases, increased retention and new business, primarily in Standard Lines and Specialty Lines.
Net Prior Year Development
The results of operations for the years ended December 31, 2004, 2003 and 2002 were impacted by net prior year development recorded for the property and casualty and the Corporate and Other Non-Core segments. Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals for prior accident years are defined as net prior year development within this MD&A. These changes can be favorable or unfavorable. The development discussed below is the amount prior to consideration of any related reinsurance allowance impacts.
The following tables summarize pretax net prior year development by segment for the property and casualty segments and the Corporate and Other Non-Core segment for the years ended December 31, 2004, 2003 and 2002.
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The following table summarizes the pretax 2004 net prior year development by segment.
2004 Net Prior Year Development
| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| Lines | Lines | Non-Core | Total | |||||||||||||
| (In millions) | ||||||||||||||||
| Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of corporate aggregate reinsurance treaties: | ||||||||||||||||
| Property and casualty, excluding APMT | $ | 105 | $ | 75 | $ | 23 | $ | 203 | ||||||||
| APMT | – | – | 55 | 55 | ||||||||||||
| Total | 105 | 75 | 78 | 258 | ||||||||||||
| Ceded losses related to corporate aggregate reinsurance treaties | 8 | (17 | ) | 9 | – | |||||||||||
| Pretax unfavorable net prior year development before impact of premium development | 113 | 58 | 87 | 258 | ||||||||||||
| Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties | (96 | ) | (33 | ) | 12 | (117 | ) | |||||||||
| Ceded premiums related to corporate aggregate reinsurance treaties | (1 | ) | 5 | (3 | ) | 1 | ||||||||||
| Pretax unfavorable (favorable) premium development | (97 | ) | (28 | ) | 9 | (116 | ) | |||||||||
Total 2004 unfavorable net prior year development (pretax) | $ | 16 | $ | 30 | $ | 96 | $ | 142 | ||||||||
Total 2004 unfavorable net prior year development (after-tax) | $ | 10 | $ | 20 | $ | 62 | $ | 92 | ||||||||
The following table summarizes the pretax 2003 net prior year development by segment.
2003 Net Prior Year Development
| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| Lines | Lines | Non-Core | Total | |||||||||||||
| (In millions) | ||||||||||||||||
| Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of corporate aggregate reinsurance treaties: | ||||||||||||||||
| Property and casualty, excluding APMT | $ | 1,424 | $ | 313 | $ | 355 | $ | 2,092 | ||||||||
| APMT | – | – | 795 | 795 | ||||||||||||
| Total | 1,424 | 313 | 1,150 | 2,887 | ||||||||||||
| Ceded losses related to corporate aggregate reinsurance treaties | (485 | ) | (56 | ) | (102 | ) | (643 | ) | ||||||||
| Pretax unfavorable net prior year development before impact of premium development | 939 | 257 | 1,048 | 2,244 | ||||||||||||
| Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties | 211 | 6 | (32 | ) | 185 | |||||||||||
| Ceded premiums related to corporate aggregate reinsurance treaties | 269 | 31 | 58 | 358 | ||||||||||||
| Pretax unfavorable premium development | 480 | 37 | 26 | 543 | ||||||||||||
Total 2003 unfavorable net prior year development (pretax) | $ | 1,419 | $ | 294 | $ | 1,074 | $ | 2,787 | ||||||||
Total 2003 unfavorable net prior year development (after-tax) | $ | 922 | $ | 191 | $ | 698 | $ | 1,811 | ||||||||
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The following table summarizes the pretax 2002 net prior year development by segment.
2002 Net Prior Year Development
| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| Lines | Lines | Non-Core | Total | |||||||||||||
| (In millions) | ||||||||||||||||
| Pretax unfavorable (favorable) net prior year claim and allocated claim adjustment expense development excluding the impact of corporate aggregate reinsurance treaties: | ||||||||||||||||
| Property and casualty, excluding APMT | $ | (191 | ) | $ | 55 | $ | 248 | $ | 112 | |||||||
| APMT | – | – | – | – | ||||||||||||
| Total | (191 | ) | 55 | 248 | 112 | |||||||||||
| Ceded losses related to corporate aggregate reinsurance treaties | (14 | ) | (41 | ) | (93 | ) | (148 | ) | ||||||||
| Pretax unfavorable (favorable) net prior year development before impact of premium development | (205 | ) | 14 | 155 | (36 | ) | ||||||||||
| Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties | 76 | 17 | (103 | ) | (10 | ) | ||||||||||
| Ceded premiums related to corporate aggregate reinsurance treaties | 10 | 29 | 62 | 101 | ||||||||||||
| Pretax unfavorable (favorable) premium development | 86 | 46 | (41 | ) | 91 | |||||||||||
Total 2002 unfavorable (favorable) net prior year development (pretax) | $ | (119 | ) | $ | 60 | $ | 114 | $ | 55 | |||||||
Total 2002 unfavorable (favorable) net prior year development (after-tax) | $ | (77 | ) | $ | 39 | $ | 74 | $ | 36 | |||||||
Strategic Review
During 2003, CNA completed a strategic review of its operations and decided to concentrate efforts on its property and casualty business. As a result of this review and several significant charges in 2003, a capital plan was developed to replenish statutory capital of the property and casualty subsidiaries. A summary of the capital plan, related actions and other significant business decisions is discussed below:
Sale of Individual Life Business –On April 30, 2004, CNA sold its individual life insurance business. The business sold included term, universal and permanent life insurance policies and individual annuity products. CNA’s individual long term care and structured settlement businesses were excluded from the sale. Consideration from the sale was approximately $700 million. CNA recorded a realized investment loss of $389 million after-tax ($622 million pretax) in 2004. See Note P to the Consolidated Financial Statements in Item 8 for further information.
Sale of Group Benefits Business –On December 31, 2003, CNA sold the majority of its group benefits business. The business sold included group life and accident, short and long term disability and certain other products. CNA’s group long term care and specialty medical businesses were excluded from the sale. Consideration from the sale was approximately $530 million, resulting in realized investment loss on the sale of $122 after-tax ($163 million pretax), including an after-tax realized investment gain of $8 million ($13 million pretax) recorded in the second quarter of 2004. See Note P to the Consolidated Financial Statements included under Item 8 for further information.
Exit from Reinsurance Business –During 2003, the Company sold the renewal rights for most of the treaty business of CNA Re and withdrew from the assumed reinsurance business. CNA is managing the run-off of its retained liabilities.
Expense Initiatives –During 2003, the Company undertook an expense initiative, of which the primary components were a reduction of the workforce by approximately five percent, lower commissions and other acquisition costs, principally related to workers compensation, and reduced spending in other areas. The Company achieved the
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targeted workforce reduction in 2003. Actions related to reducing commissions and other acquisition expenses began in 2003 and were completed in 2004.
During 2004, the Company undertook additional expense initiatives that produced expense savings of approximately $100 million. The primary components of the expense initiatives were a reduction in certain business expenses through more stringent expense policies and guidelines, reduced facilities cost through consolidation of locations and, to a lesser extent, workforce reductions. The Company is currently formulating plans to reach its goal of an additional $100 million of expense reductions in 2005.
Capital Plan –In November of 2003, the Company established a capital plan to replenish statutory capital impacted by the strategic review and charges for prior year development and related matters. Under the capital plan, in November of 2003, CNAF sold to Loews $750 million of a new series of convertible preferred stock which converted into 32,327,015 shares of CNAF common stock on April 20, 2004, and received commitments from Loews for additional capital support of up to $650 million through the purchase of surplus notes of Continental Casualty Company (CCC), CNA’s principal insurance subsidiary, in the event certain additions to CCC’s statutory capital were not achieved through asset sales. As a result of this commitment, Loews purchased $300 million principal amount of surplus notes in February of 2004 in relation to CNA’s sale of the individual life business and $46 million principal amount of surplus notes in February ofon April 30, 2004, in relation to the sale of the group benefits business. The $300 million surplus note was repaid in June of 2004, and the $46 million surplus note was repaid in December of 2004, thereby fulfilling all of the commitments under the capital plan.
Revised Business Segment Reporting –As a result of the strategic review and other actions described above, in 2004 CNA changed how it manages its core operations and makes business decisions. Accordingly, the Company revised its reportable business segment structure to reflect these changes. CNA’s core operations, property and casualty operations, are now reported in two business segments: Standard Lines and Specialty Lines. CNA’s non-core operations are managed in two segments: Life and Group Non-Core and Corporate and Other Non-Core. Prior period segment disclosures have been conformed to the current year presentation.
Standard Lines includes standard property and casualty coverages, excess and surplus lines and insurance and risk management products. CNA Global (formerly included in Specialty Lines), which consists of marine and global standard lines, is also included in Standard Lines.
Specialty Lines includes professional financial and specialty property and casualty products and services.
Life and Group Non-Core includes the results of Life Operations and Group Operations (formerly separate reportable segments), which primarily have been sold or placed in run-off, and certain run-off life and group operations formerly included in the Corporate and Other segment.
Corporate and Other Non-Core includes the results of several property and casualty and other lines of business placed in run-off, includingas well as decreased premiums from CNA Re (formerlywhich exited the reinsurance market in 2003.
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Consolidated Net Income (Loss)
| Life and | Corporate | |||||||||||||||||||
| Group Non- | and Other | |||||||||||||||||||
| Standard Lines | Specialty Lines | Core | Non-Core (b) | Total | ||||||||||||||||
Year ended December 31, 2004 | ||||||||||||||||||||
| Net results of businesses retained | $ | 360 | $ | 378 | $ | 13 | $ | 117 | $ | 868 | ||||||||||
| Net results of businesses sold (a) | – | – | (427 | ) | – | (427 | ) | |||||||||||||
Total consolidated net income (loss) for the year ended December 31, 2004 | $ | 360 | $ | 378 | $ | (414 | ) | $ | 117 | $ | 441 | |||||||||
Year ended December 31, 2003 | ||||||||||||||||||||
| Net results of businesses retained | $ | (717 | ) | $ | 40 | $ | 41 | $ | (761 | ) | $ | (1,397 | ) | |||||||
| Net results of businesses sold (a) | – | – | (36 | ) | – | (36 | ) | |||||||||||||
Total consolidated net income (loss) for the year ended December 31, 2003 | $ | (717 | ) | $ | 40 | $ | 5 | $ | (761 | ) | $ | (1,433 | ) | |||||||
Year ended December 31, 2002 | ||||||||||||||||||||
| Net results of businesses retained | $ | 47 | $ | 60 | $ | (42 | ) | $ | – | $ | 65 | |||||||||
| Net results of businesses sold (a) | – | – | 90 | – | 90 | |||||||||||||||
Total consolidated net income (loss) for the year ended December 31, 2002 | $ | 47 | $ | 60 | $ | 48 | $ | – | $ | 155 | ||||||||||
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Net Earned Premiums
| Life and | Corporate | |||||||||||||||||||
| Group Non- | and Other | |||||||||||||||||||
| Standard Lines | Specialty Lines | Core | Non-Core (b) | Total | ||||||||||||||||
Year ended December 31, 2004 | ||||||||||||||||||||
| Net earned premiums of businesses retained | $ | 4,917 | $ | 2,277 | $ | 806 | $ | 94 | $ | 8,094 | ||||||||||
| Net earned premiums of businesses sold (a) | – | – | 115 | – | 115 | |||||||||||||||
Total net earned premiums for the year ended December 31, 2004 | $ | 4,917 | $ | 2,277 | $ | 921 | $ | 94 | $ | 8,209 | ||||||||||
Year ended December 31, 2003 | ||||||||||||||||||||
| Net earned premiums of businesses retained | $ | 4,530 | $ | 1,840 | $ | 917 | $ | 468 | $ | 7,755 | ||||||||||
| Net earned premiums of businesses sold (a) | – | – | 1,459 | – | 1,459 | |||||||||||||||
Total net earned premiums for the year ended December 31, 2003 | $ | 4,530 | $ | 1,840 | $ | 2,376 | $ | 468 | $ | 9,214 | ||||||||||
Year ended December 31, 2002 | ||||||||||||||||||||
| Net earned premiums of businesses retained | $ | 4,678 | $ | 1,451 | $ | 2,027 | $ | 676 | $ | 8,832 | ||||||||||
| Net earned premiums of businesses sold (a) | – | – | 1,381 | – | 1,381 | |||||||||||||||
Total net earned premiums for the year ended December 31, 2002 | $ | 4,678 | $ | 1,451 | $ | 3,408 | $ | 676 | $ | 10,213 | ||||||||||
Reclassification of Change in Allowance for Uncollectible Reinsurance –In 2004, the expenses incurred related to uncollectible reinsurance receivables were reclassified from “Other operating expenses” to “Insurance claims and policyholders’ benefits” on the Consolidated Statements of Operations. Prior period amounts and ratios have been reclassified to conform to the current year presentation. This reclassification had no impact on net income (loss) or the combined ratios in any period; however, this change generally had an unfavorable impact on the loss and loss adjustment expense ratios and a favorable impact on the expense ratios.
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Critical Accounting Estimates
CNA’s
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The Company’s
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The Company continues to monitor potential changes in authoritative guidance related to recognizing other-than-temporary impairments. Any such changes may cause the Company to recognize impairment losses in results of operations which would not be recognized under the current guidance, or to recognize such losses in earlier periods, especially those due to increases in interest rates. Such changes could also impact the recognition of investment income on impaired securities. While the impact of changes in authoritative guidance could increase earnings volatility in future periods, because fluctuations in the fair value of securities are already reflected in shareholders’ equity, any changes would not be expected to have a significant impact on equity. Further information on the Company’sour process for evaluating impairments is providedincluded in Note B of the Investments section below.
Consolidated Financial Statements included under Item 8.
The Company’s reserves
assumptions, the deferred acquisition costs may not be fully recovered and the reserves may not be adequate, requiring us to add to reserves, or take unfavorable development. Therefore, our financial results could be adversely impacted.
The Company is required to
The Company is
CNA Surety has provided significant surety bond protection for a large national contractor that undertakes projects for the construction of government and private facilities, a substantial portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has provided loans to the contractor through a credit facility. In December of 2004, the credit facility was amended to increase the maximum available loans to $106 million from $86 million. The amendment also provides that CNAF may in its sole discretion further increase the amounts available for loans under the credit facility, up to an aggregate maximum of $126 million. As of December 31, 2004 and 2003, there were $99 million and $80 million of total debt outstanding under the credit facility. Additional loans in January and February of 2005 brought the total debt outstanding under the credit facility, less accrued interest, to $104 million as of February 24, 2005. Loews, through a participation agreement with CNAF, provided funds for and owned a participation of $29 million and $25 million of the loans outstanding as of December 31, 2004 and 2003, and has agreed to participation of one-third of any additional loans which may be made above the original $86 million credit facility limit up to the $126 million maximum available line.
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In connection with the amendment to increase the maximum available line under the credit facility in December of 2004, the term of the loan under the credit facility was extended to mature in March of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum, effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the facility are at or below the original $86 million limit. Loans under the credit facility are secured by a pledge of substantially all of the assets of the contractor and certain of its affiliates. In connection with the credit facility, CNAF has also guaranteed or provided collateral for letters of credit which are charged against the maximum available line and, if drawn upon, would be treated as loans under the credit facility. As of December 31, 2004 and 2003, these guarantees and collateral obligations aggregated $13 million and $7 million.
As of December 31, 2004, the aggregate amount of outstanding principal and accrued interest under the credit facility was $70 million, net of participation by Loews in the amount of $29 million.
The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and appointed a chief restructuring officer to manage execution of the plan. In the course of addressing various expense, operational and strategic issues, however, the contractor has decided to substantially reduce the scope of its original business and to concentrate on those segments determined to be potentially profitable. As a consequence, operating cash flow, and in turn the capacity to service debt, has been reduced below previous levels. Restructuring plans have also been extended to accommodate these circumstances. In light of these developments, CNA has taken an impairment charge of $56 million pretax ($36 million after-tax) for the fourth quarter of 2004, net of the participation by Loews, with respect to amounts loaned under the facility. Any draws under the credit facility beyond $106 million or further changes in the national contractor’s business plan or projections may necessitate further impairment charges. Indemnification and subrogation rights, including rights to contract proceeds on construction projects in the event of default, exist that reduce CNA Surety’s and ultimately the Company’s exposure to loss. While CNAF believes that the contractor’s restructuring efforts may be successful and provide sufficient cash flow for its operations, the contractor’s failure to achieve its restructuring plan or perform its contractual obligations under the credit facility or under the Company’s surety bonds could have a material adverse effect on the Company’s results of operations and/or equity. If such failures occur, the Company estimates the surety loss, net of indemnification and subrogation recoveries, but before the effects of minority interest, to be approximately $200 million pretax. In addition, such failures could cause the remaining unimpaired amount due under the credit facility to be uncollectible.
Further information on the Company’s exposure to this national contractor and this credit agreement are provided in Note S of the Consolidated Financial Statements included under Item 8 and the Liquidity and Capital Resources section below.
Reserves –- - Estimates and Uncertainties
The Company maintains
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Among the many uncertain future events about which the Company makes assumptions and estimates, many of which have become increasingly unpredictable, are claims severity, frequency of claims, mortality, morbidity, expected interest rates, inflation, claims handling and case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time it is ultimately settled, referred to in the insurance industry as the “tail.” These factors must be individually considered in relation to the Company’s evaluation of each type of business. Many of these uncertainties are not precisely quantifiable, particularly on a prospective basis, and require significant management judgment.
Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, the Company regularly reviews the adequacy of its reserves and reassesses its reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods.
In addition, the Company is subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social and other environmental conditions change. These issues have had, and may continue to have, a negative effect on the Company’s business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Recent examples of emerging or potential claims and coverage issues include:
The impact of these and other unforeseen emerging or potential claims and coverage issues is difficult to predict and could materially adversely affect the adequacy of the Company’s claim and claim adjustment expense reserves and could lead to future reserve additions. See the Segment Results sections of this MD&A for a discussion of changes in reserve estimates and the impact on the Company’s results of operations.
The Company’sOur experience has been that establishing reserves for casualty coverages relating to APMTasbestos, environmental pollution and mass tort (APMT) claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others:
| • | coverage issues, including whether certain costs are covered under the policies and whether policy limits apply; | |||
| • | inconsistent court decisions and developing legal theories; | |||
| • | ||||
| • | the risks and lack of predictability inherent in major litigation; | |||
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| • | changes in the volume of | |||
| • | ||||
| the impact of the exhaustion of primary limits and the resulting increase in claims on any umbrella or excess policies | ||||
| • | the number and outcome of direct actions against | |||
| • | ||||
Due to the factors described above, among others, establishing reserves for APMT claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims.
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| • | increases in the number and size of claims relating to injuries from medical products; | |
| • | the effects of accounting and financial reporting scandals and other major corporate governance failures, which have resulted in an increase in the number and size of claims, including director and officer and errors and omissions insurance claims; | |
| • | class action litigation relating to claims handling and other practices; | |
| • | construction defect claims, including claims for a broad range of additional insured endorsements on policies; | |
| • | clergy abuse claims, including passage of legislation to reopen or extend various statutes of limitations; and | |
| • | mass tort claims, including bodily injury claims related to silica, welding rods, benzene, lead and various other chemical exposure claims. |
| • | Paid Development, | |
| • | Incurred Development, |
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| • | Loss Ratio, | |
| • | Bornhuetter-Ferguson Using Premiums and Paid Loss, | |
| • | Bornhuetter-Ferguson Using Premiums and Incurred Loss, and | |
| • | Average Loss. |
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For Standard Lines, the December 31, 2004 carried net claim and claim adjustment expense reserve isloss reserve.
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actuarial estimates for APMT exposures reflect current knowledge, management feelswe feel it is prudent, based on the history of developments in this area, to reflect some volatilitymargin in the carried reserve until the ultimate outcome of the issues associated with these exposures is clearer.
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&A for further information regarding our financial strength and debt ratings.
Estimated Volatility in Gross Carried Loss Reserves by Segment
| Gross | ||||||||
| Carried | Estimated | |||||||
| Loss | Volatility in | |||||||
| December 31, 2004 | Reserves | Reserves | ||||||
| (In millions) | ||||||||
| Standard Lines | $ | 14,302 | +/- 7 | % | ||||
| Specialty Lines | 4,860 | +/- 7 | % | |||||
| Corporate and Other Non-Core | 8,678 | +/- 25 | % | |||||
The estimated volatility noted above doesaggregation of losses from multiple catastrophic events. We did not representpurchase an actuarial range around the Company’s gross loss reserves, and it does not represent the range of all possible outcomes. The volatility represents an estimate of the inherent volatility associated with estimating loss reservesaggregate property catastrophe treaty for the specific type of business written by each segment, and along with the associated reserve balances, allows for the quantification of potential earnings impacts in future reporting periods. The primary characteristics influencing the estimated level of volatility are the length of the claim settlement period, the potential for changes in medical and other claim costs, changes in the level of litigation or other dispute resolution processes, changes in the legal environment and the potential for different types of injuries emerging. Ceded reinsurance arrangements may reduce the volatility. Since ceded reinsurance arrangements vary by year, volatility in gross reserves may not result in comparable impacts to net income or shareholders’ equity.
Reinsurance
CNA assumes and cedes reinsurance to other insurers, reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk, minimize exposures on larger risks and to exit certain lines of business. The ceding of insurance does not discharge the primary liability of the Company. Therefore, a credit exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet the obligations or to the extent that the reinsurer disputes the liabilities assumed under reinsurance agreements.
Property and casualty reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA’s retained amount varies by type of coverage. Treaty reinsurance is purchased to protect specific lines of business such as property, worker’s compensation and professional liability. Corporate catastrophe reinsurance is also purchased for property and worker’s compensation exposure. Most treaty reinsurance is purchased on an excess of loss basis. CNA also utilizes facultative reinsurance in certain lines.
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The Company’s overall reinsurance program includes certain property and casualty contracts, such as the corporate aggregate reinsurance treaties discussed in more detail later in this section, that are entered into and accounted for on a “funds withheld” basis. Under the funds withheld basis, the Company records the cash remitted to the reinsurer for the reinsurer’s margin, or cost of the reinsurance contract, as ceded premiums. The remainder of the premiums ceded under the reinsurance contract not remitted in cash is recorded as funds withheld liabilities. The Company is required to increase the funds withheld balance at stated interest crediting rates applied to the funds withheld balance or as otherwise specified under the terms of the contract. The funds withheld liability is reduced by any cumulative claim payments made by the Company in excess of the Company’s retention under the reinsurance contract. If the funds withheld liability is exhausted, interest crediting will cease and additional claim payments are recoverable from the reinsurer. The funds withheld liability is recorded in reinsurance balances payable in the Consolidated Balance Sheets.
Interest cost on funds withheld and other deposits is credited during all periods in which a funds withheld liability exists. Pretax interest cost, which is included in net investment income, was $267 million, $344 million and $239 million in 2004, 2003 and 2002. The amount subject to interest crediting rates on such contracts was $2,570 million and $2,789 million at December 31, 2004 and 2003. Certain funds withheld reinsurance contracts, including the corporate aggregate reinsurance treaties, require interest on additional premiums arising from ceded losses as if those premiums were payable at the inception of the contract. Additionally, on the corporate aggregate reinsurance treaties discussed below, if the Company exceeds certain aggregate loss ratio thresholds, the rate at which interest charges are accrued would increase and be retroactively applied to the inception of the contract or to a specified date. Any such retroactive interest is accrued in the period the additional premiums arise or the loss ratio thresholds are met. The amount of retroactive interest, included in the totals above, was $46 million, $147 million and $10 million in 2004, 2003 and 2002.
The amount subject to interest crediting on these funds withheld contracts will vary over time based on a number of factors, including the timing of loss payments and ultimate gross losses incurred. The Company expects that it will continue to incur significant interest costs on these contracts for several years.
The following table summarizes the amounts receivable from reinsurers at December 31, 2004 and December 31, 2003.
Components of reinsurance receivables
| December 31, 2004 | December 31, 2003 | |||||||
| (In millions) | ||||||||
| Reinsurance receivables related to insurance reserves: | ||||||||
| Ceded claim and claim adjustment expense | $ | 13,984 | $ | 14,216 | ||||
| Ceded future policy benefits | 1,260 | 1,218 | ||||||
| Ceded policyholders’ funds | 65 | 7 | ||||||
| Billed reinsurance receivables | 685 | 813 | ||||||
Reinsurance receivables | 15,994 | 16,254 | ||||||
| Allowance for uncollectible reinsurance | (531 | ) | (573 | ) | ||||
Reinsurance receivables, net of allowance for uncollectible reinsurance | $ | 15,463 | $ | 15,681 | ||||
The Company has established an allowance for uncollectible reinsurance receivables. The allowance for uncollectible reinsurance receivables was $531 million and $573 million at December 31, 2004 and December 31, 2003. The net decrease in the allowance was primarily due to a release of a previously established allowance related to The Trenwick Group resulting from the execution of commutation agreements in 2004, partially offset by a net increase in the allowance for other reinsurance receivables. The provision incurred related to uncollectible reinsurance receivables is presented as a component of “Insurance claims and policyholders’ benefits” on the Consolidated Statements of Operations.
Prior to the April of 2004 sale of its individual life and annuity business to Swiss Re Life & Health America Inc. (Swiss Re), CNA had reinsured a portion of this business through coinsurance, yearly renewable term and facultative programs to various reinsurers. As a result of the sale of the individual life and annuity business, 100% of the net reserves were reinsured to Swiss Re. Subject to certain exceptions, Swiss Re assumed the credit risk of
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the business that was previously reinsured to other carriers. As of December 31, 2004, CNA ceded $1,012 million of future policy benefits to Swiss Re. In connection with the sale of the group benefits business, CNA ceded insurance reserves to Hartford Financial Services, Inc. (Hartford). As of December 31, 2004 and 2003, these ceded reserves were $1,726 million and $1,473 million.
The Company attempts to mitigate its credit risk related to reinsurance by entering into reinsurance arrangements only with reinsurers that have credit ratings above certain levels and by obtaining substantial amounts of collateral. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances. Such collateral was approximately $4,561 million and $5,255 million at December 31, 2004 and 2003.
In certain circumstances, including significant deterioration of a reinsurer’s financial strength ratings, the Companywe may engage in commutation discussions with individual reinsurers. The outcome of such discussions may result in a lump sum settlement that is less than the recorded receivable, net of any applicable allowance for doubtful accounts. Losses arising from commutations could have an adverse material impact on the Company’sour results of operations or equity.
operations.
CNA’s largest recoverables from a single reinsurer at December 31, 2004, including prepaid reinsurance premiums, were approximately $2,236 million from subsidiaries of The Allstate Corporation (Allstate), $2,163 million from subsidiaries of Swiss Reinsurance Group, $1,843 million from subsidiaries of Hannover Reinsurance (Ireland), Ltd., $1,726 million from Hartford Life Group Insurance Company, $944 million from American Reinsurance Company and $603 million from subsidiaries of the Berkshire Hathaway Group.
In 2002, the Company2001, we entered into a one-year corporate aggregate reinsurance treaty covering substantially all of the Company’s property and casualty lines of business (the 2002 Cover). Ceded premium related to the reinsurer’s margin of $10 million was recorded in 2002. No losses were ceded during 2002 under this contract, and the 2002 Cover was commuted as of December 31, 2002.
The Company has an aggregate reinsurance treaty related to the 1999 through 2001 accident years that covers substantially all of the Company’s property and casualty lines of business (the Aggregate Cover). The Aggregate Cover provides for two sections of coverage. These coverages attach at defined loss ratios for each accident year. Coverage under the first section of the Aggregate Cover, which is available for all accident years covered by the treaty, has a $500 million limit per accident year of ceded losses and an aggregate limit of $1 billion of ceded losses for the three accident years. The ceded premiums associated with the first section are a percentage of ceded losses and for each $500 million of limit the ceded premium is $230 million. The second section of the Aggregate Cover, which only relates to accident year 2001, provides additional coverage of up to $510 million of ceded losses for a maximum ceded premium of $310 million. Under the Aggregate Cover, interest charges on the funds withheld liability accrue at 8% per annum. The aggregate loss ratio for the three-year period has exceeded certain thresholds which requires additional premiums to be paid and an increase in the rate at which interest charges are accrued. This rate will increase to 8.25% per annum commencing in 2006. Also, if an additional aggregate loss ratio threshold is exceeded, additional premiums of 10% of amounts in excess of the aggregate loss ratio threshold are to be paid retroactively with interest. Any such premiums would be recorded in the period in which the loss ratio threshold is met.
During 2003, as a result of the unfavorable net prior year development recorded related to accident years 2000 and 2001, the $500 million limit related to the 2000 and 2001 accident years under the first section was fully utilized and losses of $500 million were ceded under the first section of the Aggregate Cover. In 2001, as a result of reserve additions including those related to accident year 1999, the $500 million limit related to the 1999 accident year under the first section was fully utilized and losses of $510 million were ceded under the second section as a result of losses related to the WTC event. The aggregate limits for the Aggregate Cover have been fully utilized.
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The impact of the Aggregate Cover was as follows:
Impact of Aggregate Cover
| Year ended December 31 | 2004 | 2003 | 2002 | |||||||||
| (In millions) | ||||||||||||
| Ceded earned premium | $ | (1 | ) | $ | (258 | ) | $ | – | ||||
| Ceded claim and claim adjustment expenses | – | 500 | – | |||||||||
| Interest charges | (82 | ) | (147 | ) | (51 | ) | ||||||
Pretax (expense) benefit | $ | (83 | ) | $ | 95 | $ | (51 | ) | ||||
In 2001, the Company entered into a one-year aggregate reinsurance treaty related to the 2001 accident year covering substantially all property and casualty lines of business in the Continental Casualty Company pool (the CCC Cover). The loss protection provided by the CCC Cover has an aggregate limit of approximately $761 million of ceded losses. The ceded premiums are a percentage of ceded losses. The ceded premium related to full utilization of the $761 million of limit is $456 million. The CCC Cover provides continuous coverage in excess of the second section of the Aggregate Cover discussed above. During 2003, the CCC Cover was fully utilized. Under theutilized in 2003. In 2006, we commuted our CCC Cover, interest chargesCover. This commutation had no impact on the funds withheld generally accrueConsolidated Statements of Operations for the year ended December 31, 2006.
At the Company’s discretion, the contract can be commuted annually on the anniversary date of the contract. The CCC Cover requires mandatory commutation on December 31, 2010, if the agreement has not been commuted on or before such date. Upon mandatory commutation of the CCC Cover, the reinsurer is required to release to the Company the existing balance of the funds withheld account if the unpaid ultimate ceded losses at the time of commutation are less than or equal to the funds withheld account balance. If the unpaid ultimate ceded losses at the time of commutation are greater than the funds withheld account balance, the reinsurer will release the existing balance of the funds withheld account and pay CNA the present value of the projected amount the reinsurer would have had to pay from its own funds absent a commutation. The present value is calculated using 1-year LIBOR as of the date of the commutation.
The impact of the CCC Cover was as follows:
Impact of CCC Cover
| Year ended December 31 | 2004 | 2003 | 2002 | |||||||||
| (In millions) | ||||||||||||
| Ceded earned premium | $ | – | $ | (100 | ) | $ | (101 | ) | ||||
| Ceded claim and claim adjustment expenses | – | 143 | 148 | |||||||||
| Interest charges | (91 | ) | (59 | ) | (37 | ) | ||||||
Pretax (expense) benefit | $ | (91 | ) | $ | (16 | ) | $ | 10 | ||||
The impact by segment of the Aggregate Cover and the CCC Cover was as follows:
Impact of Aggregate Cover and CCC Cover
| Year ended December 31 | 2004 | 2003 | 2002 | |||||||||
| (In millions) | ||||||||||||
| Standard Lines | $ | (114 | ) | $ | 70 | $ | (53 | ) | ||||
| Specialty Lines | (1 | ) | 9 | 3 | ||||||||
| Corporate and Other Non-Core | (59 | ) | – | 9 | ||||||||
Pretax (expense) benefit | $ | (174 | ) | $ | 79 | $ | (41 | ) | ||||
3229
CNA
The Terrorism Risk Insurance Act of 2002 (the Act)(TRIA) established a program within the Department of the Treasury under which insurers are required to offer terrorism insurance and the federal government will share the risk of loss by commercial property and casualty insurers arising from future terrorist attacks. The Act expiresAlthough TRIA expired on December 31, 2005. Each participating2005, the Terrorism Risk Insurance Extension Act of 2005 (TRIEA) extended this program through December 31, 2007 with changes such as the lines of business covered, the deductible amount that must be paid by the insurance company must pay a deductible, ranging from 7% of direct earned premiums from commercial insurance lines in 2003and the aggregate industry loss prior to 15% in 2005, before federal government assistance becomesbecoming available. For losses in excess of a company’s deductible, the federal government will cover 90% of the excess losses, while companies retain the remaining 10%. Losses covered by the program will be capped annually at $100 billion; above this amount, insurers are not liable for covered losses and Congress is to determine the procedures for and the source of any payments. Amounts paid by the federal government under the program over certain phased limits are to be recouped by the Department of the Treasury through policy surcharges, which cannot exceed 3% of annual premium.
The Company is required to participate in the program, but it does not cover life or health insurance products. State law limitations applying to premiums and policies for terrorism coverage are not generally affected under the program. The Act requires insurers to offer terrorism coverage through 2004. On June 18, 2004, the Department of the Treasury announced its decision to extend this offer requirement until December 31, 2005.
Terrorism-related reinsurance losses are not covered byexposure.
The bills described above would extend the Act for two additionalpast several years, and require that terrorism coverage be made available for all years. Deductibles under the bills would be held at 15% in 2006 and raisedwe have been underwriting our business to 20% in 2007. Notwithstanding these developments, enactment of a law extending the Act is not assured.
If the Act is not extended CNA will, among other steps, seek to exclude risks with perceivedmanage our terrorism exposure to the extentthrough strict underwriting standards, risk avoidance measures and conditional terrorism exclusions where permitted by law. Strict underwriting standards and risk avoidance measures will be taken where exclusions are not permitted. Annual policy renewals with effective dates of January 1, 2005 or later will be underwritten with the assumption that the Act will not be extended and that no Federal backstop forThere is substantial uncertainty as to our ability to effectively contain our terrorism exposure will be available. In July 2004, the National Associationsince, notwithstanding our efforts described above, we continue to issue forms of Insurance Commissioners adoptedcoverage, in particular, workers’ compensation, that are exposed to risk of loss from a Model Bulletin available for use in states that intend to approve terrorism coverage limitations in the event the Act is not reauthorized. Since that time, a number of states have announced that they will approve, on an expedited basis, conditional exclusions which fall within certain limitations. Other states appear unlikely to approve terrorism exclusions. There is no assurance that CNA will be able to eliminate or limit terrorism exposure risks in coverages, or that regulatory authorities will approve policy exclusions for terrorism.
event.
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2001 Plan
The overall goal oflocations. During 2006, we reevaluated the 2001 Plan was to create a simplified and leaner organization for customers and business partners. The major components of the plan included a reduction in the number of strategic business units (SBUs) in the property and casualty operations, changes in the strategic focus of the Life and Group Non-Core segment (formerly Life Operations and Group Operations) and consolidation of real estate locations. The reduction in the number of property and casualty SBUs resulted in consolidation of SBU functions, including underwriting, claims, marketing and finance. The strategic changes in Group Operations included a decision to discontinue the variable life and annuity business.
During 2002, $32 million pretax, or $21 million after-tax, of this accrual was reduced. No restructuring or other related charges or releases related to the 2001 Plan were incurred in 2003 or 2004.
All lease termination costs and impaired asset charges, except lease termination costs incurred by operations in the United Kingdom and software write-offs incurred by Life and Group Non-Core segment, were charged to the Corporate and Other Non-Core segment because office closure and consolidation decisions were not within the control of the other segments affected. Lease termination costs incurred in the United Kingdom related solely to the operations of CNA Re. All other charges were recorded in the segment benefiting from the services or existence of an employee or an asset.
The following tables summarize the 2001 Plan Initial Accrual and the activity in that accrual through December 31, 2004 by type of restructuring cost and by segment.
2001 Plan Initial Accrual
| Employee | ||||||||||||||||||||
| Termination | Lease | Impaired | ||||||||||||||||||
| and Related | Termination | Asset | Other | |||||||||||||||||
| Benefit Costs | Costs | Charges | Costs | Total | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
| 2001 Plan Initial Accrual | $ | 68 | $ | 56 | $ | 30 | $ | 35 | $ | 189 | ||||||||||
| Costs that did not require cash | – | – | – | (35 | ) | (35 | ) | |||||||||||||
| Payments charged against liability | (2 | ) | – | – | – | (2 | ) | |||||||||||||
| Accrued costs December 31, 2001 | 66 | 56 | 30 | – | 152 | |||||||||||||||
| Costs that did not require cash | (1 | ) | (3 | ) | (9 | ) | – | (13 | ) | |||||||||||
| Payments charged against liability | (53 | ) | (12 | ) | (4 | ) | – | (69 | ) | |||||||||||
| Reduction of accrual | (10 | ) | (7 | ) | (15 | ) | – | (32 | ) | |||||||||||
| Accrued costs December 31, 2002 | 2 | 34 | 2 | – | 38 | |||||||||||||||
| Costs that did not require cash | – | – | (1 | ) | – | (1 | ) | |||||||||||||
| Payments charged against liability | (2 | ) | (15 | ) | – | – | (17 | ) | ||||||||||||
| Accrued costs December 31, 2003 | – | 19 | 1 | – | 20 | |||||||||||||||
| Payments charged against liability | – | (5 | ) | – | – | (5 | ) | |||||||||||||
Accrued costs December 31, 2004 | $ | – | $ | 14 | $ | 1 | $ | – | $ | 15 | ||||||||||
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2001 Plan Initial Accrual
| Corporate | ||||||||||||||||||||
| Standard | Specialty | Life and Group | and Other | |||||||||||||||||
| Lines | Lines | Non-Core | Non-Core | Total | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
| 2001 Plan Initial Accrual | $ | 42 | $ | 4 | $ | 54 | $ | 89 | $ | 189 | ||||||||||
| Costs that did not require cash | – | – | (35 | ) | – | (35 | ) | |||||||||||||
| Payments charged against liability | – | – | – | (2 | ) | (2 | ) | |||||||||||||
| Accrued costs December 31, 2001 | 42 | 4 | 19 | 87 | 152 | |||||||||||||||
| Costs that did not require cash | – | – | – | (13 | ) | (13 | ) | |||||||||||||
| Payments charged against liability | (34 | ) | (1 | ) | (18 | ) | (16 | ) | (69 | ) | ||||||||||
| Reduction of accrual | (7 | ) | (2 | ) | (1 | ) | (22 | ) | (32 | ) | ||||||||||
| Accrued costs December 31, 2002 | 1 | 1 | – | 36 | 38 | |||||||||||||||
| Costs that did not require cash | – | – | – | (1 | ) | (1 | ) | |||||||||||||
| Payments charged against liability | (1 | ) | (1 | ) | – | (15 | ) | (17 | ) | |||||||||||
| Accrued costs December 31, 2003 | – | – | – | 20 | 20 | |||||||||||||||
| Payments charged against liability | – | – | – | (5 | ) | (5 | ) | |||||||||||||
Accrued costs December 31, 2004 | $ | – | $ | – | $ | – | $ | 15 | $ | 15 | ||||||||||
Approximately $3 millionsufficiency of the remaining accrual, for the 2001 Plan, primarilywhich related to lease termination costs, and determined that the liability is expected to be paidno longer required as we have completed our lease obligations. As a result, the excess remaining accrual was released in 2005.
Segment Results
2006, resulting in income of $8 million after-tax for the year ended December 31, 2006.
30
35
Excess & Surplus (E&S) is included in Casualty. E&S provides specialized insurance and other financial products for selected commercial risks on both an individual customer and program basis. Customers insured by E&S are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. E&S’s products are distributed throughout the United States through specialist producers, program agents and P&C’sProperty and Casualty’s agents and brokers. E&S has specialized underwriting and claim resources in Chicago, Denver and Columbus.
through a wholly-owned subsidiary, ClaimsPlus, Inc., a third party administrator.
Marine serves domestic and global ocean marine needs, with markets extending across North America, Europe and throughout the world. Marine offers hull, cargo, primary and excess marine liability, marine claims and recovery products and services. Business is sold through national brokers, regional marine specialty brokers and independent agencies.
Global Standard Lines is responsible for coordinating and managing the direct business of CNA’s overseasHawaii. These affiliates offer property and casualty operations. This business identifiesinsurance to small and capitalizesmedium size businesses and capitalize on strategic indigenous opportunities and currently has operations in Hawaii, Europe, Latin America and Canada.
opportunities.
| Years ended December 31 | 2004 | 2003 | 2002 | 2006 | 2005 | 2004 | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Net written premiums | $ | 4,582 | $ | 4,561 | $ | 4,755 | $ | 4,433 | $ | 4,382 | $ | 4,582 | ||||||||||||
| Net earned premiums | 4,917 | 4,530 | 4,678 | 4,413 | 4,410 | 4,917 | ||||||||||||||||||
| Income (loss) before net realized investment gains (losses) | 221 | (951 | ) | 169 | ||||||||||||||||||||
| Net realized investment gains (losses) | 139 | 234 | (79 | ) | ||||||||||||||||||||
| Net investment income | 991 | 767 | 496 | |||||||||||||||||||||
| Net operating income (loss) | 617 | (41 | ) | 220 | ||||||||||||||||||||
| Net realized investment gains, after-tax | 55 | 9 | 139 | |||||||||||||||||||||
| Net income (loss) | 360 | (717 | ) | 47 | 672 | (32 | ) | 359 | ||||||||||||||||
| Ratios | ||||||||||||||||||||||||
| Loss and loss adjustment expense | 70.7 | % | 98.1 | % | 73.1 | % | 70.1 | % | 87.5 | % | 70.8 | % | ||||||||||||
| Expense | 34.6 | 42.7 | 31.5 | 31.1 | 32.4 | 34.6 | ||||||||||||||||||
| Dividend | 0.2 | 2.2 | 1.6 | 0.4 | 0.4 | 0.2 | ||||||||||||||||||
| Combined | 105.5 | % | 143.0 | % | 106.2 | % | 101.6 | % | 120.3 | % | 105.6 | % | ||||||||||||
2004
Net results increased $1,077 million in 2004 as compared with 2003. This improvement was due primarily to decreased unfavorable net prior year development of $912 million after-tax ($1,403 million pretax), a decrease in the bad debt provision recorded for insurance receivables of $57 million after-tax ($88 million pretax), a decrease in the bad debt provision for reinsurance receivables of $48 million after-tax ($74 million pretax), decreased dividend development of $45 million after-tax ($69 million pretax), a decrease in certain insurance related assessments of $35 million after-tax ($54 million pretax) and increased net investment income of $57 million after-tax ($88 million
36
pretax), primarily due to reduced interest charges of $63 million after-tax ($97 million pretax) related to the corporate aggregate and other reinsurance treaties. These favorable items were partially offset by decreased net realized investment results of $95 million after-tax ($142 million pretax) and increased catastrophe losses in 2004. The impact of catastrophes was $183 million after-tax ($282 million pretax) and $71 million after-tax ($110 million pretax) for 2004 and 2003, as discussed below. These catastrophe impacts are net of anticipated reinsurance recoveries, and include the effect of reinstatement premiums and estimated insurance assessments. See the Investments section of the MD&A for further discussion on net investment income and net realized investment gains.
Net written premiums for Standard Lines increased $21$51 million in 20042006 as compared with 2003.2005. This increase was primarily driven by decreasedfavorable new business, rate and retention in the Property lines of business. Net earned premiums ceded of $270increased $3 million to corporate aggregate and other reinsurance treaties in 20042006 as compared with 2003. The 2003 cessions2005. Net earned premiums were principally dueimpacted by decreased favorable premium development in 2006 as compared to the unfavorable net prior year development recorded in 2003. This favorable impact was partially offset by lower new business2005, as competition increases and carriers protect renewals, as well as intentional underwriting actions in business classified as high hazard. Specifically impacting retention was the impact of intentional underwriting actions, including reductions in certain silica-related risks and workers compensation policies classified as high hazard. The net written premium results are consistent with the Company’s strategy ofdiscussed below. We continue to focus on portfolio optimization. The Company’s priority is a diversified portfolio in profitable classes of business.
31
each period.
The combined ratio decreased 37.5 pointssignificantly reduced catastrophe losses in 2004 as compared with 2003. The loss ratio decreased 27.4 points2006, an increase in 2004 as compared with 2003. These improvements were primarily due to decreased net unfavorable prior year development of $1,403 millioninvestment income and a decrease in the bad debt provision recorded forunfavorable net prior year development as discussed below. The 2006 net operating results included catastrophe impacts of $31 million after-tax. The 2005 net operating results included catastrophe impacts of $318 million after-tax related to Hurricanes Katrina, Wilma, Rita, Dennis and Ophelia, net of reinsurance receivables of $74 million. These favorable impacts on the 2004recoveries.
decrease in the provision for insurance bad debt. In addition, the 2005 ratio included increased ceded commissions as a result of an unfavorable arbitration ruling related to two reinsurance treaties. Changes in estimates for premium taxes partially offset these favorable impacts.
| December 31 | 2006 | 2005 | ||||||
| (In millions) | ||||||||
| Gross Case Reserves | $ | 6,746 | $ | 7,033 | ||||
| Gross IBNR Reserves | 8,188 | 8,051 | ||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 14,934 | $ | 15,084 | ||||
| Net Case Reserves | $ | 5,234 | $ | 5,165 | ||||
| Net IBNR Reserves | 6,632 | 6,081 | ||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 11,866 | $ | 11,246 | ||||
32
37
The following table summarizes the gross2004. Further information on Standard Lines Net Prior Year Development for 2005 and net carried reserves as of December 31, 2004 and 2003 for Standard Lines.
Gross and Net CarriedClaim and Claim Adjustment Expense Reserves
| December 31, | 2004 | 2003 | ||||||
| (In millions) | ||||||||
| Gross Case Reserves | $ | 6,904 | $ | 6,416 | ||||
| Gross IBNR Reserves | 7,398 | 7,866 | ||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 14,302 | $ | 14,282 | ||||
| Net Case Reserves | $ | 4,759 | $ | 4,585 | ||||
| Net IBNR Reserves | 4,544 | 4,382 | ||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 9,303 | $ | 8,967 | ||||
Approximately $190 million of unfavorable net prior year claim and allocated claim adjustment expense development recorded during 2004 resulted from increased severity trends for workers compensation on large account policies primarilyis included in accident years 2002 and prior. Favorable premium development on retrospectively rated large account policies of $50 million was recorded in relation to this unfavorable net prior year claim and allocated claims adjustment expense development.
Approximately $60 million of unfavorable net prior year claim and allocated claim adjustment expense development was recorded in involuntary pools in which the Company’s participation is mandatory and primarily based on premium writings. Approximately $15 million of this unfavorable net prior year claim and allocated claim adjustment expense development was related to the Company’s shareNote F of the National Workers Compensation Reinsurance Pool (NWCRP). Consolidated Financial Statements included under Item 8.
Approximately $60 million of unfavorable net prior year claim and allocated claim adjustment expense development resulted from the change in estimates due to increased severity trends for excess and surplus business driven by excess liability, liquor liability and coverages provided to apartment and condominium complexes. Approximately $105 million of favorable net prior year claim and allocated claim adjustment expense development resulted from reserve studies of commercial auto liability policies and the liability portion of package policies. The change was due to improvement in the severity and number of claims for this business. Approximately $85 million of favorable net prior year claim and allocated claim adjustment expense development was due to improvement in the severity and number of claims for property coverages primarily in accident year 2003.
Other favorable net prior year premium development of approximately $50 million resulted primarily from higher audit and endorsement premiums on workers compensation policies.
In addition to the above, during 2004, the Company executed commutation agreements withwe commuted several members of the Trenwick Group. These commutationssignificant reinsurance contracts that resulted in unfavorable claimdevelopment of $285 million and claim adjustment expense reserve$5 million, which is included in the development above, and which was more thanpartially offset by athe release of a previously established allowance for uncollectible reinsurance.
These commutations resulted in an unfavorable impact of $173 million after-tax and favorable impact of $4 million after-tax in 2005 and 2004. These contracts contained interest crediting provisions. The following discussesinterest charges associated with the reinsurance contracts commuted were $42 million and $110 million in 2005 and 2004. There will be no further interest crediting charges related to these commuted contracts in future periods.
Approximately $495 million of unfavorable claim2005 and allocated claim adjustment2004.
38
2003, it became apparent that the assumptions regarding the number of claims, which were used to estimate the expected losses, were no longer appropriate. The analyses indicated that the number of claims reported was higher than expected primarily in states other than California. States where this activity is most evident include Texas, Arizona, Nevada, Washington and Colorado. The number of claims reported in states other than California during the first six months of 2003 was almost 35% higher than the last six months of 2002. The number of claims reported during the last six months of 2002 increased by less than 10% from the first six months of 2002. In California, claims resulting from additional insured endorsements increased throughout 2003. Additional insured endorsements are regularly included on policies provided to subcontractors. The additional insured endorsement names general contractors and developers2005 as additional insureds covered by the policy. Current California case law (Presley Homes, Inc. v. American States Insurance Company, (June 11, 2001) 90 Cal App. 4th 571, 108 Cal. Rptr. 2d 686) specifies that an individual subcontractorcompared with an additional insured obligation has a duty to defend the additional insured in the entire action, subject to contribution or recovery later. In addition, the additional insured is allowed to choose one specific carrier to defend the entire action. These additional insured claims can remain open for a longer period of time than other construction defect claims because the additional insured defense obligation can continue until the entire case is resolved. The adverse reserve development recorded related to construction defect claims was primarily related to accident years 1999 and prior.
Unfavorable net prior year development of approximately $595 million, including $518 million of unfavorable claim and allocated claim adjustment expense reserve development and $77 million of unfavorable premium development, was recorded for large account business including workers compensation coverages in 2003. Many of the policies issued to these large accounts include provisions tailored specifically to the individual accounts. Such provisions effectively result in the insured being responsible for a portion of the loss. An example of such a provision is a deductible arrangement where the insured reimburses the Company for all amounts less than a specified dollar amount. These arrangements often limit the aggregate amount the insured is required to reimburse the Company. Analyses completed during 2003 indicated that the provisions that result in the insured being responsible for a portion of the losses would have less of an impact due to the larger size of claims as well as the increased number of claims. The net prior year development recorded was primarily related to accident years 2000 and prior.
Approximately $98 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 resulted from a program covering facilities that provide services to developmentally disabled individuals.2004. This net prior year development was due to an increase in the size of known claims and increases in policyholder defense costs. With regard to average claim size, updated data showed the average claim size increasing at an annual rate of approximately 20%. Prior data had shown average claim size to be level. Similar to the average claim size, updated data showed the average policyholder defense cost increasing at an annual rate of approximately 20%. Prior data had shown average policyholder defense cost to be level. The net prior year development recorded was primarily for accident years 2001 and prior.
Approximately $40 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was for excess workers compensation coverages due to increasing severity. The increase in severity means that a higher percentage of the total loss dollars will be the Company’s responsibility since more claims will exceed the point at which the Company’s coverage begins. The net prior year development recorded was primarily for accident year 2000.
Approximately $73 million of unfavorable development recorded in 2003 was the result of a commutation of all ceded reinsurance treaties with the Gerling Global Group of companies (Gerling), related to accident years 1999 through 2001, including $41 million of unfavorable claim and allocated claim adjustment expense development and $32 million of unfavorable premium development.
Unfavorable net prior year claim and allocated claim adjustment expense reserve development of approximately $40 million recorded in 2003 was related to a program covering tow truck and ambulance operators, primarily impacting the 2001 accident year. The Company had previously expected that loss ratios for this business would be similar to its middle market commercial automobile liability business. During 2002, the Company ceased writing business under this program.
Approximately $25 million of unfavorable net prior year premium development recorded in 2003 was related to a second quarter of 2003 reevaluation of losses ceded to a reinsurance contract covering middle market workers
39
compensation exposures. The reevaluation of losses led to a new estimate of the number and dollar amount of claims that would be ceded under the reinsurance contract. As a result of the reevaluation of losses, the Company recorded approximately $36 million of unfavorable claim and allocated claim adjustment expense reserve development, which was ceded under the contract. The net prior year development was recorded for accident year 2000.
Approximately $11 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was related to directors and officers exposures in Global Lines. The unfavorable net prior year reserve developmentimprovement was primarily due to securities class action cases related to certain known corporate malfeasance cases and investment banking firms. This net prior year development recorded was primarily for accident years 2000 through 2002.
The following premium and claim and allocated claim adjustment expense development was recorded in 2003 as a result of the elimination of deficiencies and redundancies in reserve positions within the segment. Unfavorable net prior year development of approximately $210 million related to small and middle market workers compensation exposures and approximately $110 million related to E&S lines was recorded in 2003. Offsetting these increases was $210 million of favorable net prior year development in the property line of business, including $79 million related to the September 11, 2001 World Trade Center Disaster and related events (WTC event).
Also, offsetting the unfavorable premium and claim and allocated claim adjustment expense development was a $216 million underwriting benefit from cessions to corporate aggregate reinsurance treaties recorded in 2003. The benefit is comprised of $485 million of ceded losses and $269 million of ceded premiums for accident years 2000 and 2001.
The expense ratio decreased 8.1 points in 2004 as compared with 2003. This decrease in 2004 was primarily due to an increased net earned premium base, an $88 million decrease in the provision for uncollectible insurance receivables, a $54 million decrease in certain insurance related assessments and reduced expenses as a result of expense reduction initiatives as compared with the same period in 2003. Partially offsetting these favorable impacts was $14 million of estimated underwriting assessments related to the 2004 Florida hurricanes.
During 2004, additional bad debt provisions for insurance receivables of $150 million were recorded as compared to $242 million recorded in 2003. The substantial bad debt provisions for insurance receivables in 2004 and 2003 were primarily related to Professional Employer Organization (PEO) accounts. During 2002, Standard Lines ceased writing coverages for PEO businesses, with the last contracts expiring on June 30, 2003. In the third quarter of 2003, the Company performed a review of PEO accounts to estimate ultimate losses and the indicated recoveries under retrospective premium or high-deductible provisions of the insurance contracts. Based on the 2003 analysis of the credit standing of the individual PEO accounts and the amount of collateral held, the Company recorded an increase in the bad debt provision. In the third quarter of 2004, the review of PEO accounts was updated and the population of accounts reviewed was expanded to include Temporary Help accounts as well. Payroll audits performed since the last study identified that the exposure base for many accounts was higher than expected. In addition, recovery estimates were updated based on current credit information on the insured. Based on the updated study, the Company recorded an estimated bad debt provision of $95 million in the third quarter of 2004 for these accounts.
In 2004, the expense ratio was adversely impacted by an additional $55 million bad debt provision for insurance receivables. The primary drivers of the provision were the completion of updated ultimate loss projections on all large account business where the insured is currently in bankruptcy and a comprehensive review of all billed balances that are past due.
The dividend ratio decreased 2.0 points in 2004 as compared with 2003 due to favorable net prior year dividend development of $23 million in 2004, as compared to unfavorable net prior year dividend development of $46 million in 2003, primarily related to workers compensation products. The favorable 2004 dividend development was related to a review that was completed in 2004 which indicated dividends were lower than prior expectations based on decreased usage of dividend programs.
40
2003 Compared with 2002
Net results decreased $764 million in 2003 as compared with 2002. The decrease in net results was primarily driven by increased unfavorable net prior year development of $999 million after-tax ($1,538 million pretax), an increase in the bad debt provision for insurance and reinsurance receivables of $193 million after-tax ($297 million pretax), an increase in certain insurance-related assessments of $49 million after-tax ($74 million pretax) and decreased net investment income primarily due to increased interest expense of $78 million after-tax ($120 million pretax) related to additional cessions to the corporate aggregate and other reinsurance treaties. Partially offsetting these decreases were increases in net realized investment gains and $94 million after-tax ($145 million pretax) of increased limited partnership income. See the Investments section of this MD&A for further discussion on net investment income and net realized investment gains (losses). Net results for 2002 also included a $43 million after-tax ($43 million pretax) cumulative effect of a change in accounting principle charge related to goodwill impairment.
Net written premiums for Standard Lines decreased $194 million and net earned premiums decreased $148 million in 2003 as compared with 2002. These decreases were due primarily to increased ceded premiums of $259 million, including premiums ceded to corporate aggregate and other reinsurance treaties, primarily as a result of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003. Premiums also decreased as a result of a shift in the mix of business to high deductible policies, which generally have lower premiums. Partially offsetting these declines were increased premiums across most P&C and E&S lines as a result of new business initiatives and rate increases.
The combined ratio increased 36.8 points in 2003 as compared with 2002. The loss ratio increased 25.0 points due principally to an increase in unfavorable net prior year development in 2003 as compared with 2002, as discussed below, an increase in the bad debt expense reserve for reinsurance receivables of $55 million and $110 million of catastrophe losses which occurred during 2003. Catastrophe losses were $38 million in 2002. Based on the Company’s credit exposure to reinsurance receivables, an increase in the bad debt reserve was deemed appropriate. See the Reinsurance section of this MD&A for additional information. Partially offsetting these unfavorable variances was an improvement in the current net accident year loss ratio.
Unfavorable net prior year development of $1,419 million, including $939 million of unfavorable claim and allocated claim adjustment expense reserve development and $480 million of unfavorable premium development, was recorded in 2003. Favorable net prior year development of $119 million, including $205 million of favorable claim and allocated claim adjustment expense reserve development and $86 million of unfavorable premium development, was recorded in 2002.
The discussion of the net prior year development recorded in 2003 was discussed in the “2004 compared with 2003” section above.
The following discusses net prior year development for Standard Lines recorded in 2002.
Approximately $140 million of favorable net prior year development was attributable to participation in the Workers Compensation Reinsurance Bureau (WCRB), a reinsurance pool, and residual markets. The favorable prior year reserve development for WCRB was the result of information received from the WCRB that reported the results of a recent actuarial review. This information indicated that the Company’s net required reserves for accident years 1970 through 1996 were $60 million less than the carried reserves. In addition, during 2002, the Company commuted accident years 1965 through 1969 for a payment of approximately $5 million to cover carried reserves of approximately $13 million, resulting in further favorable net prior year claim and allocated claim adjustment expense development of $8 million. The favorable residual market net prior year development was the result of lower than expected paid loss activity during recent periods for accident years dating back to 1984. The paid losses during 2002 on prior accident years were approximately 60% of the previously expected amount.
In addition, Standard Lines had favorable net prior year development, primarily in the package liability and auto liability lines of business due to the then new claims initiatives. These new claims initiatives, which included specialized training on specific areas of the claims adjudication process, enhanced claims litigation management, enhanced adjuster-level metrics to monitor performance and more focused metric-based claim file review and oversight, were expected to produce significant reductions in ultimate claim costs. Based on management’s best
41
estimate of the reduction in ultimate claim costs, approximately $100 million of favorable net prior year development was recorded in 2002. Approximately one-half of this favorable net prior year development was recorded in accident years prior to 1999, with the remainder of the favorable net prior year development recorded in accident years 1999 to 2001.
Approximately $50 million of favorable net prior year development during 2002 was recorded in commercial automobile liability. Most of the favorable development was from accident year 2000. An actuarial review completed during 2002 showed that underwriting actions had resulted in reducing the number of commercial automobile liability claims for then recent accident years, especially the number of large losses.
Approximately $45 million of favorable net prior year development was recorded in property lines during 2002. The favorable net prior year development was principally from accident years 1999 through 2001, and was the result of the low number of large losses in recent years. Although property claims are generally reported relatively quickly, determining the ultimate cost of the claim can involve a significant amount of time between the occurrence of the claim and settlement.
Offsetting these favorable net prior year developments were approximately $100 million of unfavorable premium development in middle market workers compensation, approximately $70 million of unfavorable net prior year claim and allocated claim adjustment expense development in programs written in CNA E&S, approximately $30 million of unfavorable net prior year claim and allocated claim adjustment expense development on a contractors account package policy program and approximately $20 million of unfavorable net prior year claim and allocated claim adjustment expense development on middle market general liability coverages. The unfavorable net prior year development on workers compensation was principally due to additional reinsurance premiums for accident years 1999 through 2001.
A CNA E&S program, covering facilities that provide services to developmentally disabled individuals, accounts for approximately $50 million of the unfavorable net prior year development. The net prior year development was due to an increase in the size of known claims and increases in policyholder defense costs. These increases became apparent as the result of an actuarial review completed during 2002, with most of the development from accident years 1999 and 2000. The other program which contributed to the CNA E&S development covered tow truck and ambulance operators in the 2000 and 2001 accident years. This program was started in 1999. The Company expected that loss ratios for this business would be similar to its middle market commercial automobile liability business. Reviews completed during 2002 resulted in estimated loss ratios on the tow truck and ambulance business that were 25 points higher than the middle market commercial automobile liability loss ratios.
The marine business recorded unfavorable net prior year development of approximately $15 million during 2002. The net prior year development for the marine business was due principally to unfavorable reserve development on hull and liability coverages from accident years 1999 and 2000 offset by favorable reserve development on cargo coverages recorded for accident year 2001. Reviews completed during 2002 showed additional reported losses on individual large accounts and other bluewater business that drove the unfavorable hull and liability development.
The unfavorable net prior year development on contractors account package policies was the result of a review completed during 2002. Since this program is no longer being written, the Company expected that the change in reported losses would decrease each quarterly period. However, in then recent quarterly periods, the change in reported losses was higher than prior quarters, resulting in the unfavorable reserve development.
The expense ratio increased 11.2 points due to increased expenses and decreased net earned premiums in 2003 as compared with 2002. Acquisition expenses were unfavorably impacted by an increase in the bad debt expense reserve for insurance receivables of $242 million. The increase in the bad debt provision for insurance receivables was primarily the result of a review of PEO accounts as well as certain accounts that have been turned over to third parties for collection. During 2002, Standard Lines ceased writing coverages for PEO businesses, with the last contracts expiring on June 30, 2003. The review analyzed losses and the related receivable including the associated collateral held by the Company. Upon completion of the review, it was determined that the ultimate loss estimates were larger than previously expected, which increased the amount of uncollateralized receivables. Based on these factors, an increase in the provision was recorded.
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Additionally, acquisition expenses increased as a result of a $44 million increase in certain insurance-related assessments recorded in 2003 as compared with a $30 million reduction in accruals for certain insurance-related assessments resulting from changes, due to legislation, in the basis on which the assessments were recorded in 2002. Also increasing the expense ratio was approximately $62 million of expenses related to eBusiness in 2003. The 2002 eBusiness expenses were included in the Corporate and Other Non-Core segment.
The dividend ratio increased 0.60.2 points in 20032005 as compared with 2002 due primarily to increased unfavorable net prior year dividend development.2004. The $42 million increase in unfavorable2004 ratio was impacted by favorable dividend development, was primarilypartially offset by decreased participation in dividend plans and lower dividend amounts related to workers compensation products. A review was completed in 2003 indicating dividend development that was higher than prior expectations. This development related tothe current accident years 2002 and prior.
year.
33
CNA Pro,
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The following table details results of operations for Specialty Lines.
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Net written premiums | $ | 2,391 | $ | 2,038 | $ | 1,574 | $ | 2,596 | $ | 2,463 | $ | 2,391 | ||||||||||||
| Net earned premiums | 2,277 | 1,840 | 1,451 | 2,555 | 2,475 | 2,277 | ||||||||||||||||||
| Income (loss) before net realized investment gains (losses) | 324 | (34 | ) | 90 | ||||||||||||||||||||
| Net realized investment gains (losses) | 54 | 74 | (25 | ) | ||||||||||||||||||||
| Net investment income | 403 | 281 | 246 | |||||||||||||||||||||
| Net operating income | 464 | 336 | 324 | |||||||||||||||||||||
| Net realized investment gains, after-tax | 18 | 12 | 54 | |||||||||||||||||||||
| Net income | 378 | 40 | 60 | 482 | 348 | 378 | ||||||||||||||||||
| Ratios | ||||||||||||||||||||||||
| Loss and loss adjustment expense | 63.3 | % | 89.6 | % | 73.5 | % | 60.5 | % | 65.3 | % | 63.3 | % | ||||||||||||
| Expense | 26.1 | 27.6 | 29.3 | 26.7 | 26.1 | 26.1 | ||||||||||||||||||
| Dividend | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | ||||||||||||||||||
| Combined | 89.6 | % | 117.4 | % | 103.0 | % | 87.4 | % | 91.6 | % | 89.6 | % | ||||||||||||
2004
Net results improved $338 million in 2004 as compared with 2003. This improvement was due primarily to decreased unfavorable net prior year development of $171 million after-tax ($264 million pretax), a decrease in the bad debt provision for reinsurance receivables of $78 million after-tax ($120 million pretax), a decrease in certain insurance related assessments of $8 million after-tax ($12 million pretax) and increased net investment income. These improvements were partially offset by decreased net realized investment gains of $20 million after-tax ($30 million pretax) and increased catastrophe losses in 2004. The impact of catastrophes was $11 million after-tax ($16 million pretax) and $3 million after-tax ($4 million pretax) in 2004 and 2003, as discussed below. See the Investments section of this MD&A for further discussion on net investment income and net realized investment gains.
2005
increased premium written.
The combined ratio decreased 27.8 pointseach period.
Unfavorable net prior year development was $30 million, including $58 million of unfavorable claim and allocated claim adjustment expense and $28 million of favorable premium development, in 2004. Unfavorable net prior year development of $294 million, including $257 million of unfavorable claim and allocated claim adjustment expense development and $37 million of unfavorable premium development, was recorded for the same period in 2003.
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The following table summarizes the gross and net carried reserves as of December 31, 2004 and 2003 for Specialty Lines.
| Gross and Net Carried Claim and Claim Adjustment Expense Reserves | ||||||||
| December 31, (In millions) | 2004 | 2003 | ||||||
| Gross Case Reserves | $ | 1,659 | $ | 1,605 | ||||
| Gross IBNR Reserves | 3,201 | 2,595 | ||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 4,860 | $ | 4,200 | ||||
| Net Case Reserves | $ | 1,191 | $ | 1,087 | ||||
| Net IBNR Reserves | 2,042 | 1,832 | ||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 3,233 | $ | 2,919 | ||||
In 2004, the Company finalized commutation agreements with several members of the Trenwick Group. These commutations resulted in unfavorable claim and claim adjustment expense reserve development which was more than offset by a release of a previously established allowance for uncollectible reinsurance. Additionally, unfavorable net prior year claim and allocated claim adjustment expense reserve development resulted from the increased emergence of several large D&O claims primarily in recent accident years.
The following discusses net prior year development for Specialty Lines recorded in 2003.
Approximately $50 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was related to increased severity in excess coverages provided to facilities providing health care services. The increase in reserves was based on reviews of individual accounts where claims had been expected to be less than the point at which the Company’s coverage applied. The then current claim trends indicated that the layers of coverage provided by the Company would be impacted. The net prior year development recorded was primarily for accident years 2001 and prior.
Approximately $68 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was for surety coverages related primarily to workers compensation bond exposure from accident years 1990 and prior and large losses for accident years 1999 and 2002. Approximately $21 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was recorded in the surety line of business in 2003 as the result of recent developments on one large claim.
Approximately $75 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was related to directors and officers exposures in CNA Pro. The unfavorable net prior year reserve development was primarily due to securities class action cases related to certain known corporate malfeasance cases and investment banking firms. This net prior year development recorded was primarily for accident years 2000 through 2002.
Approximately $84 million of losses were recorded during 2003 as the result of a commutation of ceded reinsurance treaties with Gerling covering CNA HealthPro, relating to accident years 1999 through 2002. Further information regarding this commutation is provided in the Reinsurance section of this MD&A.
The following net prior year development was recorded in 2003 as a result of the elimination of deficiencies and redundancies in reserve positions within the segment. An additional $50 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was recorded related to medical malpractice and long term care facilities. Partially offsetting this unfavorable claim and allocated claim adjustment expense reserve development was a $25 million underwriting benefit from cessions to corporate aggregate reinsurance treaties. The
45
benefit was comprised of $56 million of ceded losses and $31 million of ceded premiums for accident years 2000 and 2001.
The expense ratio decreased 1.5 points primarily due to the increased earned premium base and a decrease of $12 million in certain insurance related assessments recorded in 2003. Additionally, the expense ratio was favorably impacted by decreased underwriting expenses due to the Company’s expense initiatives.
2003 Compared with 2002
Net income was $40 million in 2003 as compared with $60 million in 2002. The decreaseincreases in net results was primarily due to increased unfavorable net prior year development of $152 million after-tax ($234 million pretax), an increase in the bad debt provision for reinsurance receivables of $50 million after-tax ($77 million pretax)operating income and increased interest expense of $4 million after-tax ($5 million pretax) related to additional cessions to the corporate aggregate reinsurance treaties. The unfavorable impacts to net results were principally offset by improved current net accident year results primarily attributable to premium rate increases and increased net realized investment results.gains. See the Investments section of this MD&A for further discussion of net investment income and net realized gains (losses). investment results.
Net written premiums for Specialty Linesoperating income increased $464 million and net earned premiums increased $389$128 million in 20032006 as compared with 2002. These increases2005. This improvement was primarily driven by an increase in net investment income, a decrease in net prior year development as discussed below and reduced catastrophe impacts in 2006. Catastrophe impacts were due primarily$1 million after-tax for the year ended December 31, 2006, as compared to rate increases$16 million after-tax for the year ended December 31, 2005. Also, the 2005 results included a $59 million loss, after the impact of taxes and increased newminority interests, in the surety line of business primarilyrelated to a large national contractor. Further information related to the large national contractor is included in CNA Pro.Note S of the Consolidated Financial Statements included under Item 8.
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in 2006.
| December 31 | 2006 | 2005 | ||||||
| (In millions) | ||||||||
| Gross Case Reserves | $ | 1,715 | $ | 1,907 | ||||
| Gross IBNR Reserves | 3,814 | 3,298 | ||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 5,529 | $ | 5,205 | ||||
| Net Case Reserves | $ | 1,350 | $ | 1,442 | ||||
| Net IBNR Reserves | 2,921 | 2,352 | ||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 4,271 | $ | 3,794 | ||||
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The discussion of the net prior year development recorded in 2003 was included in the “2004 compared with 2003” section above.
The following discusses net prior year development for Specialty Lines recorded in 2002.
development. Unfavorable net prior year development of approximately $180$30 million, including $58 million of unfavorable claim and allocated claim adjustment expense reserve development and $28 million of favorable premium development, was recorded in 2004. Further information on Specialty Lines Net Prior Year Development for CNA HealthPro2005 and 2004 is included in 2002 and was driven principally by medical malpractice excess products provided to hospitals and physicians and coverages provided to long term care facilities, principally national for-profit nursing homes. Approximately $100 millionNote F of the net prior year unfavorable development was related to assumed excess products and loss portfolio transfers, and was primarily driven by unexpected increases in the number of excess claims in accident years 1999 and 2000. The percentage of total claims greater than $1 million has increased by 33%, from less than 3% of all claims to more than 4% of all claims. CNA HealthPro no longer writes assumed excess products and loss portfolio transfers.
Approximately $50 million of the unfavorable net prior year development was related to long term care facilities. The unfavorable net prior year development was principally recorded for accident years 1997 through 2000. The average value of claims closed during the first several months of 2002 increased by more than 50% when compared to claims closed during 2001. In response to those trends, CNA HealthPro has reduced its writings of national for-
46
profit nursing home chains. Excess products provided to healthcare institutions and physician coverages in a limited number of states were responsible for the remaining development in CNA HealthPro. The unfavorable net prior year development on excess products provided to institutions for accident years 1996 through 1999 resulted from increases in the size of claims experienced by these institutions. Due to the increase in the size of claims, more claims were exceeding the point at which these excess products apply. The unfavorable net prior year development on physician coverages was recorded for accident years 1999 through 2001 in Oregon, California, Arizona and Nevada. The average claim size in these states has increased by 20%, driving the change in losses.
Offsetting this unfavorable net prior year development was favorable net prior year development in CNA Pro and for Enron related exposures. Programs providing professional liability coverage to accountants, lawyers and realtors primarily drove favorable net prior year development of approximately $110 million in CNA Pro. Reviews of this business completed during 2002 showed little activity for older accident years (principally prior to 1999), which reduced the need for reserves on these years. The reported losses on these programs for accident years prior to 1999 increased by approximately $5 million during 2002. This increase compared to the total reserve at the beginning of 2002 of approximately $180 million, net of reinsurance. Additionally, favorable net prior year development of $20 million was associated with the Enron settlement. The Company had established a $20 million reserve for accident year 2001 for an excess layer associated with Enron related surety losses; however the case was settled for less than the attachment point of this excess layer.
A $12 million underwriting benefit was recorded for cessions to the corporate aggregate reinsurance treaties in 2002. The benefit was comprised of $41 million of ceded losses and $29 million of ceded premium for accident year 2001.
The expense ratio decreased 1.7 points primarily duewas the same in 2005 as compared with 2004. The 2005 ratio was impacted by a change in estimate related to profit commissions in the warranty line of business, which was offset by the impact of the increased net earned premium base, partially offset by an increase in certain insurance related assessments of $11 million.
base.
Life and Group Non-Core includes the following lines of business: Life & Annuity, Health and Other.
Life & Annuityconsists primarily of individual term, universal life and permanent life insurance products, guaranteed investment contracts, as well as individual and group annuity products. As discussed above, on April 30, 2004, certain of these products were sold. The remaining businesses are being managed as a run-off operation; however certain businesses focused on institutional investors are accepting new deposits from existing customers.
Healthconsists primarily of the Group Benefits business, group long term care, individual long term care and specialty medical products and related services. On December 31, 2003, CNA completed the sale of the Group Benefits business. CNA is continuingsegment. We continue to service itsour existing group and individual long term care commitments, our payout annuity business and is managing these businesses asour pension deposit business. We also manage a run-off operation. In January of 2005, the specialty medical business was sold to Aetna. This business contributed $16 million, $9 million and $2 million of net income for 2004, 2003 and 2002.
Otherconsists primarilyblock of group reinsurance and life settlement contracts. These businesses are being managed as a run-off operation.
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The following table summarizes the results of operations for Life and Group Non-Core.
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||
| Net earned premiums | $ | 921 | $ | 2,376 | $ | 3,408 | ||||||
| Income (loss) before net realized investment losses | (29 | ) | 113 | 206 | ||||||||
| Net realized investment losses | (385 | ) | (108 | ) | (115 | ) | ||||||
| Net income (loss) | (414 | ) | 5 | 48 | ||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||
| (In millions) | ||||||||||||
| Net earned premiums | $ | 641 | $ | 704 | $ | 921 | ||||||
| Net investment income | 698 | 593 | 692 | |||||||||
| Net operating loss | (14 | ) | (51 | ) | (29 | ) | ||||||
| Net realized investment losses, after-tax | (33 | ) | (19 | ) | (385 | ) | ||||||
| Net loss | (47 | ) | (70 | ) | (414 | ) | ||||||
2004
2005
Net results decreased by $419 million in 2004 as compared with 2003. The decrease in net results related primarily tothese favorable impacts were increased net realized investment losses includingand the realized lossabsence of approximately $389 million after-tax ($622 million pretax) fromincome related to agreements with buyers of sold businesses which ended as of December 31, 2005. In addition, the sale2005 net results included a change in estimate, which reduced a prior accrual of state premium taxes. See the individual life businessInvestments section of this MD&A for further discussion of net investment income and reduced results from the group benefits and individual life businesses. Netnet realized investment losses in 2003 include a loss recorded on the sale of the Group Benefits business of $130 million after-tax ($176 million pretax). Net results for the sold life and group businesses were losses of $427 million and $36 million, including the loss on sales and the effects of shared corporate overhead expenses, in 2004 and 2003. In addition, results for life settlement contracts declined in 2004. These items were partially offset by reduced increases in individual long term care reserves of $21 million after-tax ($32 million pretax) in 2004 as compared with 2003. Also included in the net results of 2004 and 2003 were the adverse impacts of $26 million after-tax ($40 million pretax) and $33 million after-tax ($50 million pretax) related to certain accident and health exposures (IGI Program) and the Company’s past participation in accident and health reinsurance programs.results.
36
2003
2004
Net income decreased by $43 million in 20032005 as compared with 2002. Net income2004. The improvement in 2003 was adversely impacted by $130net results related primarily to a $389 million after-tax ($176 million pretax)realized loss recorded on the sale of the Group Benefitsindividual life business in 2004. Also contributing to the improvement in net results was the reduction in 2005 of significant 2004 items related to certain assumed reinsurance exposures. Additionally, 2005 results included $13 million income related to a service agreement with a purchaser for sold businesses. These agreements have expired. These results were partially offset by a decline in net investment income of $99 million. This included a decrease of approximately $64 million from the trading portfolio which was largely offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio. In addition, it included the absence of favorable results from sold insurance operations. Also unfavorably impacting the 2005 results was a $17 million provision increase for estimated indemnification liabilities related to the sold individual life business and unfavorable results related to the long term care business. In 2002, net income was adversely impacted by impairment losses. See the Investments section of this MD&A for additional information. Additionally, the decrease infurther discussion of net investment income was due to unfavorableand net prior year claim and allocated claim adjustment expense reserve development of $33 million after-tax ($50 million pretax) that was recorded in relation to the Company’s past participation in several insurance pools, which is part of the group reinsurance run-off business, and increases in individual long term care reserves of $4 million after-tax ($7 million pretax) due to increased severity and claim frequency. Additionally a change in the discount rate on prior year disability and life waiver of premium reserves from 6.5% to 6.0%, resulted in a $14 million after-tax ($22 million pretax) decrease in net income. The change in discount rate reflected the decreasing portfolio yield and the then currentrealized investment environment. The decrease was also due to severance costs of $3 million after-tax ($4 million pretax) related to the individual long term care product. These items were partially offset by an improvement in net results for life settlement contracts of $25 million after-tax ($39 million pretax), increased favorable net prior year development related to a $7 million after-tax ($11 million pretax) release of WTC event reserves and the absence of the
48
cumulative effect of a change in accounting principle of $8 million after-tax ($12 million pretax) recorded in 2002 relating to the write-down of impaired goodwill.
CORPORATE AND OTHER NON-CORE
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Net investment income | $ | 320 | $ | 251 | $ | 246 | ||||||||||||||||||
| Revenues | $ | 353 | $ | 729 | $ | 952 | 305 | 311 | 358 | |||||||||||||||
| Net investment income | 241 | 218 | 262 | |||||||||||||||||||||
| Net operating income | 3 | 9 | 84 | |||||||||||||||||||||
| Net realized investment gains (losses), after-tax | 27 | (12 | ) | 39 | ||||||||||||||||||||
| Net income (loss) | 117 | (761 | ) | – | 30 | (3 | ) | 123 | ||||||||||||||||
2004
2005
37
| December 31 | 2006 | 2005 | ||||||
| (In millions) | ||||||||
| Gross Case Reserves | $ | 2,511 | $ | 3,297 | ||||
| Gross IBNR Reserves | 3,528 | 4,075 | ||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 6,039 | $ | 7,372 | ||||
| Net Case Reserves | $ | 1,453 | $ | 1,554 | ||||
| Net IBNR Reserves | 1,999 | 1,902 | ||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 3,452 | $ | 3,456 | ||||
results. Partially offsetting these decreases was $121 million of interest income related to a federal income tax settlement. See Note E to the Consolidated Financial Statements included under Item 8 for further information.
federal income tax reserves.
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The following table summarizes the gross and net carried reserves as of December 31, 2004 and 2003 forFurther information on Corporate and Other Non-Core.
| Gross and Net Carried | ||||||||
| Claim and Claim Adjustment Expense Reserves | ||||||||
| December 31, (In millions) | 2004 | 2003 | ||||||
| Gross Case Reserves | $ | 3,803 | $ | 4,342 | ||||
| Gross IBNR Reserves | 4,875 | 5,330 | ||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 8,678 | $ | 9,672 | ||||
| Net Case Reserves | $ | 1,485 | $ | 1,879 | ||||
| Net IBNR Reserves | 1,691 | 1,858 | ||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 3,176 | $ | 3,737 | ||||
InNon-Core’s Net Prior Year Development for 2005 and 2004 the Company executed commutation agreements with several membersis included in Note F of the Trenwick Group. These commutationsConsolidated Financial Statements included under Item 8.
The following discusses net prior year development for the Corporate and Other Non-Core Segment recorded during 2003.
This development was primarily driven by $795 million of unfavorable net prior year claim and allocated claim adjustment expense reserve developmentcharges related to APMT. See the APMT Reserves section of this MD&A for further discussion of APMT development.
In addition to APMT development, there was unfavorable net prior year development recordedthese commuted contracts in 2003 related to CNA Re of $149 million and $75 million related to voluntary pools.
Unfavorable net prior year claim and allocated claim adjustment expense reserve development of approximately $25 million was recorded in CNA Re primarily for directors and officers exposures. The unfavorable net prior year development was a result of a claims review that was completed during the second quarter of 2003. The unfavorable net prior year development was primarily due to securities class action cases related to certain known corporate malfeasance cases and investment banking firms. The unfavorable net prior year development recorded was for accident years 2000 and 2001.
The CNA Re unfavorable net prior year development for 2003 was also due to a general change in the pattern of how losses emerged over time as reported by the companies that purchased reinsurance from CNA Re. Losses have continued to show large increases for accident years in the late 1990s and into 2000 and 2001. These increases are greater than the increases indicated by patterns from older accident years and had a similar effect on several lines of business. Approximately $67 million unfavorable net prior year development recorded in 2003 was related to proportional liability exposures, primarily from multi-line and umbrella treaties in accident years 1997 through 2001. Approximately $32 million of unfavorable net prior year development recorded in 2003 was related to assumed financial reinsurance for accident years 2001 and prior and approximately $24 million of unfavorable net prior year development was related to professional liability exposures in accident years 2001 and prior.
Additionally, CNA Re recorded $15 million of unfavorable net prior year development for construction defect related exposures. Because of the unique nature of this exposure, losses have not followed expected development
5038
patterns. The continued reporting of claims in California, the increase in the number of claims from states other than California and a review of individual ceding companies’ exposure to this type of claim resulted in an increase in the estimated reserve.
The following premium and claim and allocated claim adjustment expense development, was recorded in 2003 as a result of the elimination of deficiencies and redundancies in the reserve positions of individual products within CNA Re. Unfavorable net prior year premium and claim and allocated claim adjustment expense development of approximately $42 million related to Surety exposures, $32 million related to excess of loss liability exposures and $12 million related to facultative liability exposures were recorded in the third quarter of 2003.
Offsetting this unfavorable net prior year development was approximately $55 million of favorable net prior year development related to the WTC event as well as a $45 million underwriting benefit from cessions to corporate aggregate reinsurance treaties recorded in 2003. The benefit from cessions to the corporate aggregate reinsurance treaties was comprised of $102 million of ceded losses and $57 million of ceded premiums for accident years 2000 and 2001. See the Reinsurance section of this MD&A for further discussion of the Company’s aggregate reinsurance treaties.
Unfavorable net prior year claim and allocated claim adjustment expense reserve development of approximately $75 million was recorded during the third quarter of 2003 related to an adverse arbitration decision involving a single large property and business interruption loss on a voluntary insurance pool. The decision was rendered against a voluntary insurance pool in which the Company was a participant. The loss was caused by a fire which occurred in 1995. The Company no longer participates in this pool.
2003 Compared with 2002
Revenues decreased $223 million in 2003 as compared with 2002. The decrease in revenues was due primarily to reduced revenues from CNA UniSource and reduced net earned premiums in CNA Re due to the decision in October of 2003 to exit the assumed reinsurance market. These unfavorable impacts to revenue were partially offset by increased realized investment gains and increased limited partnership income.
Net results declined $761 million in 2003 as compared with 2002. The decrease in net results was due primarily to a $624 million after-tax ($960 million pretax) increase in unfavorable net prior year development primarily regarding APMT, a $44 million after-tax ($67 million pretax) increase in ULAE reserves, a $12 million after-tax ($18 million pretax) increase in certain insurance related assessments, a $153 million after-tax ($236 million pretax) increase in the bad debt provision for reinsurance receivables, decreased net investment income due primarily to a reduction of invested assets resulting from the sale of CNA Re U.K. and increased interest expense of $8 million after-tax ($12 million pretax) related to additional cessions to the corporate aggregate reinsurance treaties. The 2003 net results were favorably impacted by increased net realized investment gains of $15 million after-tax ($45 million pretax) and the absences of $40 million after-tax ($62 million pretax) of eBusiness expenses and an $18 million after-tax ($27 million pretax) reduction of the accrual for restructuring and other related charges. See the Investments section of this MD&A for further discussion on net investment income and net realized gains (losses).
Unfavorable net prior year development of $1,074 million was recorded in 2003, including $1,048 million of unfavorable claim and allocated claim adjustment expense reserve development and $26 million of unfavorable premium development. Unfavorable net prior year development of $114 million, including $155 million of unfavorable claim and allocated claim adjustment expense reserve development, and $41 million of favorable premium development, was recorded in 2002.
The discussion of the net prior year development recorded in 2003 was included in the “2004 compared with 2003” section above.
The following discusses net prior year development recorded in 2002 for Corporate and Other Non-Core.
The development recorded in 2002 consisted primarily of CNA Re unfavorable net prior year development.
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The unfavorable net prior year development recorded in 2002 related primarily to CNA Re and was the result of an actuarial review completed during 2002 and was primarily recorded in the directors and officers, professional liability errors and omissions and surety lines of business. Several large losses, as well as continued increases in the overall average size of claims for these lines, have resulted in higher than expected loss ratios.
Additionally, during 2002, CNA Re revised its estimate of premiums and losses related to the WTC event. In estimating CNA Re’s WTC event losses, the Company performed a treaty-by-treaty analysis of exposure. The Company’s original loss estimate was based on a number of assumptions including the loss to the industry, the loss to individual lines of business and the market share of CNA Re’s cedants. Information that became available in the first quarter of 2002 resulted in CNA Re increasing its estimate of WTC event related premiums and losses on its property facultative and property catastrophe business. The impact of increasing the estimate of gross WTC event losses by $144 million was fully offset on a net of reinsurance basis (before the impact of the CCC Cover) by higher reinstatement premiums and a reduction of return premiums. Approximately $95 million of CNA Re’s net WTC loss estimate was attributable to CNA Re U.K., which was sold in 2002.
A $32 million underwriting benefit was recorded for CNA Re for the corporate aggregate reinsurance treaties in 2002. The benefit was comprised of $93 million of ceded losses and $61 million of ceded premiums for accident year 2001.
Many ceding companies have sought provisions for the collateralization of assumed reserves in the event of a financial strength ratings downgrade or other triggers. Before exiting the reinsurance market, CNA Re had been impacted by this trend and had entered into several contracts with rating or other triggers. See the Ratings section of this MD&A for more information.
Additionally, personal insurance unfavorable net prior year development of $35 million was recorded in 2002 on accident years 1997 through 1999. The unfavorable net prior year development was principally due to the then continuing policyholder defense costs associated with remaining open personal insurance claims. The unfavorable net prior year development was partially offset by favorable reserve development on other run-off business driven principally by financial and mortgage guarantee coverages from accident years 1997 and prior. The favorable net prior year development on financial and mortgage guarantee coverages resulted from a review of the underlying exposures and the outstanding losses, which showed that salvage and subrogation continues to be collected on these types of claims, thereby reducing estimated future losses net of anticipated reinsurance recoveries.
APMT Reserves
CNA’s
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relating to silicaclaims; the possibility of expanding theories of liability against our policyholders in environmental and silica-containing products, and the outcomemass tort matters; possible exhaustion of ongoing disputes as to coverage in relation to these claims; a further increase of claims and claims payments that may exhaust underlying umbrella and excess coverages at accelerated rates;coverage; and future developments pertaining to the Company’sour ability to recover reinsurance for asbestos, and environmental pollution claims.
CNA regularly performs ground up reviews of all open APMT accounts to evaluate the adequacy of the Company’s APMT reserves. In performing its comprehensive ground up analysis, the Company considers input from its professionals with direct responsibility for the claims, inside and outside counsel with responsibility for representation of the Company, and its actuarial staff. These professionals review, among many factors, the policyholder’s present and predicted future exposures, including such factors as claims volume, trial conditions, prior settlement history, settlement demands and defense costs; the impact of asbestos defendant bankruptcies on the policyholder; the policies issued by CNA, including such factors as aggregate or per occurrence limits, whether the policy is primary, umbrella or excess and the existence of policyholder retentions and/or deductibles; the existence of other insurance; and reinsurance arrangements.
With respect to other court cases and how they might affect the Company’s reserves and reasonable possible losses, the following should be noted. State and federal courts issue numerous decisions each year, which potentially impact losses and reserves in both a favorable and unfavorable manner. Examples of favorable developments include decisions to allocate defense and indemnity payments in a manner so as to limit carriers’ obligations to damages taking place during the effective dates of their policies; decisions holding that injuries occurring after asbestos operations are completed are subject to the completed operations aggregate limits of the policies; and decisions ruling that carriers’ loss control inspections of their insured’s premises do not give rise to a duty to warn third parties to the dangers of asbestos.
Examples of unfavorable developments include decisions limiting the application of the absolute pollution exclusion and decisions holding carriers liable for defense and indemnity of asbestos and pollution claims on a joint and several basis.
The Company’s ultimate liability for its environmental pollution and mass tort claims is impacted by several factors including ongoing disputes with policyholders over scope and meaning of coverage terms and, in the area of environmental pollution, court decisions that continue to restrict the scope and applicability of the absolute pollution exclusion contained in policies issued by the Company after 1989. Due to the inherent uncertainties described above, including the inconsistency of court decisions, the number of waste sites subject to cleanup and in the area of environmental pollution, the standards for cleanup and liability, the ultimate liability of CNA for environmental pollution and mass tort claims may vary substantially from the amount currently recorded.
claims.
5339
| December 31, 2006 | December 31, 2005 | |||||||||||||||
| Environmental | Environmental | |||||||||||||||
| Pollution and | Pollution and | |||||||||||||||
| Asbestos | Mass Tort | Asbestos | Mass Tort | |||||||||||||
| (In millions) | ||||||||||||||||
| Gross reserves | $ | 2,635 | $ | 647 | $ | 2,992 | $ | 680 | ||||||||
| Ceded reserves | (1,183 | ) | (231 | ) | (1,438 | ) | (257 | ) | ||||||||
Net reserves | $ | 1,452 | $ | 416 | $ | 1,554 | $ | 423 | ||||||||
| December 31, 2004 | December 31, 2003 | |||||||||||||||
| Environmental | Environmental | |||||||||||||||
| Pollution and | Pollution and | |||||||||||||||
| (In millions) | Asbestos | Mass Tort | Asbestos | Mass Tort | ||||||||||||
| Gross reserves | $ | 3,218 | $ | 755 | $ | 3,347 | $ | 839 | ||||||||
| Ceded reserves | (1,532 | ) | (258 | ) | (1,580 | ) | (262 | ) | ||||||||
Net reserves | $ | 1,686 | $ | 497 | $ | 1,767 | $ | 577 | ||||||||
Asbestos
CNA’s property and casualty insurance subsidiaries have exposure to asbestos-related claims. Estimation of asbestos-related claim and claim adjustment expense reserves involves limitations such as inconsistency of court decisions, specific policy provisions, allocation of liability among insurers and insureds and additional factors such as missing policies and proof of coverage. Furthermore, estimation of asbestos-related claims is difficult due to, among other reasons, the proliferation of bankruptcy proceedings and attendant uncertainties, the targeting of a broader range of businesses and entities as defendants, the uncertainty as to which other insureds may be targeted in the future and the uncertainties inherent in predicting the number of future claims.
In the past several years, CNA haswe experienced, at certain points in time, significant increases in claim counts for asbestos-related claims. The factors that led to these increases included, among other things, intensive advertising campaigns by lawyers for asbestos claimants, mass medical screening programs sponsored by plaintiff lawyers and the addition of new defendants such as the distributors and installers of products containing asbestos. During 2004In recent years, the rate of new filings appears to have decreased from the filing rates seen in the past several years.has decreased. Various challenges to mass screening claimants have been mounted. Nevertheless,successful. Historically, the Company continues to experience an overall increase in total asbestos claim counts. The majority of asbestos bodily injury claims arehave been filed by persons exhibiting few, if any, disease symptoms. Recent studiesStudies have concluded that the percentage of unimpaired claimants to total claimants ranges between 66% and up to 90%. Some courts including the federal district court responsible for pre-trial proceedings in all federal asbestos bodily injury actions, have orderedand some state statutes mandate that so-called “unimpaired” claimants may not recover unless at some point the claimant’s condition worsens to the point of impairment.
Some plaintiffs classified as “unimpaired” continue to challenge those orders and statutes. Therefore, the ultimate impact of the orders and statutes on future asbestos claims remains uncertain.
Challenges to these practices are being mounted, though the ultimate impact or success of these tactics remains uncertain.
As of December 31, 2004 and 2003, CNA carried approximately $1,686 million and $1,767 million of claim and claim adjustment expense reserves, net of reinsurance recoverables,policyholders claiming coverage for reported and unreported asbestos-related claims. The Company recorded $54 million and $642 million of unfavorable asbestos-related net claim and claim adjustment expense reserve development for the years ended December 31, 2004 and 2003. The Company recorded
54
no asbestos related net claim and claim adjustment expense reserve development forclaims has remained relatively constant in the year ended December 31, 2002. The 2004 unfavorable net prior year development was primarily related to a commutation loss related to Trenwick. The Company paid asbestos-related claims, net of reinsurance recoveries, of $135 million, $121 million and $21 million for the years ended December 31, 2004, 2003 and 2002.
The Company recorded $1,826 million and $642 million in unfavorable gross and net prior year development for the year ended December 31, 2003 for reported and unreported asbestos-related claims, principally due to potential losses from policies issued by the Company with high attachment points, which previous exposure analysis indicated would not be reached. The Company examined the claims filing trends to determine timeframes within which high excess policies issued by the Company could be reached. Elevated claims volumes and increased claims values, together with certain adverse court decisions affecting the ability of policyholders to access excess policies, supported the conclusion that excess policies with high attachment points previously thought not to be exposed may now potentially be exposed. The ceded reinsurance arrangements on these excess policies are different from the primary policies. In general, more extensive reinsurance arrangements apply to the excess policies. As a result, the prior year development shows a higher ratio of ceded to gross amounts than the reserves established in prior periods, resulting in a higher percentage of reserves ceded as of December 31, 2003 versus prior periods.
The Company haspast several years.
CNA has
40
The Company categorizes
Small accounts are defined as active accounts with $100,000$100 thousand or less of cumulative paid losses. At December 31, 2004, the Company had 1,109 small accounts, approximately 83%Approximately 80% and 81% of itsour total active asbestos accounts with reserves of $141 million, net of reinsurance. Atare classified as small accounts at December 31, 2003, CNA had 1,065 small accounts2006 and established reserves of $147 million, net of reinsurance. Small accounts are typically representative of policyholders with limited connection to asbestos. As entities which were historic targets in asbestos litigation continue to file for bankruptcy protection, plaintiffs’ attorneys are seeking other viable targets. As a result, companies with few or no previous asbestos claims are becoming targets in asbestos litigation and nevertheless must be defended by CNA under its
55
policies. Bankruptcy filings and increased claims filings in the last few years could potentially increase costs incurred in defending small accounts.
The CompanyWe also evaluates itsevaluate our asbestos liabilities arising from itsour assumed reinsurance business and itsour participation in various pools. At December 31, 2004 and 2003, CNA had $148 million and $157 million of reserves, net of reinsurance, related to these asbestos liabilities arising from the Company’s assumed reinsurance obligations and CNA’s participation in pools, including Excess & Casualty Reinsurance Association (ECRA).
At December 31, 2004 and 2003, the unassigned
2005.
| Net Paid | ||||||||||||||||
| (Recovered) Losses | Net Asbestos | Percent of | ||||||||||||||
| Number of | in 2006 | Reserves | Asbestos | |||||||||||||
| December 31, 2006 | Policyholders | (In millions) | (In millions) | Net Reserves | ||||||||||||
| Policyholders with settlement agreements | ||||||||||||||||
| Structured Settlements | 15 | $ | 22 | $ | 171 | 12 | % | |||||||||
| Wellington | 3 | (1 | ) | 14 | 1 | |||||||||||
| Coverage in place | 37 | (18 | ) | 79 | 5 | |||||||||||
| Fibreboard | 1 | — | 53 | 4 | ||||||||||||
| Total with settlement agreements | 56 | 3 | 317 | 22 | ||||||||||||
| Other policyholders with active accounts | ||||||||||||||||
| Large asbestos accounts | 220 | 76 | 254 | 17 | ||||||||||||
| Small asbestos accounts | 1,080 | 17 | 101 | 7 | ||||||||||||
| Total other policyholders | 1,300 | 93 | 355 | 24 | ||||||||||||
| Assumed reinsurance and pools | — | 6 | 141 | 10 | ||||||||||||
| Unassigned IBNR | — | — | 639 | 44 | ||||||||||||
Total | 1,356 | $ | 102 | $ | 1,452 | 100 | % | |||||||||
December 31, 2004
| Net Paid Losses | Net Asbestos | Percent of | ||||||||||||||
| Number of | in 2004 | Reserves | Asbestos | |||||||||||||
| Policyholders | (In millions) | (In millions) | Net Reserves | |||||||||||||
| Policyholders with settlement agreements | ||||||||||||||||
| Structured Settlements | 11 | $ | 39 | $ | 175 | 10 | % | |||||||||
| Wellington | 4 | 4 | 17 | 1 | ||||||||||||
| Coverage in place | 33 | 14 | 76 | 5 | ||||||||||||
| Fibreboard | 1 | – | 54 | 3 | ||||||||||||
| Total with settlement agreements | 49 | 57 | 322 | 19 | ||||||||||||
| Other policyholders with active accounts | ||||||||||||||||
| Large asbestos accounts | 180 | 47 | 368 | 22 | ||||||||||||
| Small asbestos accounts | 1,109 | 23 | 141 | 8 | ||||||||||||
| Total other policyholders | 1,289 | 70 | 509 | 30 | ||||||||||||
| Assumed reinsurance and pools | – | 8 | 148 | 9 | ||||||||||||
| Unassigned IBNR | – | – | 707 | 42 | ||||||||||||
Total | 1,338 | $ | 135 | $ | 1,686 | 100 | % | |||||||||
5641
December 31, 2003
| Net Paid Losses | Net Asbestos | Percent of | Net Paid Losses | Net Asbestos | Percent of | |||||||||||||||||||||||||||
| Number of | in 2003 | Reserves | Asbestos | Number of | in 2005 | Reserves | Asbestos | |||||||||||||||||||||||||
| Policyholders | (In millions) | (In millions) | Net Reserves | |||||||||||||||||||||||||||||
| December 31, 2005 | Policyholders | (In millions) | (In millions) | Net Reserves | ||||||||||||||||||||||||||||
| Policyholders with settlement agreements | ||||||||||||||||||||||||||||||||
| Structured Settlements | 9 | $ | 20 | $ | 188 | 11 | % | 13 | $ | 30 | $ | 167 | 11 | % | ||||||||||||||||||
| Wellington | 5 | 2 | 23 | 1 | 4 | 2 | 15 | 1 | ||||||||||||||||||||||||
| Coverage in place | 32 | 40 | 109 | 6 | 34 | 13 | 58 | 4 | ||||||||||||||||||||||||
| Fibreboard | 1 | 1 | 54 | 3 | 1 | — | 54 | 3 | ||||||||||||||||||||||||
| Total with settlement agreements | 47 | 63 | 374 | 21 | 52 | 45 | 294 | 19 | ||||||||||||||||||||||||
| Other policyholders with active accounts | ||||||||||||||||||||||||||||||||
| Large asbestos accounts | 160 | 35 | 405 | 23 | 199 | 68 | 273 | 17 | ||||||||||||||||||||||||
| Small asbestos accounts | 1,065 | 16 | 147 | 8 | 1,073 | 23 | 135 | 9 | ||||||||||||||||||||||||
| Total other policyholders | 1,225 | 51 | 552 | 31 | 1,272 | 91 | 408 | 26 | ||||||||||||||||||||||||
| Assumed reinsurance and pools | – | 7 | 157 | 9 | — | 6 | 143 | 9 | ||||||||||||||||||||||||
| Unassigned IBNR | – | – | 684 | 39 | — | — | 709 | 46 | ||||||||||||||||||||||||
Total | 1,272 | $ | 121 | $ | 1,767 | 100 | % | 1,324 | $ | 142 | $ | 1,554 | 100 | % | ||||||||||||||||||
Certain asbestos litigation in which CNA is currently engaged is described below:
As more fully discussed in Note F of the Consolidated Financial Statements included under Item 8 under the heading “APMT Reserves” and in this MD&A under the headings “Asbestos” and “Reserves—Estimates and Uncertainties,” the ultimate cost of reported claims, and in particular APMT claims, is subject to a great many uncertainties, including future developments of various kinds that CNA does not control and that are difficult or impossible to foresee accurately. With respect to the litigation identified below in particular, numerous factual and legal issues remain unresolved. Rulings on those issues by the courts are critical to the evaluation of the ultimate cost to the Company. The outcome of the litigation cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
On February 13, 2003, CNA announced it had resolved asbestos related coverage litigation and claims involving A.P. Green Industries, A.P. Green Services and Bigelow — Liptak Corporation. Under the agreement, CNA is required to pay $74 million, net of reinsurance recoveries, over a ten year period commencing after the final approval of a bankruptcy plan of reorganization. The settlement resolves CNA’s liabilities for all pending and
57
future asbestos claims involving A.P. Green Industries, Bigelow — Liptak Corporation and related subsidiaries, including alleged “non-products” exposures. The settlement received initial bankruptcy court approval on August 18, 2003 and CNA expects to procure confirmation of a bankruptcy plan containing an injunction to protect CNA from any future claims.
CNA is engaged in insurance coverage litigation, filed in 2003, with underlying plaintiffs who have asbestos bodily injury claims against the former Robert A. Keasbey Company (Keasbey) in New York state court (Continental Casualty Co. v. Employers Ins. of Wausau et al., No. 601037/03 (N.Y. County)). Keasbey, a currently dissolved corporation, was a seller and installer of asbestos-containing insulation products in New York and New Jersey. Thousands of plaintiffs have filed bodily injury claims against Keasbey; however, Keasbey’s involvement at a number of work sites is a highly contested issue. Therefore, the defense disputes the percentage of valid claims against Keasbey. CNA issued Keasbey primary policies for 1970-1987 and excess policies for 1972-1978. CNA has paid an amount substantially equal to the policies’ aggregate limits for products and completed operations claims. Claimants against Keasbey allege, among other things, that CNA owes coverage under sections of the policies not subject to the aggregate limits, an allegation CNA vigorously contests in the lawsuit. In the litigation, CNA and the claimants seek declaratory relief as to the interpretation of various policy provisions. The court dismissed a claim alleging bad faith and seeking unspecified damages on March 21, 2004; that ruling is now being appealed. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether the Company has any further responsibility to compensate claimants against Keasbey under its policies and, if so, under which policies; (b) whether the Company’s responsibilities extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions in some of the policies apply to exclude certain claims; (e) the extent to which claimants can establish exposures to asbestos materials as to which Keasbey has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Keasbey and whether such theories can, in fact, be established; (g) the diseases and damages claimed by such claimants; (h) and the extent that such liability would be shared with other responsible parties. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
CNA has insurance coverage disputes related to asbestos bodily injury claims against Burns & Roe Enterprises, Inc. (Burns & Roe). Originally raised in litigation, now stayed, these disputes are currently part ofIn re: Burns & Roe Enterprises, Inc., pending in the U.S. Bankruptcy Court for the District of New Jersey, No. 00-41610. Burns & Roe provided engineering and related services in connection with construction projects. At the time of its bankruptcy filing, on December 4, 2000, Burns & Roe faced approximately 11,000 claims alleging bodily injury resulting from exposure to asbestos as a result of construction projects in which Burns & Roe was involved. CNA allegedly provided primary liability coverage to Burns & Roe from 1956-1969 and 1971-1974, along with certain project-specific policies from 1964-1970. The parties in the litigation are seeking a declaration of the scope and extent of coverage, if any, afforded to Burns & Roe for its asbestos liabilities. The litigation has been stayed since May 14, 2003 pending resolution of the bankruptcy proceedings. With respect to the Burns & Roe litigation and the pending bankruptcy proceeding, numerous unresolved factual and legal issues will impact the ultimate exposure to the Company. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether the Company has any further responsibility to compensate claimants against Burns & Roe under its policies and, if so, under which; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions, including professional liability exclusions, in some of the Company’s policies apply to exclude certain claims; (e) the extent to which claimants can establish exposures to asbestos materials as to which Burns & Roe has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Burns & Roe and whether such theories can, in fact, be established; (g) the diseases and damages claimed by such claimants; (h) the extent that any liability of Burns & Roe would be shared with other potentially responsible parties; (i) and the impact of bankruptcy proceedings on claims and coverage issue resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
CIC issued certain primary and excess policies to Bendix Corporation (Bendix), now part of Honeywell International, Inc. (Honeywell). Honeywell faces approximately 75,400 pending asbestos bodily injury claims resulting from alleged
58
exposure to Bendix friction products. CIC’s primary policies allegedly covered the period from at least 1939 (when Bendix began to use asbestos in its friction products) to 1983, although the parties disagree about whether CIC’s policies provided product liability coverage before 1940 and from 1945 to 1956. CIC asserts that it owes no further material obligations to Bendix under any primary policy. Honeywell alleges that two primary policies issued by CIC covering 1969-1975 contain occurrence limits but not product liability aggregate limits for asbestos bodily injury claims. CIC has asserted, among other things, even if Honeywell’s allegation is correct, which CNA denies, its liability is limited to a single occurrence limit per policy or per year, and in the alternative, a proper allocation of losses would substantially limit its exposure under the 1969-1975 policies to asbestos claims. These and other issues are being litigated inContinental Insurance Co., et al. v. Honeywell International Inc., No. MRS-L-1523-00 (Morris County, New Jersey) which was filed on May 15, 2000. In the litigation, the parties are seeking declaratory relief of the scope and extent of coverage, if any, afforded to Bendix under the policies issued by the Company. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether certain of the primary policies issued by the Company contain aggregate limits of liability; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether some of the claims against Bendix arise out of events which took place after expiration of the Company’s policies; (e) the extent to which claimants can establish exposures to asbestos materials as to which Bendix has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Bendix and whether such theories can, in fact, be established; (g) the diseases and damages claimed by such claimants; (h) the extent that any liability of Bendix would be shared with other responsible parties; and (i) whether Bendix is responsible for reimbursement of funds advanced by the Company for defense and indemnity in the past. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
Suits have also been initiated directly against CNA and other insurers in four jurisdictions: Ohio, Texas, West Virginia and Montana. In the two Ohio actions, plaintiffs allege the defendants negligently performed duties undertaken to protect workers and the public from the effects of asbestos (Varner v. Ford Motor Co., et al. (Cuyahoga County, Ohio, filed on June 12, 2003) andPeplowski v. ACE American Ins. Co., et al. (U.S. D. C. N.D. Ohio, filed on April 1, 2004)). The state trial court granted insurers, including CNA, summary judgment against a representative group of plaintiffs, ruling that insurers had no duty to warn plaintiffs about the dangers of asbestos. The summary judgment ruling is on appeal. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date are barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
Similar lawsuits have also been filed in Texas against CNA beginning in 2002, and other insurers and non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos (Boson v. Union Carbide Corp., et al. (District Court of Nueces County, Texas)). During 2003, many of the Texas claims have been dismissed as time-barred by the applicable Statute of Limitations. In other claims, the Texas courts have ruled that the carriers did not owe any duty to the plaintiffs or the general public to advise on the effects of asbestos thereby dismissing these claims. Certain of the Texas courts’ rulings have been appealed. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date are barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any
59
particular claimant to recovery; (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
CNA was named inAdams v. Aetna, Inc., et al. (Circuit Court of Kanawha County, West Virginia, filed June 23, 2002), a purported class action against CNA and other insurers, alleging that the defendants violated West Virginia’s Unfair Trade Practices Act in handling and resolving asbestos claims against their policyholders. The Adams litigation had been stayed pending disposition of two cases in the West Virginia Supreme Court of Appeals. Those cases were decided in June, 2004. The Adams case also involves proceedings and mediation in the Bankruptcy Court in New York with jurisdiction over the Manville Bankruptcy. In those proceedings issues have been raised concerning the preclusive effect of the Manville Bankruptcy settlements with insurers and resulting injunctions against claims. Those issues are now on appeal to the United States District Court for the Eastern District of New York. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the legal sufficiency of the novel statutory and common law claims pled by the claimants; (b) the applicability of claimants’ legal theories to insurers who neither defended nor controlled the defense of certain policyholders; (c) the possibility that certain of the claims are barred by various Statutes of Limitation; (d) the fact that the imposition of duties would interfere with the attorney client privilege and the contractual rights and responsibilities of the parties to the Company’s insurance policies; (e) the potential and relative magnitude of liabilities of co-defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
On March 22, 2002, a direct action was filed in Montana (Pennock, et al. v. Maryland Casualty, et al. First Judicial District Court of Lewis & Clark County, Montana) by eight individual plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses against CNA, Maryland Casualty and the State of Montana. This action alleges that the carriers failed to warn of or otherwise protect W.R. Grace employees from the dangers of asbestos at a W.R. Grace vermiculite mining facility in Libby, Montana. The Montana direct action is currently stayed because of W.R. Grace’s pending bankruptcy. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the unclear nature and scope of any alleged duties owed to people exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the potential application of Statutes of Limitation to many of the claims which may be made depending on the nature and scope of the alleged duties; (c) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; (d) the diseases and damages claimed by such claimants; (e) and the extent that such liability would be shared with other potentially responsible parties; and, (f) the impact of bankruptcy proceedings on claims resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
CNA is vigorously defending these and other cases and believes that it has meritorious defenses to the claims asserted. However, there are numerous factual and legal issues to be resolved in connection with these claims, and it is extremely difficult to predict the outcome or ultimate financial exposure represented by these matters. Adverse developments with respect to any of these matters could have a material adverse effect on CNA’s business, insurer financial strength and debt ratings and results of operations and/or equity.
As a result of the uncertainties and complexities involved, reserves for asbestos claims cannot be estimated with traditional actuarial techniques that rely on historical accident year loss development factors. In establishing asbestos reserves, CNA evaluateswe evaluate the exposure presented by each insured. As part of this evaluation, CNA considerswe consider the available insurance coverage; limits and deductibles; the potential role of other insurance, particularly underlying coverage below any CNAof our excess liability policies; and applicable coverage defenses, including asbestos exclusions. Estimation of asbestos-related claim and claim adjustment expense reserves involves a high degree of judgment on theour part of management and consideration of many complex factors, including:
6042
We are involved in significant asbestos-related claim litigation, which | ||||
The Company is also monitoring possible legislative reforms ondescribed in Note F of the state and national level, including possible federal legislation to create a national privately financed trust financed by contributions from insurers such as CNA, industrial companies and others, which if established, could replace litigation of asbestos claims with payments to claimants from the trust. It is uncertain at the present time whether such legislation will be enacted or, if it is, its impact on the Company.
Consolidated Financial Statements included under Item 8.
61
cleanup costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and the definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues.
A number of proposals to modify Superfund
As of December 31, 2004 and 2003, CNA carried approximately $497 million and $577 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and mass tort claims. There was $1 million and $153 million of environmental pollution and mass tort net claim and claim adjustment expense reserve development recorded for the years ended December 31, 2004 and 2003. There was no environmental pollution and mass tort net claim and claim adjustment expense reserve development recorded for the year ended December 31, 2002. Additionally, the Company recorded $15 million of current accident year losses related to mass tort in 2004. The Company paid environmental pollution-related claims and mass tort-related claims, net of reinsurance recoveries, of $96 million, $93 million and $116 million for the years ended December 31, 2004, 2003 and 2002.
CNA has made resolution of large environmental pollution exposures a management priority. The Company hasWe have resolved a number of itsour large environmental accounts by negotiating settlement agreements. In itsour settlements, CNAwe sought to resolve those exposures and obtain the broadest release language to avoid future claims from the same policyholders seeking coverage for sites or claims that had not emerged at the time CNAwe settled with itsour policyholder. While the terms of each settlement agreement vary, CNAwe sought to obtain broad environmental releases that include known and unknown sites, claims and policies. The broad scope of the release provisions contained in those settlement agreements should, in many cases, prevent future exposure from settled policyholders. It remains uncertain, however, whether a court interpreting the language of the settlement agreements will adhere to the intent of the parties and uphold the broad scope of language of the agreements.
The Company classifies its
CNA has
62
during the policy periods and other documentation supporting the demand for claims payment. Coverage in place agreements may have annual payment caps. At December 31, 2004, CNA had negotiated fifteen coverage in place agreements and had established a reserve of $16 million, net of reinsurance. At December 31, 2003, CNA had six such agreements with a recorded reserve of $8 million, net of reinsurance.
The Company categorizes
The Company
At December 31, 2004, the Company’s
43
| Net | ||||||||||||||||
| Environmental | Percent of | |||||||||||||||
| Net Paid Losses | Pollution | Environmental | ||||||||||||||
| Number of | in 2006 | Reserves | Pollution Net | |||||||||||||
| December 31, 2006 | Policyholders | (In millions) | (In millions) | Reserve | ||||||||||||
| Policyholders with Settlement Agreements | ||||||||||||||||
| Structured settlements | 11 | $ | 16 | $ | 9 | 3 | % | |||||||||
| Coverage in place | 18 | 5 | 14 | 5 | ||||||||||||
| Total with Settlement Agreements | 29 | 21 | 23 | 8 | ||||||||||||
| Other Policyholders with Active Accounts | ||||||||||||||||
| Large pollution accounts | 115 | 20 | 58 | 20 | ||||||||||||
| Small pollution accounts | 346 | 9 | 46 | 17 | ||||||||||||
| Total Other Policyholders | 461 | 29 | 104 | 37 | ||||||||||||
| Assumed Reinsurance & Pools | — | 1 | 32 | 11 | ||||||||||||
| Unassigned IBNR | — | — | 126 | 44 | ||||||||||||
Total | 490 | $ | 51 | $ | 285 | 100 | % | |||||||||
| Net | ||||||||||||||||
| Environmental | Percent of | |||||||||||||||
| Net Paid Losses | Pollution | Environmental | ||||||||||||||
| Number of | in 2005 | Reserves | Pollution Net | |||||||||||||
| December 31, 2005 | Policyholders | (In millions) | (In millions) | Reserve | ||||||||||||
| Policyholders with Settlement Agreements | ||||||||||||||||
| Structured settlements | 6 | $ | 10 | $ | 17 | 5 | % | |||||||||
| Coverage in place | 16 | 10 | 23 | 7 | ||||||||||||
| Total with Settlement Agreements | 22 | 20 | 40 | 12 | ||||||||||||
| Other Policyholders with Active Accounts | ||||||||||||||||
| Large pollution accounts | 120 | 18 | 63 | 19 | ||||||||||||
| Small pollution accounts | 362 | 15 | 50 | 15 | ||||||||||||
| Total Other Policyholders | 482 | 33 | 113 | 34 | ||||||||||||
| Assumed Reinsurance & Pools | — | 3 | 33 | 10 | ||||||||||||
| Unassigned IBNR | — | — | 150 | 44 | ||||||||||||
Total | 504 | $ | 56 | $ | 336 | 100 | % | |||||||||
At December 31, 2004
| Net | ||||||||||||||||
| Environmental | Percent of | |||||||||||||||
| Net Paid Losses | Pollution | Environmental | ||||||||||||||
| Number of | in 2004 | Reserves | Pollution Net | |||||||||||||
| Policyholders | (In millions) | (In millions) | Reserve | |||||||||||||
| Policyholders with Settlement Agreements | ||||||||||||||||
| Structured settlements | 2 | $ | 14 | $ | 5 | 1 | % | |||||||||
| Coverage in place | 15 | 5 | 16 | 5 | ||||||||||||
| Total with Settlement Agreements | 17 | 19 | 21 | 6 | ||||||||||||
| Other Policyholders with Active Accounts | ||||||||||||||||
| Large pollution accounts | 134 | 18 | 75 | 22 | ||||||||||||
| Small pollution accounts | 405 | 14 | 47 | 14 | ||||||||||||
| Total Other Policyholders | 539 | 32 | 122 | 36 | ||||||||||||
| Assumed Reinsurance & Pools | – | 2 | 36 | 10 | ||||||||||||
| Unassigned IBNR | – | – | 163 | 48 | ||||||||||||
Total | 556 | $ | 53 | $ | 342 | 100 | % | |||||||||
6344
| Net | ||||||||||||||||
| Environmental | Percent of | |||||||||||||||
| Net Paid Losses | Pollution | Environmental | ||||||||||||||
| Number of | in 2003 | Reserves | Pollution Net | |||||||||||||
| Policyholders | (In millions) | (In millions) | Reserve | |||||||||||||
| Policyholders with Settlement Agreements | ||||||||||||||||
| Structured settlements | 1 | $ | 17 | $ | 12 | 3 | % | |||||||||
| Coverage in place | 6 | 3 | 8 | 2 | ||||||||||||
| Total with Settlement Agreements | 7 | 20 | 20 | 5 | ||||||||||||
| Other Policyholders with Active Accounts | ||||||||||||||||
| Large pollution accounts | 144 | 21 | 86 | 22 | ||||||||||||
| Small pollution accounts | 432 | 14 | 53 | 13 | ||||||||||||
| Total Other Policyholders | 576 | 35 | 139 | 35 | ||||||||||||
| Assumed Reinsurance & Pools | – | 2 | 38 | 10 | ||||||||||||
| Unassigned IBNR | – | – | 197 | 50 | ||||||||||||
Total | 583 | $ | 57 | $ | 394 | 100 | % | |||||||||
In 2003, CNA observed a marked increase in silica claims frequency in Mississippi, where plaintiff attorneys appear to have filed claims to avoid the effect of tort reform. In 2004, silica claims frequency in Mississippi has moderated notably due to implementation of tort reform measures and favorable court decisions. To date, the most significant silica exposures identified included a relatively small number of accounts with significant numbers of new claims reported in 2003 that continued at a lesser rate in 2004. Establishing claim and claim adjustment expense reserves for silica claims is subject to uncertainties because of disputes concerning medical causation with respect to certain diseases, including lung cancer, geographical concentration of the lawsuits asserting the claims, and the large rise in the total number of claims without underlying epidemiological developments suggesting an increase in disease rates or plaintiffs. Moreover, judicial interpretations regarding application of various tort defenses, including application of various theories of joint and several liabilities, impede the Company’s ability to estimate its ultimate liability for such claims.
64
INVESTMENTS
CNA adopted Statement of Position 03-01,Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-01) as of January 1, 2004. The assets and liabilities of certain guaranteed investment contracts and indexed group annuity contracts that were previously segregated and reported as separate accounts no longer qualify for separate account presentation. Prior to the adoption of SOP 03-01, the asset and liability presentation of these affected contracts were categorized as separate account assets and liabilities within the Consolidated Balance Sheet. The results of operations from separate account business were primarily classified as other revenue in the Consolidated Statement of Operations. In accordance with the provisions of SOP 03-01, the classification and presentation of certain balance sheet and income statement items have been modified. Accordingly, certain investment securities previously classified as separate account assets have now been reclassified on the balance sheet to the general account and are reported as available-for-sale or trading securities. The investment portfolio supporting the indexed group annuity contracts is classified as held for trading purposes, and is carried at fair value, with both the net realized and unrealized gains (losses) included within net investment income in the Consolidated Statement of Operations. Consistent with the requirements of SOP 03-01, prior year amounts have not been conformed to the current year presentation.
Beginning in the fourth quarter of 2004, the Company has designated new purchases related to a specific investment strategy, that primarily includes convertible bond securities, as held for trading purposes. These securities in the trading portfolio are carried at fair value, with both the net realized and unrealized gains (losses) included within net investment income in the Consolidated Statements of Operations.
Net Investment Income
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Fixed maturity securities | $ | 1,571 | $ | 1,651 | $ | 1,854 | $ | 1,842 | $ | 1,608 | $ | 1,571 | ||||||||||||
| Short term investments | 56 | 63 | 62 | 248 | 147 | 56 | ||||||||||||||||||
| Limited partnerships | 212 | 221 | (34 | ) | 288 | 254 | 212 | |||||||||||||||||
| Equity securities | 14 | 19 | 66 | 23 | 25 | 14 | ||||||||||||||||||
| Income from trading portfolio (a) | 110 | – | – | 103 | 47 | 110 | ||||||||||||||||||
| Interest on funds withheld and other deposits | (267 | ) | (344 | ) | (239 | ) | (68 | ) | (166 | ) | (261 | ) | ||||||||||||
| Other | 18 | 85 | 81 | 18 | 20 | 18 | ||||||||||||||||||
| Gross investment income | 1,714 | 1,695 | 1,790 | 2,454 | 1,935 | 1,720 | ||||||||||||||||||
| Investment expense | (40 | ) | (48 | ) | (60 | ) | (42 | ) | (43 | ) | (40 | ) | ||||||||||||
Net investment income | $ | 1,674 | $ | 1,647 | $ | 1,730 | $ | 2,412 | $ | 1,892 | $ | 1,680 | ||||||||||||
(a) There was no change in net unrealized gains (losses) on trading securities included in net investment income for the year ended December 31, 2006. The change in net unrealized gains (losses) on trading securities included in net investment income was $(7) million and $2 million for the years ended December 31, 2005 and 2004. Net investment income was $2increased by $520 million for the year ended December 31, 2004.The Company experienced slightly higher net investment income in 2004 as2006 compared with 2003. This2005. The improvement was primarily driven by interest rate increases across fixed maturity securities and short term investments, an increase was due primarily toin the reducedoverall invested asset base resulting from improved cash flow and a reduction of interest expense on funds withheld and other deposits. TheDuring 2006 and 2005, we commuted several significant finite reinsurance contracts which contained interest costscrediting provisions and as a result, interest expense on funds withheld has declined significantly. No further interest expense is due on the funds withheld on the commuted contracts. The pretax interest expense on funds withheld related to these significant commuted contracts was $14 million, $84 million and other deposits increased in 2003$146 million for December 31, 2006, 2005 and 2004, and was reflected as a resultcomponent of additional cessions toNet investment income in our Consolidated Statements of Operations. The 2005 and 2004 amounts include the corporate aggregate reinsurance and other treaties due to adverse net prior year development (seeinterest charges associated with the Reinsurance sectioncontract commuted in 2006. See Note H of this MD&Athe Consolidated Financial Statements included under Item 8 for additional information for interest costs on funds withheld and other deposits).deposits. Also impacting net investment income was increased income from the trading portfolio of approximately $56 million. The increased income from the trading portfolio was largely offset by a corresponding increase in the policyholders’ funds reserves supported by the trading portfolio, which is included in Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations.Net investment income increased by $212 million for 2005 compared with 2004. This improvementincrease was offset partly by decreases in investment incomedue to the reduced interest expense on funds withheld and other deposits discussed above and improved results across all other available-for-sale asset classes, which is largelyespecially short term investments, due to the result of the impacts of the Group Benefits and Individual Life sales transactions that are describedimproved period over period yields. This improvement was partly offset by decreases in Note P — Significant Transactions. Also, the net investment income offrom the trading portfolio positively impacted results for 2004.The Company experienced lower net investment income in 2003 as compared with 2002. This decrease was due primarily to lower investment yields on fixed maturity securities and increased costs on funds withheld and other deposits. The interest costs on funds withheld and other deposits increased principally as a result of additional cessions to the corporate aggregate reinsurance and other treaties due to adverse net prior year development65
recorded in 2003. This decrease in net investment income in 2003 was partially offset by increased limited partnership income. Limited partnership income increased as a result of improving equity markets and favorable conditions in the fixed income markets.
The bond segment of the investment portfolio yielded 5.6% in 2006, 4.9% in 2005 and 4.6% in 2004, 5.1% in 2003 and 6.0% in 2002.2004.
45
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Realized investment gains (losses): | ||||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||
| U.S. Government bonds | $ | 10 | $ | (70 | ) | $ | 392 | $ | 62 | $ | (33 | ) | $ | 10 | ||||||||||
| Corporate and other taxable bonds | 123 | 380 | (557 | ) | (98 | ) | (86 | ) | 123 | |||||||||||||||
| Tax-exempt bonds | 42 | 97 | 48 | 53 | 12 | 42 | ||||||||||||||||||
| Asset-backed bonds | 53 | 42 | 36 | (9 | ) | 14 | 53 | |||||||||||||||||
| Redeemable preferred stock | 19 | (12 | ) | (28 | ) | (3 | ) | 3 | 19 | |||||||||||||||
| Total fixed maturity securities | 247 | 437 | (109 | ) | 5 | (90 | ) | 247 | ||||||||||||||||
| Equity securities | 202 | 114 | (158 | ) | 16 | 38 | 202 | |||||||||||||||||
| Derivative securities | (84 | ) | 78 | (52 | ) | 18 | 49 | (84 | ) | |||||||||||||||
| Short-term investments | (3 | ) | 3 | 12 | ||||||||||||||||||||
| Other, including dispositions of businesses, net of participating policyholders’ interest | (601 | ) | (168 | ) | 53 | |||||||||||||||||||
| Short term investments | (5 | ) | — | (3 | ) | |||||||||||||||||||
| Other, including dispositions of businesses net of participating policyholders’ interest | 53 | (10 | ) | (601 | ) | |||||||||||||||||||
| Realized investment gains (losses) before allocation to participating policyholders’ and minority interests | (239 | ) | 464 | (254 | ) | 87 | (13 | ) | (239 | ) | ||||||||||||||
| Allocated to participating policyholders’ and minority interests | (9 | ) | (4 | ) | 2 | (1 | ) | 3 | (9 | ) | ||||||||||||||
| Income tax (expense) benefit | 95 | (175 | ) | 103 | (19 | ) | — | 95 | ||||||||||||||||
Net realized investment gains (losses), net of participating policyholders’ and minority interests | $ | (153 | ) | $ | 285 | $ | (149 | ) | $ | 67 | $ | (10 | ) | $ | (153 | ) | ||||||||
The derivative securities losses recorded in 2004 were primarily duenational contractor. For additional information on loans to derivative securities held to mitigate the effect of changes in long term interest rates on the valuenational contractor, see Note S of the fixed maturity portfolio.
NetConsolidated Financial Statements included under Item 8. Other realized investment results increased $434 million after-tax in 2003 as compared with 2002. This change was due primarily to $209 million after-tax ($321 million pretax) impairmentgains (losses) for the year ended December 31, 2005 and 2004 include gains and losses for other-than-temporary declines in market values for fixed maturity and equity securities recorded in 2003 as compared to $578 million after-tax ($890 million pretax) recorded in 2002. The impairment losses recorded in 2002 related primarily to the telecommunications sector. Also contributing to the increase was improved realized results related to fixed maturity and derivative securitiessales of certain operations or affiliates that are described in 2003. These increases were partially offset by the $130 million after-tax ($176 million pretax) loss recorded in 2003 on the saleNote P of the Group Benefits business.
66
A primary objective in the management of the fixed maturity and equity portfolios is to maximize totaloptimize return relative to underlying liabilities and respective liquidity needs. The Company’sOur views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions, and the domestic and global economic conditions, are some of the factors that may enter into a decision to move between asset classes. Based on the Company’s consideration of these factors, in the course of normalan investment activity the Company may, in pursuit of the total return objective, be willing to sell securities that, in its analysis, are overvalued on a risk adjusted basis relative to other opportunities that are available at the time in the market; in turn the Company may purchase other securities that, according to its analysis, are undervalued in relation to other securities in the market. In making these value decisions, securities may be bought and sold that shift the investment portfolio between asset classes. The Companydecision. We also continually monitorsmonitor exposure to issuers of securities held and broader industry sector exposures and may from time to time reduceadjust such exposures based on itsour views of a specific issuer or industry sector. These activities will produce realized gains or losses.
46
contract liability relating to Life and Group Non-Core indexed group annuity contracts. We provided collateral to satisfy margin deposits on exchange-traded derivatives totaling $27 million as of December 31, 2006. For over-the-counter derivative transactions we utilize International Swaps and Derivatives Association (ISDA) Master Agreements that specify certain limits over which collateral is exchanged. As of December 31, 2006, we provided $31 million of cash as collateral for over-the-counter derivative instruments.
CNA classifies its
securities, which include OTTI losses.
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Net realized gains (losses) on fixed maturity securities and equity securities: | ||||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||
| Gross realized gains | $ | 704 | $ | 1,244 | $ | 1,009 | $ | 382 | $ | 361 | $ | 704 | ||||||||||||
| Gross realized losses | (457 | ) | (807 | ) | (1,118 | ) | (377 | ) | (451 | ) | (457 | ) | ||||||||||||
| Net realized gains (losses) on fixed maturity securities | 247 | 437 | (109 | ) | 5 | (90 | ) | 247 | ||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||
| Gross realized gains | 225 | 143 | 251 | 24 | 73 | 225 | ||||||||||||||||||
| Gross realized losses | (23 | ) | (29 | ) | (409 | ) | (8 | ) | (35 | ) | (23 | ) | ||||||||||||
| Net realized gains (losses) on equity securities | 202 | 114 | (158 | ) | ||||||||||||||||||||
| Net realized gains on equity securities | 16 | 38 | 202 | |||||||||||||||||||||
Net realized gains (losses) on fixed maturity and equity securities | $ | 449 | $ | 551 | $ | (267 | ) | $ | 21 | $ | (52 | ) | $ | 449 | ||||||||||
6747
| Fair | Months in | |||||||||||
| Value at | Unrealized | |||||||||||
| Date of | Loss | Loss Prior | ||||||||||
| Issuer Description and Discussion | Sale | On Sale | To Sale (a) | |||||||||
| (In millions) | ||||||||||||
| Various notes and bonds issued by the United States Treasury. Securities sold due to outlook on interest rates and inflation. | $ | 4,529 | $ | 18 | 0-6 | |||||||
| State issued revenue bonds. Positions were sold as part of a broader initiative to reduce municipal holdings. | 289 | 6 | 0-12 | |||||||||
| Financial services group that provides property and casualty, managed care, life, and various other insurance products in the United States. Position was sold to reduce exposure to the issuer and sector. | 56 | 5 | 0-6 | |||||||||
| Company is in the advertising industry, utilizing various venues including television, radio, outdoor displays, and live entertainment. The company has entered into an agreement to be acquired. Position was reduced in response to the announced transaction. | 66 | 5 | 0-12+ | |||||||||
| Company develops and operates broadband cable communication networks, high speed internet service and digital video applications. Position was sold in response to newly issued debt. | 92 | 5 | 0-6 | |||||||||
| $ | 5,032 | $ | 39 | |||||||||
| (a) | Represents the range of consecutive months the various positions were in an unrealized loss prior to sale. 0-12+ means certain positions were less than 12 months, while others were greater than 12 months. |
| Fair | Months in | |||||||||||
| Year ended December 31, 2004 | Value | Unrealized | ||||||||||
| Date of | Loss | Loss Prior | ||||||||||
| Issuer Description and Discussion | Sale | On Sale | To Sale | |||||||||
| (In millions) | ||||||||||||
| Issues and sells mortgage backed securities. Issuer was charted by United States Congress to facilitate housing ownership for low to middle income Americans. Loss was incurred as a result of unfavorable interest rate change. | $ | 4,766 | $ | 19 | 0-12 | |||||||
| Company acquires, sells and operates power generation facilities. The loss reflects intense competition and price pressure in the sector. | 120 | 18 | 0-24 | + | ||||||||
| Various notes and bonds issued by the United States Treasury. Volatility of interest rates prompted movement to other asset classes. | 4,092 | 15 | 0-12 | |||||||||
| Municipal issuer of revenue bonds that authorizes the financing of water facilities. Loss was incurred as a result of unfavorable interest rate change. | 309 | 13 | 0-12 | |||||||||
| Company provides networking telecommunications services worldwide. The company is under price/profit pressure as a result of excess capacity in the industry. | 97 | 11 | 0-12 | |||||||||
| Municipal issuer of special obligation bonds for school financing. Loss was incurred as a result of unfavorable interest rate change. | 152 | 8 | 0-6, 13-24 | |||||||||
| Municipal issuer of revenue bonds that supports transportation services. Loss was incurred as a result of unfavorable interest rate change. | 296 | 7 | 0-12 | |||||||||
| Municipal issuer of revenue bonds that authorizes the financing of sewer facilities. Loss was incurred as a result of unfavorable interest rate change. | 113 | 7 | 0-6 | |||||||||
| Municipal issuer of revenue bonds that authorizes the financing of water facilities. Loss was incurred as a result of unfavorable interest rate change. | 200 | 7 | 0-12 | |||||||||
| Air transportation carrier for passengers, freight and mail both domestic and international. Company was subject to higher fuel costs and union negotiations. | 24 | 6 | 0-6 | |||||||||
| Municipal issuer of revenue bonds that authorizes bridge and tunnel facilities. Loss was incurred as a result of unfavorable interest rate change. | 103 | 6 | 0-12 | |||||||||
| State issuer of general obligation bonds. Loss was incurred as a result of unfavorable interest rate change. | 222 | 5 | 0-12 | |||||||||
| State issuer of general obligation bonds for the purpose of public improvements. Loss was incurred as a result of unfavorable interest rate change. | 270 | 5 | 0-12 | |||||||||
| $ | 10,764 | $ | 127 | |||||||||
6848
investments.
| December 31, | December 31, | |||||||||||||||||||||||||||||||
| December 31, | December 31, | 2006 | % | 2005 | % | |||||||||||||||||||||||||||
| (In millions) | 2004 | % | 2003 | % | ||||||||||||||||||||||||||||
| General account investments: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities available-for-sale: | ||||||||||||||||||||||||||||||||
| U.S. Treasury securities and obligations of government agencies | $ | 4,346 | 11 | % | $ | 1,900 | 5 | % | $ | 5,138 | 12 | % | $ | 1,469 | 4 | % | ||||||||||||||||
| Asset-backed securities | 7,788 | 20 | 8,757 | 23 | 13,677 | 31 | 12,859 | 32 | ||||||||||||||||||||||||
| States, municipalities and political subdivisions — tax-exempt | 8,857 | 22 | 7,970 | 21 | ||||||||||||||||||||||||||||
| States, municipalities and political subdivisions – tax-exempt | 5,146 | 12 | 9,209 | 23 | ||||||||||||||||||||||||||||
| Corporate securities | 6,513 | 17 | 6,482 | 17 | 7,132 | 16 | 6,165 | 15 | ||||||||||||||||||||||||
| Other debt securities | 3,053 | 8 | 3,264 | 9 | 3,642 | 8 | 3,044 | 8 | ||||||||||||||||||||||||
| Redeemable preferred stock | 146 | – | 104 | – | 912 | 2 | 216 | 1 | ||||||||||||||||||||||||
| Options embedded in convertible debt securities | 234 | 1 | 201 | – | — | — | 1 | — | ||||||||||||||||||||||||
| Total fixed maturity securities available-for-sale | 30,937 | 79 | 28,678 | 75 | 35,647 | 81 | 32,963 | 83 | ||||||||||||||||||||||||
| Fixed maturity securities trading: | ||||||||||||||||||||||||||||||||
| U.S. Treasury securities and obligations of government agencies | 27 | – | – | – | 2 | — | 4 | — | ||||||||||||||||||||||||
| Asset-backed securities | 125 | – | – | – | 55 | — | 87 | — | ||||||||||||||||||||||||
| Corporate securities | 199 | 1 | – | – | 133 | 1 | 154 | 1 | ||||||||||||||||||||||||
| Other debt securities | 35 | – | – | – | 14 | — | 26 | — | ||||||||||||||||||||||||
| Redeemable preferred stock | 4 | – | – | – | ||||||||||||||||||||||||||||
| Total fixed maturity securities trading | 390 | 1 | – | – | 204 | 1 | 271 | 1 | ||||||||||||||||||||||||
| Equity securities available-for-sale: | ||||||||||||||||||||||||||||||||
| Common stock | 260 | 1 | 383 | 1 | 452 | 1 | 289 | 1 | ||||||||||||||||||||||||
| Non-redeemable preferred stock | 150 | – | 144 | – | ||||||||||||||||||||||||||||
| Preferred stock | 145 | — | 343 | 1 | ||||||||||||||||||||||||||||
| Total equity securities available-for-sale | 410 | 1 | 527 | 1 | 597 | 1 | 632 | 2 | ||||||||||||||||||||||||
| Total equity securities trading | 46 | – | – | – | 60 | — | 49 | — | ||||||||||||||||||||||||
| Short term investments available-for-sale | 5,404 | 14 | 7,538 | 20 | 5,538 | 13 | 3,870 | 9 | ||||||||||||||||||||||||
| Short term investments trading | 459 | 1 | – | – | 172 | — | 368 | 1 | ||||||||||||||||||||||||
| Limited partnerships | 1,549 | 4 | 1,117 | 3 | 1,852 | 4 | 1,509 | 4 | ||||||||||||||||||||||||
| Other investments | 36 | – | 240 | 1 | 26 | — | 33 | — | ||||||||||||||||||||||||
Total general account investments | $ | 39,231 | 100 | % | $ | 38,100 | 100 | % | $ | 44,096 | 100 | % | $ | 39,695 | 100 | % | ||||||||||||||||
The Company’s
U.S. treasury securities.
6949
Unrealized Gains (Losses) on Fixed Maturity and Equity Securities
| Cost or | Gross | Gross Unrealized Losses | Net | |||||||||||||||||
| Amortized | Unrealized | Less than | Greater than | Unrealized | ||||||||||||||||
| December 31, 2004 (In millions) | Cost | Gains | 12 Months | 12 Months | Gain/(Loss) | |||||||||||||||
| Fixed maturity securities available-for-sale: | ||||||||||||||||||||
| U.S. Treasury securities and obligations of government agencies | $ | 4,233 | $ | 126 | $ | 13 | $ | – | $ | 113 | ||||||||||
| Asset-backed securities | 7,706 | 105 | 19 | 4 | 82 | |||||||||||||||
| States, municipalities and political subdivisions – tax-exempt | 8,699 | 189 | 28 | 3 | 158 | |||||||||||||||
| Corporate securities | 6,093 | 477 | 52 | 5 | 420 | |||||||||||||||
| Other debt securities | 2,769 | 295 | 11 | – | 284 | |||||||||||||||
| Redeemable preferred stock | 142 | 6 | – | 2 | 4 | |||||||||||||||
| Options embedded in convertible debt securities | 234 | – | – | – | – | |||||||||||||||
| Total fixed maturity securities available-for-sale | 29,876 | 1,198 | 123 | 14 | 1,061 | |||||||||||||||
| Total fixed maturity securities trading | 390 | – | – | – | – | |||||||||||||||
| Equity securities available-for-sale: | ||||||||||||||||||||
| Common stock | 148 | 112 | – | – | 112 | |||||||||||||||
| Non-redeemable preferred stock | 126 | 24 | – | – | 24 | |||||||||||||||
| Total equity securities available-for-sale | 274 | 136 | – | – | 136 | |||||||||||||||
| Total equity securities trading | 46 | – | – | – | – | |||||||||||||||
Total fixed maturity and equity securities | $ | 30,586 | $ | 1,334 | $ | 123 | $ | 14 | $ | 1,197 | ||||||||||
Unrealized Gains (Losses) on Fixed Maturity and Equity Securities
| Cost or | Gross | Gross Unrealized Losses | Net | |||||||||||||||||
| Amortized | Unrealized | Less than | Greater than | Unrealized | ||||||||||||||||
| December 31, 2003 (In millions) | Cost | Gains | 12 Months | 12 Months | Gain/(Loss) | |||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||
| U.S. Treasury securities and obligations of government agencies | $ | 1,823 | $ | 91 | $ | 10 | $ | 4 | $ | 77 | ||||||||||
| Asset-backed securities | 8,634 | 146 | 22 | 1 | 123 | |||||||||||||||
| States, municipalities and political subdivisions – tax-exempt | 7,787 | 207 | 22 | 2 | 183 | |||||||||||||||
| Corporate securities | 6,061 | 475 | 40 | 14 | 421 | |||||||||||||||
| Other debt securities | 2,961 | 311 | 4 | 4 | 303 | |||||||||||||||
| Redeemable preferred stock | 97 | 7 | – | – | 7 | |||||||||||||||
| Options embedded in convertible debt securities | 201 | – | – | – | – | |||||||||||||||
| Total fixed maturity securities | 27,564 | 1,237 | 98 | 25 | 1,114 | |||||||||||||||
| Equity securities: | ||||||||||||||||||||
| Common stock | 163 | 222 | 2 | – | 220 | |||||||||||||||
| Non-redeemable preferred stock | 130 | 16 | 2 | – | 14 | |||||||||||||||
| Total equity securities | 293 | 238 | 4 | – | 234 | |||||||||||||||
Total fixed maturity and equity securities | $ | 27,857 | $ | 1,475 | $ | 102 | $ | 25 | $ | 1,348 | ||||||||||
70
The Company’sOur investment policies for both the general account and separate accountsaccount emphasize high credit quality and diversification by industry, issuer and issue. Assets supporting interest rate sensitive liabilities are segmented within the general account to facilitate asset/liability duration management.
At December 31, 2004, the carrying value of the general account fixed maturities was $31,327 million, representing 80% of the total investment portfolio. The net unrealized gain of this fixed maturity portfolio was $1,061 million, comprising gross unrealized gains of $1,198 million and gross unrealized losses of $137 million. Gross unrealized losses were across various sectors, the largest of which was corporate bonds. Within corporate bonds, the largest industry sectors were financial and consumer-cyclical, which as a percentage of total gross unrealized losses were 40% and 28%. Gross unrealized losses in any single issuer were less than 0.1% of the carrying value of the total general account fixed maturity portfolio.
Contractual Maturity
| Percent of | Percent of | |||||||
| Market | Unrealized | |||||||
| Value | Loss | |||||||
| Due in one year or less | 8 | % | 2 | % | ||||
| Due after one year through five years | 25 | 18 | ||||||
| Due after five years through ten years | 25 | 24 | ||||||
| Due after ten years | 15 | 40 | ||||||
| Asset-backed securities | 27 | 16 | ||||||
Total | 100 | % | 100 | % | ||||
71
The following table summarizes for fixed maturity and equity securities in an unrealized loss positionprofile. Securities not due at December 31, 2004 and 2003, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.
Unrealized Loss Aging
| December 31, 2004 | December 31, 2003 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Estimated | Unrealized | Estimated | Unrealized | |||||||||||||
| (In millions) | Fair Value | Loss | Fair Value | Loss | ||||||||||||
| Fixed maturity securities: | ||||||||||||||||
| Investment grade: | ||||||||||||||||
| 0-6 months | $ | 7,742 | $ | 53 | $ | 4,138 | $ | 50 | ||||||||
| 7-12 months | 2,448 | 59 | 834 | 36 | ||||||||||||
| 13-24 months | 368 | 12 | 76 | 11 | ||||||||||||
| Greater than 24 months | 2 | – | 51 | 3 | ||||||||||||
| Total investment grade | 10,560 | 124 | 5,099 | 100 | ||||||||||||
| Non-investment grade: | ||||||||||||||||
| 0-6 months | 188 | 7 | 134 | 5 | ||||||||||||
| 7-12 months | 69 | 4 | 60 | 7 | ||||||||||||
| 13-24 months | 20 | 2 | 16 | 1 | ||||||||||||
| Greater than 24 months | – | – | 105 | 10 | ||||||||||||
| Total non-investment grade | 277 | 13 | 315 | 23 | ||||||||||||
| Total fixed maturity securities | 10,837 | 137 | 5,414 | 123 | ||||||||||||
| Equity securities: | ||||||||||||||||
| 0-6 months | 4 | – | 23 | 2 | ||||||||||||
| 7-12 months | 1 | – | 10 | 2 | ||||||||||||
| 13-24 months | 1 | – | 3 | – | ||||||||||||
| Greater than 24 months | 3 | – | 6 | – | ||||||||||||
| Total equity securities | 9 | – | 42 | 4 | ||||||||||||
Total fixed maturity and equity securities | $ | 10,846 | $ | 137 | $ | 5,456 | $ | 127 | ||||||||
A significant judgment in the valuation of investments is the determination of when an other-than-temporary decline in value has occurred. The Company follows a consistent and systematic process for impairing securities that sustain other-than-temporary declines in value. The Company has established a committee responsible for the impairment process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by the Company’s Chief Financial Officer. The Impairment Committee is responsible for analyzing watch list securities on at least a quarterly basis. The watch list includes individual securities that fall below certain thresholds or that exhibit evidence of impairment indicators including, but not limited to, a significant adverse change in the financial condition and near term prospects of the investment or a significant adverse change in legal factors, the business climate or credit ratings.
When a security is placed on the watch list, it is monitored for further fair value changes and additional news related to the issuer’s financial condition. The focus is on objective evidence that may influence the evaluation of impairment factors.
The decision to impair a security incorporates both quantitative criteria and qualitative information. The Impairment Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than book value, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in value, (d) whether the debtor is current on interest and principal payments and (e) general market conditions and industry or sector specific factors.
72
The Impairment Committee’s decision to impair a security is primarilysingle date are allocated based on whether the security’s fair value is likely to remain significantly below its book value in light of all of the factors considered. For securities that are impaired, the security is written down to fair value and the resulting losses are recognized in realized gains/losses in the Consolidated Statements of Operations.
Realized investment losses included $93 million, $321 million and $890 million of pretax impairment losses for the three years ended December 31, 2004, 2003 and 2002. The 2003 and 2002 impairments were primarily the result of the continued credit deterioration on specific issuers in the bond and equity markets and the effects on such markets due to the overall slowing of the economy. For the year ended December 31, 2004, the impairment losses recorded related largely to an after-tax impairment loss related to loans made under a credit facility to a national contractor, that are classified as fixed maturities. See the Loans to National Contractor section of the MD&A.
For 2003, the impairment losses recorded related primarily to corporate bonds in the airline, healthcare and energy industries.
For 2002, the impairment losses recorded related primarily to corporate bonds in the communications industry sectors including $129 million related to WorldCom Inc., $74 million related to Adelphia Communication Corporation, $60 million for Charter Communications, $57 million for AT&T Canada and $53 million for Telewest PLC. During 2002, the Company reduced the impairment loss related to the sale of CNA Re U.K. by approximately $39 million after-tax.
The Company’sweighted average life.
| Percent of | Percent of | |||||||
| Market | Unrealized | |||||||
| Value | Loss | |||||||
| Due in one year or less | 5 | % | 3 | % | ||||
| Due after one year through five years | 44 | 50 | ||||||
| Due after five years through ten years | 33 | 24 | ||||||
| Due after ten years | 18 | 23 | ||||||
Total | 100 | % | 100 | % | ||||
2005.
| Estimated | Fair Value as a Percentage of Book Value | Unrealized | Fair Value as a Percentage of Book Value | |||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2004 (In millions) | Fair Value | 90-99% | 80-89% | 70-79% | <70% | Loss | ||||||||||||||||||||||||||||||||||||||||||
| Gross | ||||||||||||||||||||||||||||||||||||||||||||||||
| Estimated | Unrealized | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2006 | Fair Value | 90-99% | 80-89% | 70-79% | <70% | Loss | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Non-investment grade: | ||||||||||||||||||||||||||||||||||||||||||||||||
| 0-6 months | $ | 188 | $ | 6 | $ | 1 | $ | – | $ | – | $ | 7 | $ | 509 | $ | 2 | $ | — | $ | — | $ | — | $ | 2 | ||||||||||||||||||||||||
| 7-12 months | 69 | 3 | 1 | – | – | 4 | 87 | 1 | 1 | — | — | 2 | ||||||||||||||||||||||||||||||||||||
| 13-24 months | 20 | 1 | 1 | – | – | 2 | 24 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Greater than 24 months | – | – | – | – | – | – | 2 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total non-investment grade | $ | 277 | $ | 10 | $ | 3 | $ | – | $ | – | $ | 13 | $ | 622 | $ | 3 | $ | 1 | $ | — | $ | — | $ | 4 | ||||||||||||||||||||||||
73
Unrealized Loss Aging for Non-investment Grade Securities
| Estimated | Fair Value as a Percentage of Book Value | Unrealized | Fair Value as a Percentage of Book Value | |||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2003 (In millions) | Fair Value | 90-99% | 80-89% | 70-79% | <70% | Loss | ||||||||||||||||||||||||||||||||||||||||||
| Gross | ||||||||||||||||||||||||||||||||||||||||||||||||
| Estimated | Unrealized | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2005 | Fair Value | 90-99% | 80-89% | 70-79% | <70% | Loss | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Non-investment grade: | ||||||||||||||||||||||||||||||||||||||||||||||||
| 0-6 months | $ | 134 | $ | 2 | $ | 1 | $ | – | $ | 2 | $ | 5 | $ | 632 | $ | 20 | $ | 8 | $ | 1 | $ | — | $ | 29 | ||||||||||||||||||||||||
| 7-12 months | 60 | 1 | 6 | – | – | 7 | 118 | 4 | 6 | — | — | 10 | ||||||||||||||||||||||||||||||||||||
| 13-24 months | 16 | 1 | – | – | – | 1 | 122 | 3 | — | — | — | 3 | ||||||||||||||||||||||||||||||||||||
| Greater than 24 months | 105 | 4 | 1 | 5 | – | 10 | 2 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total non-investment grade | $ | 315 | $ | 8 | $ | 8 | $ | 5 | $ | 2 | $ | 23 | $ | 874 | $ | 27 | $ | 14 | $ | 1 | $ | — | $ | 42 | ||||||||||||||||||||||||
50
The Company’s
such securities.
74
General Account Bond Ratings
| December 31 (In millions) | 2004 | % | 2003 | % | ||||||||||||||||||||||||||||
| December 31 | 2006 | % | 2005 | % | ||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| U.S. Government and affiliated agency securities | $ | 4,640 | 15 | % | $ | 2,818 | 10 | % | $ | 5,285 | 15 | % | $ | 1,628 | 5 | % | ||||||||||||||||
| Other AAA rated | 14,628 | 47 | 12,779 | 45 | 16,311 | 47 | 18,233 | 55 | ||||||||||||||||||||||||
| AA and A rated | 5,597 | 18 | 6,329 | 22 | 5,222 | 15 | 6,046 | 18 | ||||||||||||||||||||||||
| BBB rated | 4,072 | 13 | 4,631 | 16 | 4,933 | 14 | 4,499 | 14 | ||||||||||||||||||||||||
| Non investment-grade | 2,240 | 7 | 2,017 | 7 | 3,188 | 9 | 2,612 | 8 | ||||||||||||||||||||||||
Total | $ | 31,177 | 100 | % | $ | 28,574 | 100 | % | $ | 34,939 | 100 | % | $ | 33,018 | 100 | % | ||||||||||||||||
us.
| December 31 (In millions) | 2004 | % | 2003 | % | ||||||||||||||||||||||||||||
| December 31 | 2006 | % | 2005 | % | ||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| U.S. Government and affiliated agency securities | $ | – | 0 | % | $ | 166 | 9 | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||
| Other AAA rated | 156 | 32 | 737 | 41 | 111 | 26 | 120 | 26 | ||||||||||||||||||||||||
| AA and A rated | 184 | 38 | 374 | 21 | 242 | 56 | 193 | 41 | ||||||||||||||||||||||||
| BBB rated | 117 | 24 | 443 | 24 | 75 | 17 | 142 | 31 | ||||||||||||||||||||||||
| Non investment-grade | 29 | 6 | 89 | 5 | 6 | 1 | 11 | 2 | ||||||||||||||||||||||||
Total | $ | 486 | 100 | % | $ | 1,809 | 100 | % | $ | 434 | 100 | % | $ | 466 | 100 | % | ||||||||||||||||
51
75
The carrying value of the components of the general account short term investment portfolio is presented in the following table.
| December 31, | December 31, | |||||||||||||||
| December 31, | December 31, | 2006 | 2005 | |||||||||||||
| (In millions) | 2004 | 2003 | ||||||||||||||
| Short-term investments available-for-sale: | ||||||||||||||||
| Short term investments available-for-sale: | ||||||||||||||||
| Commercial paper | $ | 923 | $ | 1,906 | ||||||||||||
| U.S. Treasury securities | 1,093 | 251 | ||||||||||||||
| Money market funds | 196 | 294 | ||||||||||||||
| Other, including collateral held related to securities lending | 3,326 | 1,419 | ||||||||||||||
| Total short term investments available-for-sale | 5,538 | 3,870 | ||||||||||||||
| Short term investments trading: | ||||||||||||||||
| Commercial paper | $ | 1,655 | $ | 4,458 | 43 | 94 | ||||||||||
| U.S. Treasury securities | 2,382 | 1,068 | 2 | 64 | ||||||||||||
| Money market funds | 174 | 1,230 | 127 | 200 | ||||||||||||
| Other | 1,193 | 782 | — | 10 | ||||||||||||
| Total short-term investments available-for-sale | 5,404 | 7,538 | ||||||||||||||
| Short-term investments trading: | ||||||||||||||||
| Commercial paper | 46 | – | ||||||||||||||
| U.S. Treasury securities | 300 | – | ||||||||||||||
| Money market funds | 99 | – | ||||||||||||||
| Other | 14 | – | ||||||||||||||
| Total short term investments trading | 172 | 368 | ||||||||||||||
| Total short-term investments trading | 459 | – | ||||||||||||||
Total short-term investments | $ | 5,863 | $ | 7,538 | ||||||||||||
Total short term investments | $ | 5,710 | $ | 4,238 | ||||||||||||
CNA invests in certain derivative financial instruments primarily to reduce its exposure to market risk (principally interest rate, equity price and foreign currency risk) and credit risk (risk of nonperformance of underlying obligor). Derivative securities are recorded at
52
The
increased loss payments.
net tax refunds of $627 million in 2004. In addition, we received cash of $121 million related to interest on a federal income tax settlement in 2005.
For 2004, net
76
For 2003, net cash used for investing activities was $2,133 million as compared with net cash used of $1,488 million in 2002. Cash flows used for investing related principally to purchases of fixed maturity securities.
securities and short term investments.
instruments, and deposits and withdrawals related to investment contract products issued by us.
The Company is closely managing the cash flows related to claims and reinsurance recoverables from the WTC event. It is anticipated that there will be a significant lag between the time claim payments are made and the receipt of the corresponding reinsurance recoverables. The Company has not suffered any liquidity problems resulting from these payments. As of December 31, 2004, the Company has paid $876 million in claims and of that amount has recovered $486 million from reinsurers.
CNA’s estimated gross pretax losses for the WTC event, recorded in 2001,2006 were $1,648 million pretax ($1,071 million after-tax). Net pretax losses before the effect of corporate aggregate reinsurance treaties were $727 million. Approximately 1%, 59% and 29% of the reinsurance recoverables on the estimated lossesprimarily related to the WTC event are from companies with S&P ratingsreturn of AAA, AA or A.
The Company believesinvestment contract balances. Additionally, we issued long-term debt and common stock, the proceeds of which were used to repurchase the Series H Cumulative Preferred Stock Issue (Series H Issue) and to repay our 6.75% notes. See the Loews section below for further discussion.
77
Debt
Debt is composed of the following obligations.
Debt
| December 31 (In millions) | 2004 | 2003 | ||||||
| Variable rate debt: | ||||||||
| Credit facility – CNA Surety, due September 30, 2005 | $ | 25 | $ | 30 | ||||
| Term loan – CNA Surety, due through September 30, 2005 | 10 | 20 | ||||||
| Debenture – CNA Surety, face amount of $31, due April 29, 2034 | 30 | – | ||||||
| Credit facility – CNAF, due April 30, 2004 | – | 250 | ||||||
| Senior notes: | ||||||||
| 6.500%, face amount of $493, due April 15, 2005 | 493 | 492 | ||||||
| 6.750%, face amount of $250, due November 15, 2006 | 249 | 249 | ||||||
| 6.450%, face amount of $150, due January 15, 2008 | 149 | 149 | ||||||
| 6.600%, face amount of $200, due December 15, 2008 | 199 | 199 | ||||||
| 8.375%, face amount of $70, due August 15, 2012 | 69 | 69 | ||||||
| 5.850%, face amount of $549, due December 15, 2014 | 546 | – | ||||||
| 6.950%, face amount of $150, due January 15, 2018 | 149 | 149 | ||||||
| Debenture, 7.250%, face amount of $243, due November 15, 2023 | 241 | 241 | ||||||
| Capital leases, 10.400%-11.500%, due through December 31, 2011 | – | 33 | ||||||
| Other debt, 1.000%-11.5%, due through 2019 | 47 | 23 | ||||||
| Surplus notes: | ||||||||
| Encompass Insurance Company of America (EICA) surplus note, face amount of $50, due March 31, 2006 | 50 | – | ||||||
Total debt | $ | 2,257 | $ | 1,904 | ||||
| Short term debt | $ | 531 | $ | 263 | ||||
| Long term debt | 1,726 | 1,641 | ||||||
Total debt | $ | 2,257 | $ | 1,904 | ||||
In December of 2004, CNA acquired three buildings, which previously were leased under capital leases. As part of the transaction, CNA directly assumed the underlying debt obligation which the lessor of the three buildings owed to a third party. By directly assuming the lessor’s debt obligation, CNA reduced its overall debt obligation by $5 million.
On December 15, 2004, CNAF completed the sale of $549 million of 5.85% ten-year senior notes in a public offering. The Company contributed approximately $47 million of the net proceeds to its subsidiary CCC for CCC to repurchase its outstanding Group Surplus Note due 2024 and intends to use approximately $498 million of the net proceeds of this offering to repay at maturity all of its outstanding 6.5% notes due April 15, 2005.
During 2004, Encompass Insurance Company of America (EICA), a wholly owned subsidiary of the Company, sold a $50 million surplus note to Allstate Insurance Company. The EICA note bears interest semi-annually at 2.5% per annum and is due on March 31, 2006.
In May of 2004, CNA Surety issued privately, through a wholly-owned trust, $30 million of preferred securities through two pooled transactions. These securities bear interest at a rate of LIBOR plus 337.5 basis points with a thirty-year term and are redeemable after five years. The securities were issued by CNA Surety Capital Trust I (Issuer Trust). The sole asset of the Issuer Trust consists of a $31 million junior subordinated debenture issued by CNA Surety to the Issuer Trust. The subordinated debenture bears interest at a rate of LIBOR plus 337.5 basis points and matures in April of 2034. As of December 31, 2004, the interest rate on the junior subordinated debenture was 5.7%.
78
On September 30, 2003, CNA Surety entered into a $50 million credit agreement, which consisted of a $30 million two-year revolving credit facility and a $20 million two-year term loan, with semi-annual principal payments of $5 million. The credit agreement isWe have an amendment to a $65 million credit agreement, extending the revolving loan termination date from September 30, 2003 to September 30, 2005. The new revolving credit facility was fully utilized at inception. In June of 2004, CNA Surety reduced the outstanding borrowings under the credit facility by $10 million, and in September of 2004, CNA Surety increased the outstanding borrowings under the credit facility by $5 million to fund the semi-annual term loan payment.
Under the amended credit facility agreement, CNA Surety pays a facility fee of 35.0 basis points on the revolving credit portion of the facility, interest at LIBOR plus 90 basis points, and for utilization greater than 50% of the amount available to borrow an additional fee of 5.0 basis points. On the term loan, CNA Surety pays interest at LIBOR plus 62.5 basis points. At December 31, 2004, the weighted-average interest rate on the $35 million of outstanding borrowings under the credit agreement, including facility fees and utilization fees, was 3.3%. Effective January 30, 2003, CNA Surety entered into a swap agreement on the term loan portion of the agreement which uses the 3-month LIBOR to determine the swap increment. As a result, the effective interest rate on the $10 million in outstanding borrowings on the term loan was 2.77% at December 31, 2004. On the $25 million revolving credit agreement, the effective interest rate at December 31, 2004 was 3.49%.
Related Parties
CNA reimburses Loews, or pays directly, for management fees, travel and related expenses and expenses of investment facilities and services provided to CNA. The amounts reimbursed or paid by CNA were approximately $21 million, $21 million and $19 million for the years ended December 31, 2004, 2003 and 2002.
CNA and its eligible subsidiaries are included in the consolidated federal income tax return of Loews and its eligible subsidiaries. For the years ended December 31, 2004 and 2003, CNA received $631 million and $369 million from Loews related to federal income taxes.
CNA previously sponsored a stock ownership plan whereby the Company financed the purchase of Company common stock by certain officers, including executive officers. Interest charged on the principal amount of these outstanding stock purchase loans is generally equivalent to the long term applicable federal rate, compounded semi-annually, in effect on the disbursement date of the loan. Loans made pursuant to the plan are generally full recourse with a ten-year term and are secured by the stock purchased. The balance of the loans as of December 31, 2004 exceeds the fair value of the related common stock collateral by $35 million.
CNA Surety has provided significant surety bond protection for a large national contractor that undertakes projects for the construction of government and private facilities, a substantial portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has provided loans to the contractor through a credit facility. In December of 2004, the credit facility was amended to increase the maximum available loans to $106 million from $86 million. The amendment also provides that CNAF may in its sole discretion further increase the amounts available for loans under the credit facility, up to an aggregate maximum of $126 million. As of December 31, 2004 and 2003, there were $99 million and $80 million of total debt outstanding under the credit facility. Additional loans in January and February of 2005 brought the total debt outstanding under the credit facility, less accrued interest, to $104 million as of February 24, 2005. Loews, through a participation agreement with CNAF, provided funds for and owned a participation of $29 million and $25 million of the loans outstanding as of December 31, 2004 and 2003 and has agreed to participation of one-third of any additional loans which may be made above the original $86 million credit facility limit up to the $126 million maximum available line.
In connection with the amendment to increase the maximum available line under the credit facility in December of 2004, the term of the loan under the credit facility was extended to mature in March of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum, effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the facility are at or below the original $86 million limit. Loans under the credit facility are secured by a pledge of substantially all of the assets of the contractor and certain of its affiliates. In connection with the credit facility, CNAF has also guaranteed or provided collateral for letters of credit which are charged against the maximum available line and, if drawn upon, would be treated as loans under the
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credit facility. As of December 31, 2004 and 2003, these guarantees and collateral obligations aggregated $13 million and $7 million.
As of December 31, 2004, the aggregate amount of outstanding principal and accrued interest under the credit facility was $70 million, net of participation by Loews in the amount of $29 million.
The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and appointed a chief restructuring officer to manage execution of the plan. In the course of addressing various expense, operational and strategic issues, however, the contractor has decided to substantially reduce the scope of its original business and to concentrate on those segments determined to be potentially profitable. As a consequence, operating cash flow, and in turn the capacity to service debt, has been reduced below previous levels. Restructuring plans have also been extended to accommodate these circumstances. In light of these developments, CNA has taken an impairment charge of $56 million pretax ($36 million after-tax) for the fourth quarter of 2004, net of the participation by Loews, with respect to amounts loaned under the facility. Any draws under the credit facility beyond $106 million or further changes in the national contractor’s business plan or projections may necessitate further impairment charges.
As a result of the impairment taken in the fourth quarter of 2004, CNAF plans to recognize income using the effective interest rate method starting in the first quarter of 2005. Under this method, interest income recognized will be accrued on the net carrying amount of the loan at the effective interest rate used to discount the impaired loan’s estimated future cash flows. The excess of the cash received over the interest income recognized will reduce the carrying amount of the loan. The change in present value, if any, of the loan that is attributable to changes in the amount or timing of future cash flows will be recorded similar to the impairment charges previously recorded.
CNA Surety has advised that it intends to continue to provide surety bonds on behalf of the contractor during this extended restructuring period, subject to the contractor’s initial and ongoing compliance with CNA Surety’s underwriting standards and ongoing management of CNA Surety’s exposure to the contractor. All bonds written for the national contractor are issued by CCC and its affiliates, other than CNA Surety, and are subject to underlying reinsurance treaties pursuant to which all bonds on behalf of CNA Surety are 100% reinsured to one of CNA Surety’s insurance subsidiaries. This arrangement underlies the more limited reinsurance coverages discussed below.
Through facultative reinsurance contracts with CCC, CNA Surety’s exposure on bonds written from October 1, 2002 through October 31, 2003 has been limited to $20 million per bond, with CCC to incur 100% of losses above that level. For bonds written on or subsequent to November 1, 2003, CNA Surety’s exposure is limited to $14.5 million per bond, subject to a per principal retention of $60 million and an aggregate limit of $150 million, under all facultative insurance coverage and two excess of loss treaties between CNA Surety and CCC. The first excess of loss contract, $40 million excess of $60 million, provides CNA Surety coverage exclusively for the national contractor, while the second excess of loss contract, $50 million excess of $100 million, provides CNA Surety with coverage for the national contractor as well as other CNA Surety risks. For bonds written prior to September 30, 2002 there is no facultative reinsurance and CCC retains 100% of the losses above the per principal retention of $60 million.
Renewals of both excess of loss contracts were effective January 1, 2005. CCC and CNA Surety are presently discussing a possible restructuring of the reinsurance arrangements described in the paragraph above,shelf registration statement under which all bonds written for the national contractor would be reinsured by CCC under an excess of $60 million treaty and other CNA Surety accounts would be covered by a separate $50 million excess of $100 million treaty.
CCC and CNA Surety continue to engage in periodic discussions with insurance regulatory authorities regarding the level of bonds provided for this principal and will continue to apprise those authorities regarding their ongoing exposure to this account.
Indemnification and subrogation rights, including rights to contract proceeds on construction projects in the event of default, exist that reduce CNA Surety’s and ultimately the Company’s exposure to loss. While CNAF believes that the contractor’s continuing restructuring effortswe may be successful and provide sufficient cash flow for its operations, the contractor’s failure to ultimately achieve its extended restructuring planissue debt or perform its contractual obligations under the credit facility or under the Company’s surety bonds could have a material adverse effect on the Company’s results of operations and/ or equity. If such failures occur, the Company estimates the surety loss, net of indemnification and subrogation recoveries, but before the effects of minority interest, to be approximately
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$200 million pretax. In addition, such failures could cause the remaining unimpaired amount due under the credit facility to be uncollectible.
Commitments, Contingencies, and Guarantees
In
business. The Company has provided guarantees related to irrevocable standby letters of credit for certain of its subsidiaries. Certainimpact of these subsidiaries have been sold; however, the irrevocable standby letter of creditcommitments, contingencies and guarantees remain in effect. The Company wouldshould be required to make payment on the letters of credit in question if the primary obligor drew down on these letters of creditconsidered when evaluating our liquidity and failed to repay such loans in accordance with the terms of the letters of credit. The maximum potential amount of future payments that CNA could be required to pay under these guarantees are approximately $30 million at December 31, 2004.
As of December 31, 2004 and 2003, the Company had committed approximately $104 million and $154 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.
In the normal course of investing activities, CCC had committed approximately $51 million as of December 31, 2004 to future capital calls from certain of its unconsolidated affiliates in exchange for an ownership interest in such affiliates.
The Company holds an investment in a real estate joint venture. In the normal course of business, CNA on a joint and several basis with other unrelated insurance company shareholders have committed to continue funding any operating deficits of this joint venture. Additionally, CNA and the other unrelated shareholders, on a joint and several basis, have guaranteed an operating lease for an office building, which expires in 2016. The guarantee of the operating lease is a parallel guarantee to the commitment to fund operating deficits; consequently, the separate guarantee to the lessor is not expected to be triggered as long as the joint venture continues to be funded by its shareholders and continues to make its annual lease payments.
In the event that the other parties to the joint venture are unable to meet their commitments in funding the operations of this joint venture, the Company would be required to assume the obligation for the entire office building operating lease. The maximum potential future lease payments at December 31, 2004 that the Company could be required to pay under this guarantee is approximately $312 million. If CNA were required to assume the entire lease obligation, the Company would have the right to pursue reimbursement from the other shareholders and would have the right to all sublease revenues.
The Company invests in multiple bank loan participations as part of its overall investment strategy and has committed to additional future purchases and sales. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlement is made. As of December 31, 2004, the Company had commitments to purchase $41 million and commitments to sell $2 million of various bank loan participations.
In the course of selling business entities and assets to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of December 31, 2004, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $950 million.
In addition, the Company has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of December 31, 2004, the Company had outstanding unlimited indemnifications in connection with the sales of certain
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of its business entities or assets for tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire. Additionally, the Company has provided a contingent guarantee to the lenders of two third parties, related to loans extended by their lenders. As of December 31, 2004, the Company has recorded approximately $21 million of liabilities related to these indemnification agreements.
Cash and securities with carrying values of approximately $18 million and $23 million were deposited with financial institutions as collateral for letters of credit as of December 31, 2004 and 2003. In addition, cash and securities were deposited in trusts with financial institutions to secure reinsurance obligations with various third parties. The carrying values of these deposits were approximately $329 million and $254 million as of December 31, 2004 and 2003.
| December 31, 2004 (In millions) | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||||||
| December 31, 2006 | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Debt (a) | $ | 660 | $ | 416 | $ | 106 | $ | 442 | $ | 74 | $ | 1,619 | $ | 3,317 | 3,364 | 143 | 604 | 636 | 1,981 | |||||||||||||||||||||||||||||
| Lease obligations | 64 | 55 | 46 | 33 | 23 | 72 | 293 | 234 | 49 | 78 | 56 | 51 | ||||||||||||||||||||||||||||||||||||
| Claim and claim expense reserves (b) | 8,008 | 5,794 | 4,168 | 2,931 | 2,123 | 10,429 | 33,453 | 31,398 | 7,147 | 9,341 | 4,810 | 10,100 | ||||||||||||||||||||||||||||||||||||
| Future policy benefits reserves (c) | 195 | 179 | 173 | 174 | 170 | 8,325 | 9,216 | 10,803 | 346 | 348 | 337 | 9,772 | ||||||||||||||||||||||||||||||||||||
| Policyholder funds reserves (c) | 502 | 845 | 152 | 33 | 10 | 164 | 1,706 | 994 | 382 | 454 | 9 | 149 | ||||||||||||||||||||||||||||||||||||
| Guaranteed payment contracts (d) | 19 | 11 | 6 | – | – | – | 36 | 15 | 12 | 3 | — | — | ||||||||||||||||||||||||||||||||||||
Total | $ | 9,448 | $ | 7,300 | $ | 4,651 | $ | 3,613 | $ | 2,400 | $ | 20,609 | $ | 48,021 | $ | 46,808 | $ | 8,079 | $ | 10,828 | $ | 5,848 | $ | 22,053 | ||||||||||||||||||||||||
| (a) | Includes estimated future interest payments, but does not include original issue discount. | |
| (b) | Claim and claim adjustment expense reserves are not discounted and represent | |
| (c) | Future policy benefits and policyholder funds reserves are not discounted and represent | |
| (d) | Primarily relating to telecommunications and software services. |
The Company has
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agreement, effective January 1, 2003, ceding all of the net insurance risks of CIC and its 14 affiliated insurance companies (CIC Group) to CCC. Additionally, the ownership of the CIC Group was transferred to CCC during 2003 in order to align the insurance risks with the supporting capital. In subsequent phases of this plan, the Company will continue its efforts to reduce both the number of U.S. property and casualty insurance entities it maintains and the number of states in which such entities are domiciled. In order to facilitate the execution of this plan, the Company, CCC and CICwe have agreed to participate in a working group consisting of several states of the National Association of Insurance Commissioners.
In connection with the approval process for aspects of the reorganization plan, the Company agreed to undergo a state regulatory financial examination of CCC and CIC as of December 31, 2003, including a review of insurance reserves by an independent actuarial firm. These state regulatory financial examinations are currently underway. The Company is presently engaged in discussions related to the examination with state regulatory agencies. Final examination reports are expected to be issued in the first half of 2005 by the state authorities.
Commissioners (NAIC). Pursuant to itsour participation in thethis working group, referenced above, the Company haswe have agreed to certain time frames and informational provisions in relation to the reorganization plan. The Company has also agreed that any proceeds from the sale of any member of the CIC pool, net of transaction expenses, will be retained in CIC or one of its subsidiaries until the dividend stipulation discussed below expires.
Ratings
Ratings We continue to respond to these subpoenas, interrogatories and inquiries to the extent they are an important factor in establishing the competitive position of insurance companies. CNA’s insurance company subsidiaries are rated by major rating agencies, and these ratings reflect the rating agency’s opinionstill open.
The actions that can be taken by rating agencies are changes in ratings or modifiers. “On Review,” “Credit Watch” and “Rating Watch” are modifiers used by the ratings agencies to alert those parties relying on the Company’s ratingsrepresentatives of the possibilityUnited States Attorney’s Office for the Southern District of a rating change in the near term. Modifiers are utilized when the agencies are uncertain asNew York conducted interviews with several of our current and former executives relating to the impactrestatement of a Company action or initiative, which could prove to be material toour financial results for 2004, including our relationship with and accounting for transactions with an affiliate that were the current rating level. Modifiers are generally used to indicate a possible change in rating within 90 days. “Outlooks” accompanied with ratings are additional modifiers used by the rating agencies to alert those parties relying on the Company’s ratings of the possibility of a rating change in the longer term. The time frame referenced in an outlook is not necessarily limited to ninety days as defined in the Credit-Watch category.
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The table below reflects the various group ratings issued by A.M. Best, Fitch, Moody’s and Standard and Poor’s as of February 16, 2005basis for the Property and Casualty and Life companies.restatement. The tableSEC also includes the ratingsrequested information relating to our restatement in 2006 of prior period results. It is possible that our analyses of, or accounting treatment for, CNAF’s senior debt and Continental senior debt.
If CNA’s property and casualty insurance financial strength ratings were downgraded below current levels, CNA’s business and results offinite reinsurance contracts or discontinued operations could be materially adversely affected. The severityquestioned or disputed by regulatory authorities. As a result, further restatements of the impact on CNA’s business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of the Company’s insurance products to certain markets, and the required collateralization of certain future payment obligations or reserves.
In addition, the Company believes that a lowering of the debt ratings of Loews by certain of these agencies could result in an adverse impact on CNA’s ratings, independent of any change in circumstances at CNA. Each of the major rating agencies which rates Loews currently maintains a negative outlook, but none currently has Loews on negative Credit Watch.
The Company has entered into several settlement agreements and assumed reinsurance contracts that require collateralization of future payment obligations and assumed reserves if the Company’s ratings or other specific criteria fall below certain thresholds. The ratings triggersour financial results are generally more than one level below the Company’s February 16, 2005 ratings.
possible.
CNAF’s
Dividends
By agreement with the New Hampshire Insurance Department, the CIC Group may not pay dividends to CCC until after January 1, 2006.
CNA’s domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based capital is a method developed by the NAIC to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of risk-based capital specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual
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capital is evaluated by a comparison to the risk-based capital results, as determined
Loews
During 2003, CNA completed a strategic review of its operationsratings for our senior debt and decided to concentrate efforts on itsContinental senior debt.
| Insurance Financial Strength | ||||||||||||||||
| Ratings (a) | Debt Ratings (a) | |||||||||||||||
| Property & | ||||||||||||||||
| Casualty | Life | CNAF | Continental | |||||||||||||
| CCC | CAC | Senior | Senior | |||||||||||||
| Group | Debt | Debt | ||||||||||||||
| A.M. Best | A | A- | bbb | Not rated | ||||||||||||
| Fitch | A- | A- | BBB- | BBB- | ||||||||||||
| Moody’s | A3 | Baa1 | Baa3 | Baa3 | ||||||||||||
| S&P | A- | BBB+ | BBB- | BBB- | ||||||||||||
| (a) | A.M. Best, Fitch, Moody’s and Standard & Poor’s outlooks are stable for our debt and insurance financial strength ratings. |
In November of 2003,rating action. Among the Company established a capital plan to replenish statutory capital impacted by the strategic review and charges for prior year development and related matters. Under the capital plan, in November of 2003, CNAF sold to Loews $750 million of a new series of convertible preferred stock which converted into 32,327,015 shares of CNAF common stock on April 20, 2004, and received commitments from Loews for additional capital support of up to $650 million through the purchase of surplus notes of CCC, CNA’s principal insurance subsidiaryadverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain additionsmajor insurance brokers, the inability to CCC’s statutory capital were not achieved through asset sales. Assell a resultmaterial volume of this commitment, Loews purchased $300 million principal amountour insurance products to certain markets and the required collateralization of surplus notes in February of 2004 in relation to CNA’s salecertain future payment obligations or reserves.
The Series H Cumulative Preferred Issue (Series H) is senior to CNAF’s common stock as to the payment of dividends and amounts payable upon any liquidation, dissolution or winding up. No dividends may be declared on CNAF’s common stock until all cumulative dividends on the Series H Issue have been paid. CNAF may not issue any equity securities ranking senior to or on par with the Series H Issue without the consent of a majority of its stockholders. The Series H Issue is non-voting and is not convertible into any other securities of CNAF. It may be redeemed only upon the mutual agreement of CNAF and a majority of the stockholders of the preferred stock.
ratings triggers are generally more than one level below our current ratings.
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In March
The Company continues to evaluate the impact of this new accounting standard on its process for determining other-than-temporary impairment of equity and fixed maturity securities, including the potential impacts from any revisions to the original guidance issued. Adoption of this standard as originally issued may cause the Company to recognize impairment losses in the Consolidated Statements of Operations which would not have been recognized under the current guidance or to recognize such losses in earlier periods, especially those due to increases in interest rates, and could also impact the recognition of investment income on impaired securities. Such an impact would likely increase earnings volatility in future periods. However, since fluctuations in the fair value for available-for-sale securities are already recorded in Accumulated Other Comprehensive Income, adoption of this standardStatement. Provisions of SFAS 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. Adoption of SFAS 155 is not expected to have a significant impact on equity.
the carrying value of securities currently held or acquired subsequent to January 1, 2007.
| • | general economic and business conditions, including inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims; | |||
| • | changes in financial markets such as fluctuations in interest rates, | |||
| • | the effects of corporate bankruptcies, such as Enron and WorldCom, on | |||
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| • | changes in foreign or domestic political, social and economic conditions; |
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| • | regulatory initiatives and compliance with governmental regulations, judicial decisions, including interpretation of policy provisions, decisions regarding coverage and theories of liability, trends in litigation and the outcome of any litigation involving | |||
| • | effects upon insurance markets and upon industry business practices and relationships of current litigation, investigations and regulatory activity by the New York State Attorney General’s office and other authorities concerning contingent commission arrangements with brokers and bid solicitation activities; | |||
| • | legal and regulatory activities with respect to certain non-traditional and finite-risk insurance products, and possible resulting changes in accounting and financial reporting | |||
| • | regulatory limitations, impositions and restrictions upon | |||
| • | the impact of competitive products, policies and pricing and the competitive environment in which | |||
| • | product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew | |||
| • | development of claims and the impact on loss reserves, including changes in claim settlement policies; | |||
| • | the effectiveness of current initiatives by claims management to reduce loss and expense | |||
| • | the performance of reinsurance companies under reinsurance contracts with | |||
| • | results of financing efforts, including the availability of bank credit facilities; | |||
| • | changes in | |||
| • | weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, | |||
| • | man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence or insufficiency of applicable terrorism legislation on coverages; | |||
| • | the | |||
| • | the occurrence of epidemics; | |||
| • | exposure to liabilities due to claims made by insureds and others relating to asbestos remediation and health-based asbestos impairments, as well as exposure to liabilities for environmental pollution, mass tort, | |||
| • | whether a national privately financed trust to replace litigation of asbestos claims with payments to claimants from the trust will be established or approved through federal legislation, or, if established and approved, whether it will contain funding requirements in excess of | |||
| • | the sufficiency of | |||
| • | regulatory limitations and restrictions, including limitations upon | |||
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| • | the risks and uncertainties associated with |
87
| • | the level of success in integrating acquired businesses and operations, and in consolidating, or selling existing ones; | |
| • | the possibility of further changes in | |
| • | the actual closing of contemplated transactions and agreements. |
The Company’s
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In accordance with the provisions of SOP 03-01, the classification and presentation of certain balance sheet and income statement items have been modified. Accordingly, the investment securities previously classified as separate account assets have now been reclassified to the general account and will be reported based on their investment classification whether available-for-sale or trading securities. The investment portfolio for the indexed group annuity contracts is classified as held for trading purposes and is carried at fair value, with both the net realized and unrealized gains (losses) included within net investment income in the Consolidated Statement of Operations. Consistent with the requirements of SOP 03-01, prior year amounts have not been conformed to the current year presentation.
Beginning in the fourth quarter of 2004, the Company has designated new purchases related to a specific investment strategy, that primarily includes convertible bond securities, as held for trading purposes. These securities in the trading portfolio are carried at fair value, with both the net realized and unrealized gains (losses) included within net investment income in the Consolidated Statements of Operations included under Item 8.
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Sensitivity Analysis
CNA monitors its
8960
| Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||||
| Fair | Interest | Currency | Equity | Market | Interest | Currency | Equity | |||||||||||||||||||||||||
| December 31, 2004 (In millions) | Value | Rate Risk | Risk | Risk | ||||||||||||||||||||||||||||
| December 31, 2006 | Value | Rate Risk | Risk | Risk | ||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| General account: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities available-for-sale | $ | 30,937 | $ | (1,824 | ) | $ | (88 | ) | $ | (26 | ) | $ | 35,647 | $ | (1,959 | ) | $ | (98 | ) | $ | (91 | ) | ||||||||||
| Fixed maturity securities trading | 390 | (4 | ) | (1 | ) | (3 | ) | 204 | (2 | ) | — | (2 | ) | |||||||||||||||||||
| Equity securities available-for-sale | 410 | – | (9 | ) | (41 | ) | 597 | — | (9 | ) | (60 | ) | ||||||||||||||||||||
| Equity securities trading | 46 | – | – | (5 | ) | 60 | — | — | (6 | ) | ||||||||||||||||||||||
| Short term investments available-for-sale | 5,404 | (7 | ) | (10 | ) | – | 5,538 | (5 | ) | (32 | ) | — | ||||||||||||||||||||
| Short term investments trading | 459 | – | – | – | 172 | — | — | — | ||||||||||||||||||||||||
| Limited partnerships | 1,549 | 6 | – | (18 | ) | 1,852 | 1 | — | (37 | ) | ||||||||||||||||||||||
| Other invested assets | 42 | – | – | – | 23 | — | — | — | ||||||||||||||||||||||||
| Interest rate swaps | (8 | ) | 8 | – | – | 1 | 190 | — | — | |||||||||||||||||||||||
| Equity index futures for trading | – | 2 | – | (116 | ) | |||||||||||||||||||||||||||
| Equity index futures trading | — | 1 | — | (65 | ) | |||||||||||||||||||||||||||
| Other derivative securities | 2 | 7 | (21 | ) | – | 2 | 1 | (2 | ) | — | ||||||||||||||||||||||
| Total general account | 39,231 | (1,812 | ) | (129 | ) | (209 | ) | 44,096 | (1,773 | ) | (141 | ) | (261 | ) | ||||||||||||||||||
| Separate accounts: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | 486 | (24 | ) | – | – | 434 | (21 | ) | — | — | ||||||||||||||||||||||
| Equity securities | 55 | – | – | (5 | ) | 41 | — | — | (4 | ) | ||||||||||||||||||||||
| Short term investments | 20 | – | – | – | 21 | — | — | — | ||||||||||||||||||||||||
| Total separate accounts | 561 | (24 | ) | – | (5 | ) | 496 | (21 | ) | — | (4 | ) | ||||||||||||||||||||
Total securities | $ | 39,792 | $ | (1,836 | ) | $ | (129 | ) | $ | (214 | ) | $ | 44,592 | $ | (1,794 | ) | $ | (141 | ) | $ | (265 | ) | ||||||||||
Debt (carrying value) | $ | 2,257 | $ | (97 | ) | $ | – | $ | – | $ | 2,156 | $ | (122 | ) | $ | — | $ | — | ||||||||||||||
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| Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||||
| Fair | Interest | Currency | Equity | Market | Interest | Currency | Equity | |||||||||||||||||||||||||
| December 31, 2003 (In millions) | Value | Rate Risk | Risk | Risk | ||||||||||||||||||||||||||||
| Held for Other Than Trading Purposes: | ||||||||||||||||||||||||||||||||
| December 31, 2005 | Value | Rate Risk | Risk | Risk | ||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| General account: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | $ | 28,678 | $ | (1,979 | ) | $ | (35 | ) | $ | (13 | ) | |||||||||||||||||||||
| Equity securities | 527 | – | (26 | ) | (51 | ) | ||||||||||||||||||||||||||
| Short term investments | 7,538 | (5 | ) | (16 | ) | – | ||||||||||||||||||||||||||
| Fixed maturity securities available-for-sale | $ | 32,963 | $ | (1,897 | ) | $ | (89 | ) | $ | (22 | ) | |||||||||||||||||||||
| Fixed maturity securities trading | 271 | (2 | ) | (1 | ) | (2 | ) | |||||||||||||||||||||||||
| Equity securities available-for-sale | 632 | — | (6 | ) | (63 | ) | ||||||||||||||||||||||||||
| Equity securities trading | 49 | — | — | (5 | ) | |||||||||||||||||||||||||||
| Short term investments available-for-sale | 3,870 | (4 | ) | (37 | ) | — | ||||||||||||||||||||||||||
| Short term investments trading | 368 | — | — | — | ||||||||||||||||||||||||||||
| Limited partnerships | 1,117 | 5 | – | (13 | ) | 1,509 | 1 | — | (29 | ) | ||||||||||||||||||||||
| Other invested assets | 233 | – | – | – | 30 | — | — | — | ||||||||||||||||||||||||
| Interest rate swaps | (5 | ) | 3 | – | – | — | 66 | — | — | |||||||||||||||||||||||
| Equity index futures trading | — | 2 | — | (102 | ) | |||||||||||||||||||||||||||
| Other derivative securities | 12 | (108 | ) | 1 | – | 3 | 3 | 10 | — | |||||||||||||||||||||||
| Total general account | 38,100 | (2,084 | ) | (76 | ) | (77 | ) | 39,695 | (1,831 | ) | (123 | ) | (223 | ) | ||||||||||||||||||
| Separate accounts: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | 1,809 | (113 | ) | – | – | 466 | (23 | ) | — | — | ||||||||||||||||||||||
| Equity securities | 117 | – | – | (12 | ) | 44 | — | — | (4 | ) | ||||||||||||||||||||||
| Short term investments | 82 | – | – | – | 36 | — | — | — | ||||||||||||||||||||||||
| Other invested assets | 415 | – | – | (41 | ) | |||||||||||||||||||||||||||
| Total separate accounts | 2,423 | (113 | ) | – | (53 | ) | 546 | (23 | ) | — | (4 | ) | ||||||||||||||||||||
| Total securities held for other than trading purposes | 40,523 | (2,197 | ) | (76 | ) | (130 | ) | |||||||||||||||||||||||||
| Held for Trading Purposes: | ||||||||||||||||||||||||||||||||
| Separate accounts: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | 304 | (4 | ) | – | (1 | ) | ||||||||||||||||||||||||||
| Short term investments | 414 | – | – | – | ||||||||||||||||||||||||||||
| Limited partnerships | 419 | 2 | – | (3 | ) | |||||||||||||||||||||||||||
| Equity indexed futures | – | 2 | – | (111 | ) | |||||||||||||||||||||||||||
| Other derivative securities | – | (1 | ) | – | – | |||||||||||||||||||||||||||
| Total securities held for trading purposes | 1,137 | (1 | ) | – | (115 | ) | ||||||||||||||||||||||||||
Total securities | $ | 41,660 | $ | (2,198 | ) | $ | (76 | ) | $ | (245 | ) | $ | 40,241 | $ | (1,854 | ) | $ | (123 | ) | $ | (227 | ) | ||||||||||
Debt (carrying value) | $ | 1,904 | $ | (70 | ) | $ | – | $ | – | $ | 1,690 | $ | (92 | ) | $ | — | $ | — | ||||||||||||||
9162
| Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||||
| Fair | Interest | Currency | Equity | Market | Interest | Currency | Equity | |||||||||||||||||||||||||
| December 31, 2004 (In millions) | Value | Rate Risk | Risk | Risk | ||||||||||||||||||||||||||||
| December 31, 2006 | Value | Rate Risk | Risk | Risk | ||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| General account: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities available-for-sale | $ | 30,937 | $ | (2,703 | ) | $ | (177 | ) | $ | (63 | ) | $ | 35,647 | $ | (2,925 | ) | $ | (197 | ) | $ | (227 | ) | ||||||||||
| Fixed maturity securities trading | 390 | (6 | ) | (1 | ) | (8 | ) | 204 | (3 | ) | — | (5 | ) | |||||||||||||||||||
| Equity securities available-for-sale | 410 | – | (18 | ) | (103 | ) | 597 | — | (18 | ) | (149 | ) | ||||||||||||||||||||
| Equity securities trading | 46 | – | – | (11 | ) | 60 | — | — | (15 | ) | ||||||||||||||||||||||
| Short term investments available-for-sale | 5,404 | (11 | ) | (20 | ) | – | 5,538 | (7 | ) | (64 | ) | — | ||||||||||||||||||||
| Short term investments trading | 459 | – | – | – | 172 | — | — | — | ||||||||||||||||||||||||
| Limited partnerships | 1,549 | 9 | – | (46 | ) | 1,852 | 1 | — | (93 | ) | ||||||||||||||||||||||
| Other invested assets | 42 | – | – | – | 23 | — | — | — | ||||||||||||||||||||||||
| Interest rate swaps | (8 | ) | 12 | – | – | 1 | 279 | — | — | |||||||||||||||||||||||
| Equity index futures for trading | – | 3 | – | (289 | ) | |||||||||||||||||||||||||||
| Equity index futures trading | — | 2 | — | (162 | ) | |||||||||||||||||||||||||||
| Other derivative securities | 2 | 10 | (38 | ) | – | 2 | 1 | (4 | ) | (1 | ) | |||||||||||||||||||||
| Total general account | 39,231 | (2,686 | ) | (254 | ) | (520 | ) | 44,096 | (2,652 | ) | (283 | ) | (652 | ) | ||||||||||||||||||
| Separate accounts: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | 486 | (35 | ) | – | – | 434 | (31 | ) | — | — | ||||||||||||||||||||||
| Equity securities | 55 | – | – | (14 | ) | 41 | — | — | (10 | ) | ||||||||||||||||||||||
| Short term investments | 20 | – | – | – | 21 | — | — | — | ||||||||||||||||||||||||
| Total separate accounts | 561 | (35 | ) | – | (14 | ) | 496 | (31 | ) | — | (10 | ) | ||||||||||||||||||||
Total securities | $ | 39,792 | $ | (2,721 | ) | $ | (254 | ) | $ | (534 | ) | $ | 44,592 | $ | (2,683 | ) | $ | (283 | ) | $ | (662 | ) | ||||||||||
Debt (carrying value) | $ | 2,257 | $ | (141 | ) | $ | – | $ | – | $ | 2,156 | $ | (180 | ) | $ | — | $ | — | ||||||||||||||
9263
| Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||||
| Fair | Interest | Currency | Equity | Market | Interest | Currency | Equity | |||||||||||||||||||||||||
| December 31, 2003 (In millions) | Value | Rate Risk | Risk | Risk | ||||||||||||||||||||||||||||
| Held for Other Than Trading Purposes: | ||||||||||||||||||||||||||||||||
| December 31, 2005 | Value | Rate Risk | Risk | Risk | ||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
| General account: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | $ | 28,678 | $ | (2,896 | ) | $ | (71 | ) | $ | (32 | ) | |||||||||||||||||||||
| Equity securities | 527 | – | (52 | ) | (129 | ) | ||||||||||||||||||||||||||
| Short term investments | 7,538 | (7 | ) | (32 | ) | – | ||||||||||||||||||||||||||
| Fixed maturity securities available-for-sale | $ | 32,963 | $ | (2,827 | ) | $ | (178 | ) | $ | (54 | ) | |||||||||||||||||||||
| Fixed maturity securities trading | 271 | (4 | ) | (1 | ) | (4 | ) | |||||||||||||||||||||||||
| Equity securities available-for-sale | 632 | — | (11 | ) | (158 | ) | ||||||||||||||||||||||||||
| Equity securities trading | 49 | — | — | (12 | ) | |||||||||||||||||||||||||||
| Short term investments available-for-sale | 3,870 | (6 | ) | (74 | ) | — | ||||||||||||||||||||||||||
| Short term investments trading | 368 | — | — | — | ||||||||||||||||||||||||||||
| Limited partnerships | 1,117 | 7 | – | (33 | ) | 1,509 | 1 | — | (72 | ) | ||||||||||||||||||||||
| Other invested assets | 233 | – | – | – | 30 | — | — | — | ||||||||||||||||||||||||
| Interest rate caps | – | 1 | – | – | ||||||||||||||||||||||||||||
| Interest rate swaps | (5 | ) | 4 | – | – | — | 95 | — | — | |||||||||||||||||||||||
| Equity index futures trading | — | 3 | (1 | ) | (255 | ) | ||||||||||||||||||||||||||
| Other derivative securities | 12 | (184 | ) | 3 | – | 3 | 5 | 20 | (1 | ) | ||||||||||||||||||||||
| Total general account | 38,100 | (3,075 | ) | (152 | ) | (194 | ) | 39,695 | (2,733 | ) | (245 | ) | (556 | ) | ||||||||||||||||||
| Separate accounts: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | 1,809 | (165 | ) | – | – | 466 | (34 | ) | — | — | ||||||||||||||||||||||
| Equity securities | 117 | – | – | (29 | ) | 44 | — | — | (11 | ) | ||||||||||||||||||||||
| Short term investments | 82 | – | – | – | 36 | — | — | — | ||||||||||||||||||||||||
| Other invested assets | 415 | – | – | (103 | ) | |||||||||||||||||||||||||||
| Total separate accounts | 2,423 | (165 | ) | – | (132 | ) | 546 | (34 | ) | — | (11 | ) | ||||||||||||||||||||
| Total securities held for other than trading purposes | 40,523 | (3,240 | ) | (152 | ) | (326 | ) | |||||||||||||||||||||||||
| Held for Trading Purposes: | ||||||||||||||||||||||||||||||||
| Separate accounts: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | 304 | (6 | ) | – | (2 | ) | ||||||||||||||||||||||||||
| Short term investments | 414 | (1 | ) | – | – | |||||||||||||||||||||||||||
| Limited partnerships | 419 | 3 | – | (7 | ) | |||||||||||||||||||||||||||
| Equity indexed futures | – | 4 | – | (277 | ) | |||||||||||||||||||||||||||
| Other derivative securities | – | (1 | ) | – | – | |||||||||||||||||||||||||||
| Total securities held for trading purposes | 1,137 | (1 | ) | – | (286 | ) | ||||||||||||||||||||||||||
Total securities | $ | 41,660 | $ | (3,241 | ) | $ | (152 | ) | $ | (612 | ) | $ | 40,241 | $ | (2,767 | ) | $ | (245 | ) | $ | (567 | ) | ||||||||||
Debt (carrying value) | $ | 1,904 | $ | (102 | ) | $ | – | $ | – | $ | 1,690 | $ | (135 | ) | $ | — | $ | — | ||||||||||||||
9364
CNA Financial Corporation
Consolidated Statements of Operations
| Years ended December 31 (In millions, except per share data) | 2004 | 2003 | 2002 | |||||||||
Revenues: | ||||||||||||
| Net earned premiums | $ | 8,209 | $ | 9,214 | $ | 10,213 | ||||||
| Net investment income | 1,674 | 1,647 | 1,730 | |||||||||
| Realized investment gains (losses), net of participating policyholders’ and minority interests | (248 | ) | 460 | (252 | ) | |||||||
| Other revenues | 295 | 395 | 595 | |||||||||
| Total revenues | 9,930 | 11,716 | 12,286 | |||||||||
Claims, Benefits and Expenses: | ||||||||||||
| Insurance claims and policyholders’ benefits | 6,446 | 10,287 | 8,420 | |||||||||
| Amortization of deferred acquisition costs | 1,680 | 1,965 | 1,791 | |||||||||
| Other operating expenses | 1,183 | 1,686 | 1,621 | |||||||||
| Restructuring and other related charges | – | – | (37 | ) | ||||||||
| Interest | 124 | 130 | 150 | |||||||||
| Total claims, benefits and expenses | 9,433 | 14,068 | 11,945 | |||||||||
| Income (loss) from continuing operations before income tax and minority interest | 497 | (2,352 | ) | 341 | ||||||||
| Income tax (expense) benefit | (29 | ) | 913 | (68 | ) | |||||||
| Minority interest | (27 | ) | 6 | (26 | ) | |||||||
| Income (loss) from continuing operations | 441 | (1,433 | ) | 247 | ||||||||
| Loss from discontinued operations, net of tax of $9 | – | – | (35 | ) | ||||||||
| Income (loss) before cumulative effect of change in accounting principle | 441 | (1,433 | ) | 212 | ||||||||
| Cumulative effect of change in accounting principle, net of tax of $7 | – | – | (57 | ) | ||||||||
Net income (loss) | $ | 441 | $ | (1,433 | ) | $ | 155 | |||||
Basic and diluted earnings (loss) per share: | ||||||||||||
| Income (loss) from continuing operations | $ | 1.47 | $ | (6.58 | ) | $ | 1.10 | |||||
| Loss from discontinued operations, net of tax | – | – | (0.16 | ) | ||||||||
| Income (loss) before cumulative effect of change in accounting principle | 1.47 | (6.58 | ) | 0.94 | ||||||||
| Cumulative effect of change in accounting principle, net of tax | – | – | (0.26 | ) | ||||||||
Basic and diluted earnings (loss) per share available to common stockholders | $ | 1.47 | $ | (6.58 | ) | $ | 0.68 | |||||
Weighted average outstanding common stock and common stock equivalents | 256.0 | 227.0 | 223.6 | |||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||
| (In millions, except per share data) | ||||||||||||
Revenues | ||||||||||||
| Net earned premiums | $ | 7,603 | $ | 7,569 | $ | 8,209 | ||||||
| Net investment income | 2,412 | 1,892 | 1,680 | |||||||||
| Realized investment gains (losses), net of participating policyholders’ and minority interests | 86 | (10 | ) | (248 | ) | |||||||
| Other revenues | 275 | 411 | 283 | |||||||||
| Total revenues | 10,376 | 9,862 | 9,924 | |||||||||
Claims, Benefits and Expenses | ||||||||||||
| Insurance claims and policyholders’ benefits | 6,047 | 6,999 | 6,445 | |||||||||
| Amortization of deferred acquisition costs | 1,534 | 1,543 | 1,680 | |||||||||
| Other operating expenses | 1,027 | 1,034 | 1,174 | |||||||||
| Restructuring and other related charges | (13 | ) | — | (3 | ) | |||||||
| Interest | 131 | 124 | 124 | |||||||||
| Total claims, benefits and expenses | 8,726 | 9,700 | 9,420 | |||||||||
| Income before income tax and minority interest | 1,650 | 162 | 504 | |||||||||
| Income tax (expense) benefit | (469 | ) | 105 | (31 | ) | |||||||
| Minority interest | (44 | ) | (24 | ) | (27 | ) | ||||||
| Income from continuing operations | 1,137 | 243 | 446 | |||||||||
| Income (loss) from discontinued operations, net of income tax (expense) benefit of $7, $(2) and $(1) | (29 | ) | 21 | (21 | ) | |||||||
Net income | $ | 1,108 | $ | 264 | $ | 425 | ||||||
Basic Earnings Per Share | ||||||||||||
| Income from continuing operations | $ | 4.17 | $ | 0.68 | $ | 1.49 | ||||||
| Income (loss) from discontinued operations | (0.11 | ) | 0.08 | (0.09 | ) | |||||||
| Basic earnings per share available to common stockholders | $ | 4.06 | $ | 0.76 | $ | 1.40 | ||||||
Diluted Earnings Per Share | ||||||||||||
| Income from continuing operations | $ | 4.16 | $ | 0.68 | $ | 1.49 | ||||||
| Income (loss) from discontinued operations | (0.11 | ) | 0.08 | (0.09 | ) | |||||||
| Diluted earnings per share available to common stockholders | $ | 4.05 | $ | 0.76 | $ | 1.40 | ||||||
Weighted Average Outstanding Common Stock and Common Stock Equivalents | ||||||||||||
| Basic | 262.1 | 256.0 | 256.0 | |||||||||
| Diluted | 262.3 | 256.0 | 256.0 | |||||||||
9465
| December 31 (In millions, except share data) | 2004 | 2003 | ||||||||||||||
| December 31 | 2006 | 2005 | ||||||||||||||
| (In millions, except share data) | ||||||||||||||||
Assets | ||||||||||||||||
| Investments: | ||||||||||||||||
| Fixed maturity securities at fair value (amortized cost of $30,266 and $27,564) | $ | 31,327 | $ | 28,678 | ||||||||||||
| Equity securities at fair value (cost of $320 and $293) | 456 | 527 | ||||||||||||||
| Fixed maturity securities at fair value (amortized cost of $35,135 and $32,616) | $ | 35,851 | $ | 33,234 | ||||||||||||
| Equity securities at fair value (cost of $408 and $511) | 657 | 681 | ||||||||||||||
| Limited partnership investments | 1,549 | 1,117 | 1,852 | 1,509 | ||||||||||||
| Other invested assets | 36 | 240 | 26 | 33 | ||||||||||||
| Short-term investments, at fair value which approximates cost | 5,863 | 7,538 | ||||||||||||||
| Short term investments | 5,710 | 4,238 | ||||||||||||||
Total investments | 39,231 | 38,100 | 44,096 | 39,695 | ||||||||||||
| Cash | 95 | 139 | 84 | 96 | ||||||||||||
| Reinsurance receivables (less allowance for uncollectible receivables of $531 and $573) | 15,463 | 15,681 | ||||||||||||||
| Insurance receivables (less allowance for doubtful accounts of $517 and $375) | 2,050 | 2,707 | ||||||||||||||
| Reinsurance receivables (less allowance for uncollectible receivables of $469 and $519) | 9,478 | 11,917 | ||||||||||||||
| Insurance receivables (less allowance for doubtful accounts of $368 and $445) | 2,108 | 2,096 | ||||||||||||||
| Accrued investment income | 297 | 323 | 313 | 312 | ||||||||||||
| Receivables for securities sold | 496 | 836 | 303 | 565 | ||||||||||||
| Deferred acquisition costs | 1,268 | 2,533 | 1,190 | 1,197 | ||||||||||||
| Prepaid reinsurance premiums | 1,128 | 1,361 | 342 | 340 | ||||||||||||
| Federal income taxes recoverable (includes $7 and $594 due from Loews Corporation) | – | 607 | ||||||||||||||
| Federal income taxes recoverable (includes $0 and $68 due from Loews Corporation) | — | 62 | ||||||||||||||
| Deferred income taxes | 692 | 600 | 855 | 1,105 | ||||||||||||
| Property and equipment at cost (less accumulated depreciation of $524 and $727) | 235 | 314 | ||||||||||||||
| Property and equipment at cost (less accumulated depreciation of $571 and $546) | 277 | 197 | ||||||||||||||
| Goodwill and other intangible assets | 162 | 162 | 142 | 146 | ||||||||||||
| Other assets | 815 | 1,571 | 592 | 737 | ||||||||||||
| Separate account business | 568 | 3,678 | 503 | 551 | ||||||||||||
Total assets | $ | 62,500 | $ | 68,612 | $ | 60,283 | $ | 59,016 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Insurance reserves: | ||||||||||||||||
| Claim and claim adjustment expenses | $ | 29,636 | $ | 30,938 | ||||||||||||
| Unearned premiums | 3,784 | 3,706 | ||||||||||||||
| Future policy benefits | 6,645 | 6,297 | ||||||||||||||
| Policyholders’ funds | 1,015 | 1,495 | ||||||||||||||
| Collateral on loaned securities | 2,851 | 767 | ||||||||||||||
| Payables for securities purchased | 221 | 129 | ||||||||||||||
| Participating policyholders’ funds | 50 | 53 | ||||||||||||||
| Short term debt | — | 252 | ||||||||||||||
| Long term debt | 2,156 | 1,438 | ||||||||||||||
| Federal income taxes payable (includes $38 and $0 due to Loews Corporation) | 40 | — | ||||||||||||||
| Reinsurance balances payable | 539 | 1,636 | ||||||||||||||
| Other liabilities | 2,740 | 2,513 | ||||||||||||||
| Separate account business | 503 | 551 | ||||||||||||||
Total liabilities | 50,180 | 49,775 | ||||||||||||||
| Commitments and contingencies (Notes B, F, G, I and K) | ||||||||||||||||
| Minority interest | 335 | 291 | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Preferred stock (12,500,000 shares authorized) | ||||||||||||||||
| Series H Issue (no par value; $100,000 stated value; no shares and 7,500 shares issued; held by Loews Corporation) | — | 750 | ||||||||||||||
| Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,543 and 258,177,285 shares issued; and 271,108,780 and 256,001,968 shares outstanding) | 683 | 645 | ||||||||||||||
| Additional paid-in capital | 2,166 | 1,701 | ||||||||||||||
| Retained earnings | 6,486 | 5,621 | ||||||||||||||
| Accumulated other comprehensive income | 549 | 359 | ||||||||||||||
| Treasury stock (1,931,763 and 2,175,317 shares), at cost | (58 | ) | (67 | ) | ||||||||||||
| 9,826 | 9,009 | |||||||||||||||
| Notes receivable for the issuance of common stock | (58 | ) | (59 | ) | ||||||||||||
Total stockholders’ equity | 9,768 | 8,950 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 60,283 | $ | 59,016 | ||||||||||||
95
| 2004 | 2003 | |||||||
Liabilities and Stockholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Insurance reserves: | ||||||||
| Claim and claim adjustment expenses | $ | 31,520 | $ | 31,730 | ||||
| Unearned premiums | 4,522 | 5,000 | ||||||
| Future policy benefits | 5,883 | 8,161 | ||||||
| Policyholders’ funds | 1,725 | 601 | ||||||
| Collateral on loaned securities | 918 | 442 | ||||||
| Payables for securities purchased | 288 | 1,902 | ||||||
| Participating policyholders’ funds | 63 | 118 | ||||||
| Short term debt | 531 | 263 | ||||||
| Long term debt | 1,726 | 1,641 | ||||||
| Reinsurance balances payable | 3,043 | 3,432 | ||||||
| Other liabilities | 2,231 | 2,436 | ||||||
| Separate account business | 568 | 3,678 | ||||||
Total liabilities | 53,018 | 59,404 | ||||||
| Commitments and contingencies (Notes F, G, I and K) | ||||||||
| Minority interest | 275 | 256 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock (12,500,000 shares authorized) | ||||||||
| Series H Issue (no par value; $100,000 stated value; 7,500 shares issued; held by Loews Corporation) | 750 | 750 | ||||||
| Series I Issue (no par value; $23,200 stated value; 32,327 shares issued; held by Loews Corporation) | – | 750 | ||||||
| Common stock ($2.50 par value; 500,000,000 shares authorized; 258,177,285 and 225,850,270 shares issued; and 255,953,958 and 223,617,337 shares outstanding) | 645 | 565 | ||||||
| Additional paid-in capital | 1,701 | 1,031 | ||||||
| Retained earnings | 5,601 | 5,160 | ||||||
| Accumulated other comprehensive income | 650 | 841 | ||||||
| Treasury stock (2,223,327 and 2,232,933 shares), at cost | (69 | ) | (69 | ) | ||||
| 9,278 | 9,028 | |||||||
| Notes receivable for the issuance of common stock | (71 | ) | (76 | ) | ||||
Total stockholders’ equity | 9,207 | 8,952 | ||||||
Total liabilities and stockholders’ equity | $ | 62,500 | $ | 68,612 | ||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
9666
| Years ended December 31 | 2004 | 2003 | 2002 | 2006 | 2005 | 2004 | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||||||||||
| Net income (loss) | $ | 441 | $ | (1,433 | ) | $ | 155 | |||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash flows provided by operating activities: | ||||||||||||||||||||||||
| Cumulative effect of change in accounting principles, net of tax | – | – | 57 | |||||||||||||||||||||
| Changes in bad debt provision for insurance and reinsurance receivables | 87 | 602 | 40 | |||||||||||||||||||||
| Loss on disposal of property and equipment | 36 | 22 | 24 | |||||||||||||||||||||
| Net income | $ | 1,108 | $ | 264 | $ | 425 | ||||||||||||||||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | ||||||||||||||||||||||||
| (Income) loss from discontinued operations | 29 | (21 | ) | 21 | ||||||||||||||||||||
| Loss (gain) on disposal of property and equipment | — | (1 | ) | 36 | ||||||||||||||||||||
| Minority interest | 27 | (6 | ) | 26 | 44 | 24 | 27 | |||||||||||||||||
| Deferred income tax provision | 35 | 67 | 7 | 173 | (220 | ) | 37 | |||||||||||||||||
| Net purchases of trading securities | (5 | ) | – | – | ||||||||||||||||||||
| Trading securities activity | 374 | 164 | (93 | ) | ||||||||||||||||||||
| Realized investment (gains) losses, net of participating policyholders’ and minority interests | 248 | (460 | ) | 252 | (86 | ) | 10 | 248 | ||||||||||||||||
| Equity method (income) loss | (214 | ) | (220 | ) | 25 | |||||||||||||||||||
| Realized loss from discontinued operations, net of tax | – | – | 37 | |||||||||||||||||||||
| Undistributed earnings of equity method investees | (170 | ) | (45 | ) | (67 | ) | ||||||||||||||||||
| Amortization of bond (discount) premium | 9 | (79 | ) | (143 | ) | (274 | ) | (153 | ) | 9 | ||||||||||||||
| Depreciation | 75 | 86 | 98 | 48 | 54 | 75 | ||||||||||||||||||
| Changes in: | ||||||||||||||||||||||||
| Receivables, net | (439 | ) | (3,529 | ) | 995 | 2,427 | 3,531 | (545 | ) | |||||||||||||||
| Deferred acquisition costs | 194 | (62 | ) | (162 | ) | 7 | 71 | 194 | ||||||||||||||||
| Accrued investment income | (12 | ) | (49 | ) | 69 | (1 | ) | (15 | ) | (12 | ) | |||||||||||||
| Federal income taxes recoverable/payable | 596 | (642 | ) | 655 | 102 | (62 | ) | 596 | ||||||||||||||||
| Prepaid reinsurance premiums | 233 | (15 | ) | (124 | ) | (2 | ) | 788 | 233 | |||||||||||||||
| Reinsurance balances payable | (355 | ) | 670 | 145 | (1,097 | ) | (1,344 | ) | (318 | ) | ||||||||||||||
| Insurance reserves | 766 | 6,818 | (931 | ) | (771 | ) | (943 | ) | 1,075 | |||||||||||||||
| Other assets | 142 | (16 | ) | 335 | ||||||||||||||||||||
| Other liabilities | 306 | 55 | 105 | |||||||||||||||||||||
| Other, net | (115 | ) | (10 | ) | (185 | ) | (98 | ) | 75 | (397 | ) | |||||||||||||
| Total adjustments | 1,166 | 3,193 | 885 | 1,153 | 1,952 | 1,559 | ||||||||||||||||||
Net cash flows provided by operating activities | $ | 1,607 | $ | 1,760 | $ | 1,040 | ||||||||||||||||||
Net cash flows provided by operating activities-continuing operations | $ | 2,261 | $ | 2,216 | $ | 1,984 | ||||||||||||||||||
Net cash flows used by operating activities-discontinued operations | $ | (11 | ) | $ | (47 | ) | $ | (16 | ) | |||||||||||||||
Net cash flows provided by operating activities-total | $ | 2,250 | $ | 2,169 | $ | 1,968 | ||||||||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||||||||||
| Purchases of fixed maturity securities | $ | (58,963 | ) | $ | (61,419 | ) | $ | (63,167 | ) | $ | (48,757 | ) | $ | (62,990 | ) | $ | (58,379 | ) | ||||||
| Proceeds from fixed maturity securities: | ||||||||||||||||||||||||
| Sales | 48,678 | 52,805 | 61,919 | 42,433 | 55,611 | 48,427 | ||||||||||||||||||
| Maturities, calls and redemptions | 4,929 | 6,435 | 3,108 | 4,310 | 4,579 | 4,800 | ||||||||||||||||||
| Purchases of equity securities | (625 | ) | (281 | ) | (814 | ) | (340 | ) | (482 | ) | (351 | ) | ||||||||||||
| Proceeds from sales of equity securities | 787 | 578 | 1,197 | 221 | 316 | 522 | ||||||||||||||||||
| Purchases of mortgage loans and real estate | (27 | ) | – | – | ||||||||||||||||||||
| Change in short term investments | 2,044 | (845 | ) | (3,249 | ) | (1,331 | ) | 1,627 | 2,021 | |||||||||||||||
| Change in collateral on loaned securities and derivatives | 476 | (111 | ) | (371 | ) | |||||||||||||||||||
| Change in collateral on loaned securities | 2,084 | (151 | ) | 476 | ||||||||||||||||||||
| Change in other investments | 100 | 300 | 167 | (195 | ) | 86 | (30 | ) | ||||||||||||||||
| Purchases of property and equipment | (41 | ) | (65 | ) | (88 | ) | (131 | ) | (45 | ) | (41 | ) | ||||||||||||
| Dispositions | 647 | 422 | (178 | ) | 8 | 57 | 647 | |||||||||||||||||
| Other, net | (24 | ) | 48 | (12 | ) | 16 | 56 | (194 | ) | |||||||||||||||
Net cash flows used by investing activities | $ | (2,019 | ) | $ | (2,133 | ) | $ | (1,488 | ) | |||||||||||||||
Net cash flows used by investing activities-continuing operations | $ | (1,682 | ) | $ | (1,336 | ) | $ | (2,102 | ) | |||||||||||||||
Net cash flows provided by investing activities-discontinued operations | $ | 36 | $ | 20 | $ | 18 | ||||||||||||||||||
Net cash flows used by investing activities-total | $ | (1,646 | ) | $ | (1,316 | ) | $ | (2,084 | ) | |||||||||||||||
97
| 2004 | 2003 | 2002 | ||||||||||
Cash Flows from Financing Activities: | ||||||||||||
| Issuance of preferred stock | $ | – | $ | 750 | $ | 750 | ||||||
| Principal payments on debt | (619 | ) | (387 | ) | (341 | ) | ||||||
| Proceeds from issuance of debt | 972 | – | 65 | |||||||||
| Receipt (return) of policyholder account balances on investment contracts | 10 | 25 | (44 | ) | ||||||||
| Receipts from investment contracts credited to policyholder account balances | – | 1 | 1 | |||||||||
| Other | 5 | (3 | ) | 1 | ||||||||
Net cash flows provided by financing activities | 368 | 386 | 432 | |||||||||
| Net change in cash | (44 | ) | 13 | (16 | ) | |||||||
Cash, beginning of year | 139 | 126 | 142 | |||||||||
Cash, end of year | $ | 95 | $ | 139 | $ | 126 | ||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||||||
| Cash paid (received): | ||||||||||||
| Interest | $ | 216 | $ | 134 | $ | 195 | ||||||
| Federal income taxes | (627 | ) | (369 | ) | (612 | ) | ||||||
| Non-cash transactions: | ||||||||||||
| Notes receivable for the issuance of common stock | – | 4 | 4 | |||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
9867
| 2006 | 2005 | 2004 | ||||||||||
Cash Flows from Financing Activities: | ||||||||||||
| Proceeds from the issuance of long term debt | $ | 759 | $ | — | $ | 972 | ||||||
| Principal payments on debt | (294 | ) | (568 | ) | (618 | ) | ||||||
| Return of investment contract account balances | (589 | ) | (281 | ) | (479 | ) | ||||||
| Receipts of investment contract account balances | 4 | 7 | 181 | |||||||||
| Payment to repurchase Series H Issue preferred stock | (993 | ) | — | — | ||||||||
| Proceeds from the issuance of common stock | 499 | — | — | |||||||||
| Stock options exercised | 10 | 2 | — | |||||||||
| Other, net | (1 | ) | 3 | 5 | ||||||||
Net cash flows (used) provided by financing activities-continuing operations | $ | (605 | ) | $ | (837 | ) | $ | 61 | ||||
Net cash flows provided by financing activities-discontinued operations | $ | — | $ | — | $ | — | ||||||
Net cash flows (used) provided by financing activities-total | $ | (605 | ) | $ | (837 | ) | $ | 61 | ||||
| Net change in cash | (1 | ) | 16 | (55 | ) | |||||||
| Net cash transactions from continuing operations to discontinued operations | 14 | (42 | ) | 13 | ||||||||
| Net cash transactions from discontinued operations to continuing operations | (14 | ) | 42 | (13 | ) | |||||||
Cash, beginning of year | 125 | 109 | 164 | |||||||||
Cash, end of year | $ | 124 | $ | 125 | $ | 109 | ||||||
| Cash-continuing operations | $ | 84 | $ | 96 | $ | 95 | ||||||
| Cash-discontinued operations | 40 | 29 | 14 | |||||||||
Cash-total | $ | 124 | $ | 125 | $ | 109 | ||||||
CNA Financial Corporation Consolidated Statements of Stockholders’ Equity
| Additional | Accumulated Other | Notes Receivable | Total | |||||||||||||||||||||||||||||
| Preferred | Common | Paid-in | Retained | Comprehensive | Treasury | Related to | Stockholders’ | |||||||||||||||||||||||||
| (In millions) | Stock | Stock | Capital | Earnings | Income (Loss) | Stock | Common Stock | Equity | ||||||||||||||||||||||||
Balance, January 1, 2002 | $ | – | $ | 565 | $ | 1,031 | $ | 6,438 | $ | 226 | $ | (70 | ) | $ | (68 | ) | $ | 8,122 | ||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | – | – | – | 155 | – | – | – | 155 | ||||||||||||||||||||||||
| Other comprehensive income | – | – | – | – | 378 | – | – | 378 | ||||||||||||||||||||||||
| Total comprehensive income | 533 | |||||||||||||||||||||||||||||||
| Issuance of Series H preferred stock | 750 | – | – | – | – | – | – | 750 | ||||||||||||||||||||||||
| Increase in notes receivable related to common stock | – | – | – | – | – | – | (4 | ) | (4 | ) | ||||||||||||||||||||||
Balance, December 31, 2002 | 750 | 565 | 1,031 | 6,593 | 604 | (70 | ) | (72 | ) | 9,401 | ||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net loss | – | – | – | (1,433 | ) | – | – | – | (1,433 | ) | ||||||||||||||||||||||
| Other comprehensive income | – | – | – | – | 237 | – | – | 237 | ||||||||||||||||||||||||
| Total comprehensive loss | (1,196 | ) | ||||||||||||||||||||||||||||||
| Issuance of Series I preferred stock | 750 | – | – | – | – | – | – | 750 | ||||||||||||||||||||||||
| Stock options exercised | – | – | – | – | – | 1 | – | 1 | ||||||||||||||||||||||||
| Increase in notes receivable related to common stock | – | – | – | – | – | – | (4 | ) | (4 | ) | ||||||||||||||||||||||
Balance, December 31, 2003 | 1,500 | 565 | 1,031 | 5,160 | 841 | (69 | ) | (76 | ) | 8,952 | ||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | – | – | – | 441 | – | – | – | 441 | ||||||||||||||||||||||||
| Other comprehensive loss | – | – | – | – | (191 | ) | – | – | (191 | ) | ||||||||||||||||||||||
| Total comprehensive income | 250 | |||||||||||||||||||||||||||||||
| Conversion of Series I preferred stock to common stock | (750 | ) | 80 | 670 | – | – | – | – | – | |||||||||||||||||||||||
| Decrease in notes receivable related to common stock | – | – | – | – | – | – | 5 | 5 | ||||||||||||||||||||||||
Balance, December 31, 2004 | $ | 750 | $ | 645 | $ | 1,701 | $ | 5,601 | $ | 650 | $ | (69 | ) | $ | (71 | ) | $ | 9,207 | ||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
9968
| Accumulated | Notes | |||||||||||||||||||||||||||||||
| Additional | Other | Receivable for | Total | |||||||||||||||||||||||||||||
| Preferred | Common | Paid-in | Retained | Comprehensive | Treasury | the Issuance of | Stockholders’ | |||||||||||||||||||||||||
| (In millions) | Stock | Stock | Capital | Earnings | Income (Loss) | Stock | Common Stock | Equity | ||||||||||||||||||||||||
Balance, January 1, 2004 | $ | 1,500 | $ | 565 | $ | 1,031 | $ | 4,932 | $ | 852 | $ | (69 | ) | $ | (76 | ) | $ | 8,735 | ||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | 425 | — | — | — | 425 | ||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (191 | ) | — | — | (191 | ) | ||||||||||||||||||||||
| Total comprehensive income | 234 | |||||||||||||||||||||||||||||||
| Conversion of Series I preferred stock to common stock | (750 | ) | 80 | 670 | — | — | — | — | — | |||||||||||||||||||||||
| Decrease in notes receivable for the issuance of common stock | — | — | — | — | — | — | 5 | 5 | ||||||||||||||||||||||||
Balance, December 31, 2004 | 750 | 645 | 1,701 | 5,357 | 661 | (69 | ) | (71 | ) | 8,974 | ||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | 264 | — | — | — | 264 | ||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (302 | ) | — | — | (302 | ) | ||||||||||||||||||||||
| Total comprehensive loss | (38 | ) | ||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | 2 | — | 2 | ||||||||||||||||||||||||
| Decrease in notes receivable for the issuance of common stock | — | — | — | — | — | — | 12 | 12 | ||||||||||||||||||||||||
Balance, December 31, 2005 | 750 | 645 | 1,701 | 5,621 | 359 | (67 | ) | (59 | ) | 8,950 | ||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | 1,108 | — | — | — | 1,108 | ||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 236 | — | — | 236 | ||||||||||||||||||||||||
| Total comprehensive income | 1,344 | |||||||||||||||||||||||||||||||
| Liquidation preference in excess of par value on Series H Issue | — | — | — | (243 | ) | — | — | — | (243 | ) | ||||||||||||||||||||||
| Repurchase of Series H Issue | (750 | ) | — | — | — | — | — | — | (750 | ) | ||||||||||||||||||||||
| Issuance of common stock | 38 | 461 | 499 | |||||||||||||||||||||||||||||
| Adjustment to initially apply FAS 158, net of tax | (46 | ) | (46 | ) | ||||||||||||||||||||||||||||
| Stock options exercised | — | — | 1 | — | — | 9 | — | 10 | ||||||||||||||||||||||||
| Decrease in notes receivable for the issuance of common stock | — | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||
| Other | — | — | 3 | — | — | — | — | 3 | ||||||||||||||||||||||||
Balance, December 31, 2006 | $ | — | $ | 683 | $ | 2,166 | $ | 6,486 | $ | 549 | $ | (58 | ) | $ | (58 | ) | $ | 9,768 | ||||||||||||||
69
2006.
CNA Group Life Assurance Company (CNAGLA) was sold to Hartford Financial Services Group, Inc. on December 31, 2003. The results of the group benefits business sold are included in the Consolidated Statement of Operations for the years ended December 31, 2003 and 2002. See Note P for further information.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
The amounts presented on the December 31, 2005 Consolidated Balance Sheet related to Insurance receivables and Other liabilities have been corrected from $1,866 million and $2,283 million to $2,096 million and $2,513 million, to conform to the 2006 presentation. The correction of $230 million relates to balances payable to insureds that were previously reflected as a deduction from insurance receivables and are currently reflected as liabilities. The balances are principally related to amounts deposited with the Company by customers, such as amounts related to the funding of deductible obligations.
As a result of the Company’s decisions to focus on core property and casualty operations and to exit certain businesses, the Company revised its reportable segment structure in the first quarter of 2004 to reflect the changes in its core operations and how management makes business decisions.
100
Insurance Operations
70
Revenues on interest-sensitive life insurance contracts are composed of contract charges and fees, which are recognized over the coverage period.
See Note Q for further information on claim and claim adjustment expense reserves for discontinued operations.
Workers
101
including interest-sensitive contracts were ceded on a 100% indemnity reinsurance basis to Swiss Re in connection with the sale of the individual life insurance business. See Note P for additionalfurther information.
71
The expenses incurred related to uncollectible reinsurance receivables are presented as a component of Insurance claims and policyholders’ benefits in the Consolidated Statements of Operations.
In 2004, the expenses incurred related to uncollectible reinsurance receivables were reclassified from “Other operating expenses” to “Insurance claims and policyholders’ benefits” on the Consolidated Statements of Operations. Prior period amounts have been reclassified to conform to the current year presentation. This reclassification had no impact on net income (loss) in any period.
102
Deferred acquisition costs:Costs, includingAcquisition costs include commissions, premium taxes and certain underwriting and policy issuance costs which vary with and are related primarily to the acquisition of business. Such costs related to property and casualty insurance business are deferred and amortized ratably over the period the related premiums are earned. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs.
The excess of first-year commissions over renewal commissions and other first-year costs of acquiring life insurance business, such as agency and policy issuance expenses, which vary with and are related primarily to the production of new and renewal business, have been deferred and are amortized with interest over the expected life of the related contracts. The excess of first-year ceded expense allowances over renewal ceded expense allowances reduces applicable unamortized deferred acquisition costs.
For universal life and cash value annuity contracts,
costs. Deferred acquisition costs are recorded net of ceding commissions and other ceded acquisition costs. The Company evaluates deferred acquisition costs for recoverability. Adjustments, if necessary, are recorded in current results of operations.
72
See the Accounting Pronouncements section of this note for further discussion of Financial Accounting Standards Board (FASB) Staff Position No. 85-4-1,Accounting for Life Settlement Contracts by Third-Party Investors.
103
In July of 2003, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-01,Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-01). SOP 03-01 provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts. SOP 03-01 was effective for financial statements for fiscal years beginning after December 15, 2003. SOP 03-01 did not allow retroactive application to prior years’ financial statements. CNA adopted SOP 03-01 at January 1, 2004. The initial adoption of SOP 03-01 did not have a significant impact on the results of operations or equity of the Company, but did affect the classification and presentation of certain balance sheet and income statement items.
Under SOP 03-01, the main criterion that needs to be satisfied for separate account presentation is that results of the investments made by the separate accounts must be directly passed through to the individual contract holders. Certain of CNA’s separate accounts have guaranteed returns not related to investment performance whereby the contract holders do not bear the losses or receive the gains from the investment performance; rather, amounts less than or in excess of the guaranteed amounts accrue to CNA. Upon adoption of SOP 03-01, these separate accounts did not meet the requirements of SOP 03-01 for separate account presentation. Therefore, the assets supporting these separate accounts are reflected within general account investments and the related liabilities within insurance reserves as of December 31, 2004. SOP 03-01 specifically precludes reclassifying balances for years prior to adoption.
The adoption of SOP 03-01 did not result in a net impact to total assets, total liabilities or shareholder’s equity. The difference between assets and liabilities as reflected within the table below, relates to the net equity of the above-referenced separate accounts which accrues to CNA, as discussed above. Prior to adoption of SOP 03-01, this equity amount was presented as Other Assets and equity within the consolidated financial statements. Following adoption of SOP 03-01, the Other Assets amount has been replaced with the actual underlying investments that are now included within the general account and are reported based on their investment classification, and the offsetting equity impact is unchanged.
From an income statement perspective, SOP 03-01 did not impact net income; however, it required a reclassification within the income statement. Prior to the adoption of SOP 03-01, the net results of the separate accounts were primarily included in Other Revenue. Upon adopting SOP 03-01, premiums, benefits, net investment income and realized gains are included within their natural line items. Specifically related to the indexed group annuity contracts, the underlying portfolio consists of limited partnership investments and a trading portfolio which are classified as held for trading purposes and are carried at fair value, with both the net realized and unrealized gains (losses) included within net investment income in the Consolidated Statement of Operations.
104
The following table provides the balance sheet presentation of assets and liabilities for certain guaranteed investment contracts and indexed group annuity contracts upon adoption of SOP 03-01, including the classification of the indexed group annuity contract investments as trading securities.
| (In millions) | December 31, 2004 | January 1, 2004 (a) | ||||||
Assets | ||||||||
| Investments: | ||||||||
| Fixed maturity securities, available-for-sale | $ | 797 | $ | 1,220 | ||||
| Fixed maturity securities, trading | 350 | 304 | ||||||
| Equity securities available-for-sale | 8 | 4 | ||||||
| Equity securities trading | 39 | – | ||||||
| Limited partnerships | 351 | 419 | ||||||
| Derivatives | 2 | – | ||||||
| Short term investments, available-for-sale | 17 | 55 | ||||||
| Short term investments, trading | 459 | 414 | ||||||
Total investments | 2,023 | 2,416 | ||||||
| Accrued investment income | 9 | 13 | ||||||
| Receivables for securities sold | 189 | 97 | ||||||
| Other assets | 1 | 1 | ||||||
Total assets | $ | 2,222 | $ | 2,527 | ||||
Liabilities | ||||||||
| Liabilities: | ||||||||
| Insurance reserves: | ||||||||
| Claim and claim adjustment expense | $ | 1 | $ | 1 | ||||
| Future policy benefits | 522 | 617 | ||||||
| Policyholders’ funds | 1,205 | 1,324 | ||||||
| Collateral on loaned securities and derivatives | – | 17 | ||||||
| Payables for securities purchased | 102 | 43 | ||||||
| Other liabilities | 87 | 47 | ||||||
Total liabilities | $ | 1,917 | $ | 2,049 | ||||
The Company continues to have variable annuity contracts issued by CAC that meet the criteria for separate account presentation. The assets and liabilities of these contracts are legally segregated and reported as assets and liabilities of the separate account business. Substantially all assets of the separate account business are carried at fair value. Separate account liabilities are carried at contract values.
Net income accruing to the Company related to separate accounts is primarily included within Other revenue on the Consolidated Statements of Operations.
105
prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments are reflected in net investment income.
Cash equivalents are short-term, highly liquid investments that are both readily convertible into known amounts of cash and so near to maturity that they present insignificant risk of changes in value due to changing interest rates.
fair value.
73
106
Derivative Financial Instruments
Synthetic guaranteed investment contracts (GIC) are guaranteed investment contracts that simulate the performance of a traditional GIC through the use of financial instruments. These contracts are accounted for as derivative financial instruments. A key difference between a synthetic GIC and a traditional GIC is that the contract owner owns the financial instruments underlying the synthetic GIC; whereas, the contract owner owns only the contract itself with a traditional GIC. The Company mitigates its exposure under these contracts by maintaining the ability to reset the crediting rate on a monthly/quarterly basis. This rate reset effectively passes any cash flow volatility and asset underperformance back to the contract owner. The Company no longer issues this product.
thereon and whether the derivative was transacted in a designated trading portfolio.
| Nature of Hedge Designation | ||
| No hedge designation | Realized investment gains or losses | |
| Fair value designation | Realized investment gains or losses, along with the change in fair value of the hedged asset or liability that is attributable to the hedged risk | |
| Cash flow designation | Other comprehensive income, with subsequent reclassification to earnings when the hedged transaction, asset or liability impacts earnings | |
| Foreign currency designation | Consistent with fair value or cash flow above, depending on the nature of the hedging relationship |
Changes
74
107
The Company’s use of derivatives is limited by statutes and regulations promulgated by the various regulatory bodies to which it is subject, and by its own derivative policy. The derivative policy limits the authorization to initiate derivative transactions to certain personnel. The policy generally prohibitsDerivatives entered into for hedging, regardless of the use of derivatives withchoice to designate hedge accounting, shall have a maturity greater than 18 months, unlessthat effectively correlates to the derivative is matched with assetsunderlying hedged asset or liabilities having a longer maturity.liability. The policy prohibits the use of derivatives containing greater than one-to-one leverage with respect to changes in the underlying price, rate or index. The policy also prohibits the use of borrowed funds, including funds obtained through repurchase transactions,securities lending, to engage in derivative transactions.
liability.
75
108
The Company is required to provide collateral for all exchange-traded futures and options contracts. These margin requirements are determined by the individual exchanges based on the fair value of the open positions and are in the custody of the exchange. Collateral may also be required for over-the-counter contracts such as interest rate swaps, credit default swaps and currency forwards per the ISDA agreements in place. The fair value of collateral provided was $58 million at December 31, 2006 and consisted primarily of cash. The fair value of the collateral at December 31, 2005 was $66 million and consisted primarily of U.S. Treasury Bills, which the Company had access to subject to replacement and therefore remained recorded as a component of Short term investments on the Consolidated Balance Sheets.
t
Furniture and fixtures are depreciated over seven years. Office equipment is depreciated over five years. The estimated lives for data processing equipment and software range from three to five years. Leasehold improvements are depreciated over the corresponding lease terms.
During 2003, the Company sold certain businesses. Accordingly, the goodwill associated with these sold businesses decreased CNA’s goodwill by $2 million in Standard Lines and $1 million in Life and Group Non-Core and a reduction in CNA’s indefinite-lived intangible assets of $4 million in Life and Group Non-Core. Additionally, a $5 million pretax impairment charge was recorded in Specialty Lines.
During 2002, the Company completed its initial goodwill impairment testing and recorded a $64 million pretax, or $57 million after-tax, impairment charge. In accordance with SFAS 142, the impairment charge, which consisted of $43 million after-tax ($43 million pretax) charge in Standard Lines, a $5 million after-tax ($8 million pretax) charge in Specialty Lines, an $8 million after-tax ($12 million pretax) charge in Life and Group Non-Core, and a $1 million after-tax ($1 million pretax) charge in Corporate and Other Non-Core, was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. Any impairment losses incurred after the initial application of this standard are reported in operating results.
stockholders.
10976
| Years ended December 31 (In millions, except per share amounts) | 2004 | 2003 | 2002 | |||||||||
| Income (loss) from continuing operations | $ | 441 | $ | (1,433 | ) | $ | 247 | |||||
| Less: undeclared preferred stock dividend | (65 | ) | (60 | ) | (2 | ) | ||||||
| Income (loss) from continuing operations available to common stockholders | 376 | (1,493 | ) | 245 | ||||||||
| Loss from discontinued operations, net of tax | – | – | (35 | ) | ||||||||
| Cumulative effect of change in accounting principles, net of tax | – | – | (57 | ) | ||||||||
| Net income (loss) available to common stockholders | $ | 376 | $ | (1,493 | ) | $ | 153 | |||||
| Weighted-average outstanding common stock and common stock equivalents | 256.0 | 227.0 | 223.6 | |||||||||
| Effect of dilutive securities, employee stock options | – | – | – | |||||||||
| Adjusted weighted-average outstanding common stock and common stock equivalents assuming conversions | 256.0 | 227.0 | 223.6 | |||||||||
Basic and diluted earnings (loss) per share available to common stockholders | $ | 1.47 | $ | (6.58 | ) | $ | 0.68 | |||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||
| (In millions, except per share amounts) | ||||||||||||
| Income from continuing operations | $ | 1,137 | $ | 243 | $ | 446 | ||||||
| Less: undeclared preferred stock dividend through repurchase date | (46 | ) | (70 | ) | (65 | ) | ||||||
| Income from continuing operations available to common stockholders | $ | 1,091 | $ | 173 | $ | 381 | ||||||
| Weighted average outstanding common stock and common stock equivalents | 262.1 | 256.0 | 256.0 | |||||||||
| Effect of dilutive securities, employee stock options | 0.2 | — | — | |||||||||
| Adjusted weighted average outstanding common stock and common stock equivalents assuming conversions | 262.3 | 256.0 | 256.0 | |||||||||
Basic earnings per share from continuing operations available to common stockholders | $ | 4.17 | $ | 0.68 | $ | 1.49 | ||||||
Diluted earnings per share from continuing operations available to common stockholders | $ | 4.16 | $ | 0.68 | $ | 1.49 | ||||||
The Company has stock-based compensation plans which are detailed in Note J. The Company applies the intrinsic value method by following Accounting Policy Board Opinion No. 25,Accounting for Stock Issued to Employees (APB 25), and related interpretations, in accounting for its stock-based compensation plan. Under the recognition and measurement principles of APB 25, no stock-based compensation cost has been recognized as the exercise price of the granted options equaled the market price of the underlying stock at the grant date.
plans for the years ended 2005 and 2004.
| Years ended December 31 (In millions, except per share amounts) | 2004 | 2003 | 2002 | |||||||||
| Net income (loss) available to common stockholders | $ | 376 | $ | (1,493 | ) | $ | 153 | |||||
| Less: Total stock-based compensation cost determined under the fair value method, net of tax | (2 | ) | (2 | ) | (1 | ) | ||||||
| Pro forma net income (loss) available to common stockholders | $ | 374 | $ | (1,495 | ) | $ | 152 | |||||
| Basic and diluted earnings (loss) per share, as reported | $ | 1.47 | $ | (6.58 | ) | $ | 0.68 | |||||
| Basic and diluted earnings (loss) per share, pro forma | $ | 1.46 | $ | (6.59 | ) | $ | 0.67 | |||||
| Years ended December 31 | 2005 | 2004 | ||||||
| (In millions, except per share amounts) | ||||||||
| Income from continuing operations | $ | 243 | $ | 446 | ||||
| Less: undeclared preferred stock dividend | (70 | ) | (65 | ) | ||||
| Income from continuing operations available to common stockholders | 173 | 381 | ||||||
| Income (loss) from discontinued operations, net of tax | 21 | (21 | ) | |||||
| Net income available to common stockholders | 194 | 360 | ||||||
| Less: Total stock-based compensation cost determined under the fair value method, net of tax | (2 | ) | (2 | ) | ||||
| Pro forma net income available to common stockholders | $ | 192 | $ | 358 | ||||
| Basic and diluted earnings per share, as reported | $ | 0.76 | $ | 1.40 | ||||
| Basic and diluted earnings per share, pro forma | $ | 0.75 | $ | 1.39 | ||||
11077
FIN 46R
In May of 2004, the FASB revisedissued FASB Staff Position (FSP) 106-1,AccountingNo. 115-1 and Disclosure Requirements RelatedFAS 124-1,The Meaning of Other-Than-Temporary Impairment and its Application to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and issued FSP 106-2,Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003Certain Investments (FSP 106-2)115-1), as applicable to debt and equity securities that are within the scope of SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities (SFAS 115) and equity securities that are accounted for using the cost method specified in Accounting Principles Board Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock. The FSP provides accounting guidance to employers who sponsor postretirement health care plans that provide prescription drug benefits and the prescription drug benefit provided by the employer is “actuarially equivalent” to Medicare Part D and qualifies for the subsidy under the Medicare amendment act. This FSP was effective for the Company as115-1 nullified certain requirements of July 1, 2004, and its adoption did not have a material impact on the Company’s results of operations or equity.
In March of 2004, theThe Emerging Issues Task Force (EITF) reached consensus on the disclosure guidance provided in EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1). Under, which provided guidance on determining whether an impairment is other-than-temporary. FSP 115-1 replaced guidance set forth in EITF 03-1 with references to existing other-than-temporary impairment guidance and clarified that an investmentinvestor should recognize an impairment loss no later than when the impairment is impaireddeemed other-than-temporary, even if a decision to sell has not been made. FSP 115-1 carried forward the fair valuerequirements in EITF 03-1 regarding required disclosures in the financial statements and requires additional disclosure related to factors considered in reaching the conclusion that the impairment is not other-than-temporary. In addition, in periods subsequent to the recognition of an other-than-temporary impairment loss for debt securities, the discount or reduced premium would be amortized over the remaining life of the investment is less than its cost including adjustments for amortization, accretion, foreign exchange, and hedging. An impairment would be considered other-than-temporary unless a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. This new guidance for determining whether the decline in the fair value of the investment is other-than-temporarysecurity based on future estimated cash flows. FSP 115-1 was to be effective for reporting periods beginning after JuneDecember 15, 2004. 2005 and was adopted by the Company as of January 1, 2006. Adoption of this standard increased income by approximately $3 million for the year ended December 31, 2006 related to the amortization of discount or reduced premium resulting from previously impaired securities. The Company has included the required additional disclosures in Note B.
market price of the underlying stock at the grant date.
78
11179
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Fixed maturity securities | $ | 1,571 | $ | 1,651 | $ | 1,854 | $ | 1,842 | $ | 1,608 | $ | 1,571 | ||||||||||||
| Short term investments | 56 | 63 | 62 | 248 | 147 | 56 | ||||||||||||||||||
| Limited partnerships | 212 | 221 | (34 | ) | 288 | 254 | 212 | |||||||||||||||||
| Equity securities | 14 | 19 | 66 | 23 | 25 | 14 | ||||||||||||||||||
| Income from trading portfolio (a) | 110 | – | – | 103 | 47 | 110 | ||||||||||||||||||
| Interest on funds withheld and other deposits | (267 | ) | (344 | ) | (239 | ) | (68 | ) | (166 | ) | (261 | ) | ||||||||||||
| Other | 18 | 85 | 81 | 18 | 20 | 18 | ||||||||||||||||||
| Gross investment income | 1,714 | 1,695 | 1,790 | 2,454 | 1,935 | 1,720 | ||||||||||||||||||
| Investment expenses | (40 | ) | (48 | ) | (60 | ) | (42 | ) | (43 | ) | (40 | ) | ||||||||||||
Net investment income | $ | 1,674 | $ | 1,647 | $ | 1,730 | $ | 2,412 | $ | 1,892 | $ | 1,680 | ||||||||||||
| (a) | There was no change in net unrealized gains (losses) on trading securities included in net investment income for the year ended December 31, 2006. The change in net unrealized gains (losses) on trading securities included in net investment income was $(7) million and $2 million for the |
80
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Net realized investment gains (losses): | ||||||||||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||||||
| Gross realized gains | $ | 704 | $ | 1,244 | $ | 1,009 | $ | 382 | $ | 361 | $ | 704 | ||||||||||||
| Gross realized losses | (457 | ) | (807 | ) | (1,118 | ) | (377 | ) | (451 | ) | (457 | ) | ||||||||||||
| Net realized gains (losses) on fixed maturity securities | 247 | 437 | (109 | ) | 5 | (90 | ) | 247 | ||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||
| Gross realized gains | 225 | 143 | 251 | 24 | 73 | 225 | ||||||||||||||||||
| Gross realized losses | (23 | ) | (29 | ) | (409 | ) | (8 | ) | (35 | ) | (23 | ) | ||||||||||||
| Net realized gains (losses) on equity securities | 202 | 114 | (158 | ) | ||||||||||||||||||||
| Other, including disposition of businesses, net of participating policyholders’ interest | (688 | ) | (87 | ) | 13 | |||||||||||||||||||
| Net realized gains on equity securities | 16 | 38 | 202 | |||||||||||||||||||||
| Other, including disposition of businesses net of participating policyholders’ interest | 66 | 39 | (688 | ) | ||||||||||||||||||||
| Net realized investment gains (losses) before allocation to participating policyholders’ and minority interests | (239 | ) | 464 | (254 | ) | 87 | (13 | ) | (239 | ) | ||||||||||||||
| Allocation to participating policyholders’ and minority interests | (9 | ) | (4 | ) | 2 | (1 | ) | 3 | (9 | ) | ||||||||||||||
| Net realized investment gains (losses) | (248 | ) | 460 | (252 | ) | 86 | (10 | ) | (248 | ) | ||||||||||||||
| Net change in unrealized appreciation (depreciation) in general account investments: | ||||||||||||||||||||||||
| Fixed maturity securities | (53 | ) | 372 | 548 | 98 | (443 | ) | (53 | ) | |||||||||||||||
| Equity securities | (98 | ) | 87 | (23 | ) | 78 | 34 | (98 | ) | |||||||||||||||
| Other | – | 2 | 17 | 2 | (1 | ) | — | |||||||||||||||||
| Total net change in unrealized appreciation (depreciation) in general account investments | (151 | ) | 461 | 542 | 178 | (410 | ) | (151 | ) | |||||||||||||||
| Net change in unrealized appreciation (depreciation) on separate accounts and other | (70 | ) | 6 | 53 | ||||||||||||||||||||
| Net change in unrealized depreciation on other | (10 | ) | (12 | ) | (70 | ) | ||||||||||||||||||
| Allocation to participating policyholders’ and minority interests | 19 | (7 | ) | (19 | ) | 4 | 18 | 19 | ||||||||||||||||
| Deferred income tax (expense) benefit | 55 | (159 | ) | (182 | ) | (58 | ) | 158 | 55 | |||||||||||||||
| Net change in unrealized appreciation (depreciation) in investments | (147 | ) | 301 | 394 | 114 | (246 | ) | (147 | ) | |||||||||||||||
Net realized gains (losses) and change in unrealized appreciation (depreciation) in investments | $ | (395 | ) | $ | 761 | $ | 142 | $ | 200 | $ | (256 | ) | $ | (395 | ) | |||||||||
112
Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that changes in these risk factors in the near term could have an adverse material impact on the Company’s results of operations or equity.
A primary objective in the management of the fixed maturity and equity portfolios is to maximize total return relative to underlying liabilities and respective liquidity needs. The Company’s views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions, and the domestic and global economic conditions, are some of the factors that may enter into a decision to move between asset classes. Based on the Company’s consideration of these factors, in the course of normal investment activity the Company may, in pursuit of the total return objective, be willing to sell securities that, in its analysis, are overvalued on a risk adjusted basis relative to other opportunities that are available at the time in the market; in turn the Company may purchase other securities that, according to its analysis, are undervalued in relation to other securities in the market. In making these value decisions securities may be bought and sold that shift the investment portfolio between asset classes. The Company also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time reduce such exposures based on its views of a specific issuer or industry sector. These activities could produce realized gains or losses.
81
| Cost or | Gross | Gross Unrealized Losses | Estimated | |||||||||||||||||
| Amortized | Unrealized | Less than | Greater than | Fair | ||||||||||||||||
| December 31, 2006 | Cost | Gains | 12 Months | 12 Months | Value | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Fixed maturity securities available-for-sale: | ||||||||||||||||||||
| U.S. Treasury securities and obligations of government agencies | $ | 5,056 | $ | 86 | $ | 3 | $ | 1 | $ | 5,138 | ||||||||||
| Asset-backed securities | 13,821 | 28 | 20 | 152 | 13,677 | |||||||||||||||
| States, municipalities and political subdivisions – tax-exempt | 4,915 | 237 | 1 | 5 | 5,146 | |||||||||||||||
| Corporate securities | 6,811 | 338 | 8 | 9 | 7,132 | |||||||||||||||
| Other debt securities | 3,443 | 207 | 7 | 1 | 3,642 | |||||||||||||||
| Redeemable preferred stock | 885 | 28 | 1 | — | 912 | |||||||||||||||
| Total fixed maturity securities available-for-sale | 34,931 | 924 | 40 | 168 | 35,647 | |||||||||||||||
| Total fixed maturity securities trading | 204 | — | — | — | 204 | |||||||||||||||
| Equity securities available-for-sale: | ||||||||||||||||||||
| Common stock | 214 | 239 | 1 | — | 452 | |||||||||||||||
| Preferred stock | 134 | 11 | — | — | 145 | |||||||||||||||
| Total equity securities available-for-sale | 348 | 250 | 1 | — | 597 | |||||||||||||||
| Total equity securities trading | 60 | — | — | — | 60 | |||||||||||||||
Total | $ | 35,543 | $ | 1,174 | $ | 41 | $ | 168 | $ | 36,508 | ||||||||||
82
| Cost or | Gross | Gross Unrealized Losses | Estimated | |||||||||||||||||
| Amortized | Unrealized | Less than | Greater than | Fair | ||||||||||||||||
| December 31, 2005 | Cost | Gains | 12 Months | 12 Months | Value | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Fixed maturity securities available-for-sale: | ||||||||||||||||||||
| U.S. Treasury securities and obligations of government agencies | $ | 1,355 | $ | 119 | $ | 4 | $ | 1 | $ | 1,469 | ||||||||||
| Asset-backed securities | 12,986 | 43 | 137 | 33 | 12,859 | |||||||||||||||
| States, municipalities and political subdivisions – tax-exempt | 9,054 | 193 | 31 | 7 | 9,209 | |||||||||||||||
| Corporate securities | 5,906 | 322 | 52 | 11 | 6,165 | |||||||||||||||
| Other debt securities | 2,830 | 234 | 18 | 2 | 3,044 | |||||||||||||||
| Redeemable preferred stock | 213 | 4 | — | 1 | 216 | |||||||||||||||
| Options embedded in convertible debt securities | 1 | — | — | — | 1 | |||||||||||||||
| Total fixed maturity securities available-for-sale | 32,345 | 915 | 242 | 55 | 32,963 | |||||||||||||||
| Total fixed maturity securities trading | 271 | — | — | — | 271 | |||||||||||||||
| Equity securities available-for-sale: | ||||||||||||||||||||
| Common stock | 140 | 150 | 1 | — | 289 | |||||||||||||||
| Preferred stock | 322 | 22 | 1 | — | 343 | |||||||||||||||
| Total equity securities available-for-sale | 462 | 172 | 2 | — | 632 | |||||||||||||||
| Total equity securities trading | 49 | — | — | — | 49 | |||||||||||||||
Total | $ | 33,127 | $ | 1,087 | $ | 244 | $ | 55 | $ | 33,915 | ||||||||||
83
| December 31, 2006 | December 31, 2005 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Estimated | Unrealized | Estimated | Unrealized | |||||||||||||
| Fair Value | Loss | Fair Value | Loss | |||||||||||||
| (In millions) | ||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||
| Investment grade: | ||||||||||||||||
| 0-6 months | $ | 9,829 | $ | 24 | $ | 9,976 | $ | 142 | ||||||||
| 7-12 months | 1,267 | 12 | 2,739 | 61 | ||||||||||||
| 13-24 months | 5,248 | 127 | 1,400 | 45 | ||||||||||||
| Greater than 24 months | 1,022 | 41 | 219 | 7 | ||||||||||||
| Total investment grade | 17,366 | 204 | 14,334 | 255 | ||||||||||||
| Non-investment grade: | ||||||||||||||||
| 0-6 months | 509 | 2 | 632 | 29 | ||||||||||||
| 7-12 months | 87 | 2 | 118 | 10 | ||||||||||||
| 13-24 months | 24 | — | 122 | 3 | ||||||||||||
| Greater than 24 months | 2 | — | 2 | — | ||||||||||||
| Total non-investment grade | 622 | 4 | 874 | 42 | ||||||||||||
| Total fixed maturity securities | 17,988 | 208 | 15,208 | 297 | ||||||||||||
| Equity securities: | ||||||||||||||||
| 0-6 months | 10 | 1 | 49 | 2 | ||||||||||||
| 7-12 months | 1 | — | 1 | — | ||||||||||||
| 13-24 months | — | — | — | — | ||||||||||||
| Greater than 24 months | 3 | — | 3 | — | ||||||||||||
| Total equity securities | 14 | 1 | 53 | 2 | ||||||||||||
Total fixed maturity and equity securities | $ | 18,002 | $ | 209 | $ | 15,261 | $ | 299 | ||||||||
84
Realized
113
Other realized investment gains (losses) for the years endedof December 31, 2004, 20032006. The aggregate severity of the unrealized loss on these securities was approximately 3% of amortized cost. These securities do not tend to be influenced by the credit of the issuer but rather the characteristics and 2002projected principal payments of the underlying collateral.
The following table provides a summary of fixed maturity and equity securities investments.
Summary of Fixed Maturity and Equity Securities
| Cost or | Gross | Gross Unrealized Losses | Estimated | |||||||||||||||||
| Amortized | Unrealized | Less than | Greater than | Fair | ||||||||||||||||
| December 31, 2004 (In millions) | Cost | Gains | 12 Months | 12 Months | Value | |||||||||||||||
| Fixed maturity securities available-for-sale: | ||||||||||||||||||||
| U.S. Treasury securities and obligations of government agencies | $ | 4,233 | $ | 126 | $ | 13 | $ | – | $ | 4,346 | ||||||||||
| Asset-backed securities | 7,706 | 105 | 19 | 4 | 7,788 | |||||||||||||||
| States, municipalities and political subdivisions – tax-exempt | 8,699 | 189 | 28 | 3 | 8,857 | |||||||||||||||
| Corporate securities | 6,093 | 477 | 52 | 5 | 6,513 | |||||||||||||||
| Other debt securities | 2,769 | 295 | 11 | – | 3,053 | |||||||||||||||
| Redeemable preferred stock | 142 | 6 | – | 2 | 146 | |||||||||||||||
| Options embedded in convertible debt securities | 234 | – | – | – | 234 | |||||||||||||||
| Total fixed maturity securities available-for-sale | 29,876 | 1,198 | 123 | 14 | 30,937 | |||||||||||||||
| Total fixed maturity securities trading | 390 | – | – | – | 390 | |||||||||||||||
| Equity securities available-for-sale: | ||||||||||||||||||||
| Common stock | 148 | 112 | – | – | 260 | |||||||||||||||
| Non-redeemable preferred stock | 126 | 24 | – | – | 150 | |||||||||||||||
| Total equity securities available-for-sale | 274 | 136 | – | – | 410 | |||||||||||||||
| Total equity securities trading | 46 | – | – | – | 46 | |||||||||||||||
Total | $ | 30,586 | $ | 1,334 | $ | 123 | $ | 14 | $ | 31,783 | ||||||||||
114
| Cost or | Gross | Gross Unrealized Losses | Estimated | |||||||||||||||||
| Amortized | Unrealized | Less than | Greater than | Fair | ||||||||||||||||
| December 31, 2003 (In millions) | Cost | Gains | 12 Months | 12 Months | Value | |||||||||||||||
| Fixed maturity securities: | ||||||||||||||||||||
| U.S. Treasury securities and obligations of government agencies | $ | 1,823 | $ | 91 | $ | 10 | $ | 4 | $ | 1,900 | ||||||||||
| Asset-backed securities | 8,634 | 146 | 22 | 1 | 8,757 | |||||||||||||||
| States, municipalities and political subdivisions – tax-exempt | 7,787 | 207 | 22 | 2 | 7,970 | |||||||||||||||
| Corporate securities | 6,061 | 475 | 40 | 14 | 6,482 | |||||||||||||||
| Other debt securities | 2,961 | 311 | 4 | 4 | 3,264 | |||||||||||||||
| Redeemable preferred stock | 97 | 7 | – | – | 104 | |||||||||||||||
| Options embedded in convertible debt securities | 201 | – | – | – | 201 | |||||||||||||||
| Total fixed maturity securities | 27,564 | 1,237 | 98 | 25 | 28,678 | |||||||||||||||
| Equity securities: | ||||||||||||||||||||
| Common stock | 163 | 222 | 2 | – | 383 | |||||||||||||||
| Non-redeemable preferred stock | 130 | 16 | 2 | – | 144 | |||||||||||||||
| Total equity securities | 293 | 238 | 4 | – | 527 | |||||||||||||||
Total | $ | 27,857 | $ | 1,475 | $ | 102 | $ | 25 | $ | 29,205 | ||||||||||
The following tables summarize fixed maturity and equity493 securities in an unrealized loss position with over 92% of these unrealized losses related to securities rated AAA. The aggregate severity of the unrealized loss was approximately 2% of amortized cost. The contractual cash flows on the asset-backed structured securities are pass-through but may be structured into classes of preference. The structured securities held are generally secured by over collateralization or default protection provided by subordinated tranches. Within this category, securities subject to EITF Issue No. 99-20,Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20), are monitored for adverse changes in cash flow projections. If there are adverse changes in cash flows the amount of accretable yield is prospectively adjusted and an OTTI loss is recognized. As of December 31, 2006, there was no adverse change in estimated cash flows noted for the EITF 99-20 securities, which have an aggregate unrealized loss of $9 million and an aggregate severity of the unrealized loss of approximately 1% of amortized cost.
Unrealized Loss Aging
| December 31, 2004 | December 31, 2003 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Estimated | Unrealized | Estimated | Unrealized | |||||||||||||
| (In millions) | Fair Value | Loss | Fair Value | Loss | ||||||||||||
| Fixed maturity securities: | ||||||||||||||||
| Investment grade: | ||||||||||||||||
| 0-6 months | $ | 7,742 | $ | 53 | $ | 4,138 | $ | 50 | ||||||||
| 7-12 months | 2,448 | 59 | 834 | 36 | ||||||||||||
| 13-24 months | 368 | 12 | 76 | 11 | ||||||||||||
| Greater than 24 months | 2 | – | 51 | 3 | ||||||||||||
| Total investment grade | 10,560 | 124 | 5,099 | 100 | ||||||||||||
| Non-investment grade: | ||||||||||||||||
| 0-6 months | 188 | 7 | 134 | 5 | ||||||||||||
| 7-12 months | 69 | 4 | 60 | 7 | ||||||||||||
| 13-24 months | 20 | 2 | 16 | 1 | ||||||||||||
| Greater than 24 months | – | – | 105 | 10 | ||||||||||||
| Total non-investment grade | 277 | 13 | 315 | 23 | ||||||||||||
| Total fixed maturity securities | 10,837 | 137 | 5,414 | 123 | ||||||||||||
| Equity securities: | ||||||||||||||||
| 0-6 months | 4 | – | 23 | 2 | ||||||||||||
| 7-12 months | 1 | – | 10 | 2 | ||||||||||||
| 13-24 months | 1 | – | 3 | – | ||||||||||||
| Greater than 24 months | 3 | – | 6 | – | ||||||||||||
| Total equity securities | 9 | – | 42 | 4 | ||||||||||||
Total fixed maturity and equity securities | $ | 10,846 | $ | 137 | $ | 5,456 | $ | 127 | ||||||||
11585
Securities not due at a single date are allocated based on weighted average life.
| December 31, 2006 | December 31, 2005 | |||||||||||||||||||||||||||||||
| December 31, 2004 | December 31, 2003 | Cost or | Estimated | Cost or | Estimated | |||||||||||||||||||||||||||
| Cost or | Estimated | Cost or | Estimated | Amortized | Fair | Amortized | Fair | |||||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Cost | Value | Cost | Value | |||||||||||||||||||||||||
| (In millions) | Cost | Value | Cost | Value | ||||||||||||||||||||||||||||
| Due in one year or less | $ | 1,048 | $ | 1,054 | $ | 275 | $ | 275 | $ | 1,599 | $ | 1,602 | $ | 953 | $ | 955 | ||||||||||||||||
| Due after one year through five years | 4,433 | 4,480 | 2,544 | 2,605 | 13,024 | 13,039 | 11,375 | 11,320 | ||||||||||||||||||||||||
| Due after five years through ten years | 9,238 | 9,577 | 3,596 | 3,886 | 9,555 | 9,619 | 6,176 | 6,280 | ||||||||||||||||||||||||
| Due after ten years | 7,451 | 8,038 | 12,515 | 13,155 | 10,753 | 11,387 | 13,841 | 14,408 | ||||||||||||||||||||||||
| Asset-backed securities | 7,706 | 7,788 | 8,634 | 8,757 | ||||||||||||||||||||||||||||
Total | $ | 29,876 | $ | 30,937 | $ | 27,564 | $ | 28,678 | $ | 34,931 | $ | 35,647 | $ | 32,345 | $ | 32,963 | ||||||||||||||||
In the normal course of investing activities, CCC had committed approximately $51 million as of December 31, 2004 and 2003 to future capital calls from certain of its unconsolidated affiliates in exchange for an ownership interest in such affiliates.
Restricted Investments
The Company may from time to time invest in securities that may be restricted in whole or in part. As of December 31, 2004 and 2003, the Company did not hold any significant positions in investments whose sale was restricted.
Cash and securities with carrying values of approximately $2.6 billion and $2.0 billion were deposited by the Company’s insurance subsidiaries under requirements of regulatory authorities as of December 31, 2004 and 2003.
The Company’s investments in limited partnerships contain withdrawal provisions that typically require advanced written notice of up to 90 days for withdrawals. The carrying value of these investments, reported as a separate line item in the Consolidated Balance Sheets, is $1,549 million and $1,117 million at December 31, 2004 and 2003.
When loan participation purchases are settled and recorded they may contain both funded and unfunded amounts. An unfunded loan represents an obligation by the Company to provide additional amounts under the terms of the loan participation. The funded portions are reflected on the Consolidated Balance Sheets, while any unfunded amounts are not recorded until a draw is made under the loan facility. As of December 31, 2006 and December 31, 2005, the Company had obligations on unfunded bank loan participations in the amount of $29 million and $21 million.
86
116
During July of 2002, the Company entered into an agreement, whereby the Phoenix Companies, Inc. acquired the variable life and annuity business of VFL through a coinsurance arrangement, with modified coinsurance on the VFL separate accounts. Related securities with carrying values of approximately $492 million were held by the Company and reported in separate account assets in the Consolidated Balance Sheet at December 31, 2003. VFL was sold in 2004. See Note P for further details.
Note C. Derivative Financial Instruments
The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential for gain or loss on these instruments.
| Contractual/ | Estimated | Estimated | Recognized | Contractual/ | Estimated | Estimated | Net | |||||||||||||||||||||||||
| Notional | Fair Value | Fair Value | Gains | Notional | Fair Value | Fair Value | Recognized | |||||||||||||||||||||||||
| As of and for the year ended December 31, 2004 (In millions) | Amount | Asset | (Liability) | (Losses) | ||||||||||||||||||||||||||||
| As of and for the year ended December 31, 2006 | Amount | Asset | (Liability) | Gains | ||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
General account | ||||||||||||||||||||||||||||||||
Without hedge designation | ||||||||||||||||||||||||||||||||
| Swaps | $ | 489 | $ | – | $ | (8 | ) | $ | 23 | $ | 4,795 | $ | — | $ | (30 | ) | $ | 14 | ||||||||||||||
| Futures sold, not yet purchased | — | — | — | 4 | ||||||||||||||||||||||||||||
| Currency forwards | 8 | — | — | — | ||||||||||||||||||||||||||||
| Equity warrants | 6 | 2 | — | — | ||||||||||||||||||||||||||||
| Options embedded in convertible debt securities | 9 | — | — | — | ||||||||||||||||||||||||||||
Trading activities | ||||||||||||||||||||||||||||||||
| Futures purchased | 1,230 | – | (1 | ) | 96 | 722 | — | (3 | ) | 65 | ||||||||||||||||||||||
| Futures sold, not yet purchased | 124 | – | – | (113 | ) | 79 | — | — | — | |||||||||||||||||||||||
| Forwards purchased | 139 | 1 | – | 5 | ||||||||||||||||||||||||||||
| Forwards sold, not yet purchased | 9 | – | – | 5 | ||||||||||||||||||||||||||||
| Commitments to purchase government and municipal securities | 25 | – | – | (12 | ) | |||||||||||||||||||||||||||
| Equity warrants | 11 | 1 | – | – | ||||||||||||||||||||||||||||
| Options purchased | 103 | 1 | – | (1 | ) | |||||||||||||||||||||||||||
| Options written | 102 | – | – | 4 | ||||||||||||||||||||||||||||
| Collateralized debt obligation liabilities | – | – | – | 5 | ||||||||||||||||||||||||||||
| Options embedded in convertible debt securities | 701 | 234 | – | 24 | ||||||||||||||||||||||||||||
| Currency forwards | 25 | — | — | — | ||||||||||||||||||||||||||||
Total | $ | 2,933 | $ | 237 | $ | (9 | ) | $ | 36 | |||||||||||||||||||||||
Total general account | $ | 5,644 | $ | 2 | $ | (33 | ) | $ | 83 | |||||||||||||||||||||||
Separate accounts | ||||||||||||||||||||||||||||||||
| Options written | $ | 9 | $ | – | $ | – | $ | 1 | $ | 1 | $ | — | $ | — | $ | — | ||||||||||||||||
Total | $ | 9 | $ | – | $ | – | $ | 1 | ||||||||||||||||||||||||
Total separate accounts | $ | 1 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
11787
| Contractual/ | Estimated | Estimated | Recognized | |||||||||||||
| Notional | Fair Value | Fair Value | Gains | |||||||||||||
| As of and for the year ended December 31, 2003 (In millions) | Amount | Asset | (Liability) | (Losses) | ||||||||||||
General account | ||||||||||||||||
| Swaps | $ | 856 | $ | – | $ | (5 | ) | $ | 87 | |||||||
| Interest rate caps | 225 | – | – | – | ||||||||||||
| Futures sold, not yet purchased | 18 | – | – | (9 | ) | |||||||||||
| Forwards | 16 | – | (1 | ) | 2 | |||||||||||
| Commitments to purchase government and municipal securities | 3,318 | 12 | – | (1 | ) | |||||||||||
| Equity warrants | 11 | – | – | – | ||||||||||||
| Options purchased | 4 | – | – | – | ||||||||||||
| Options written | 515 | – | (2 | ) | – | |||||||||||
| Collateralized debt obligation liabilities | 110 | – | (14 | ) | (1 | ) | ||||||||||
| Synthetic guaranteed investment contracts | 280 | – | – | – | ||||||||||||
| Options embedded in convertible debt securities | 681 | 201 | – | 36 | ||||||||||||
Total | $ | 6,034 | $ | 213 | $ | (22 | ) | $ | 114 | |||||||
Separate accounts | ||||||||||||||||
| Futures purchased | $ | 1,106 | $ | 3 | $ | – | $ | 208 | ||||||||
| Futures sold, not yet purchased | 12 | – | – | – | ||||||||||||
| Options purchased | – | – | – | (1 | ) | |||||||||||
| Options written | 12 | – | – | 2 | ||||||||||||
Total | $ | 1,130 | $ | 3 | $ | – | $ | 209 | ||||||||
| Net | ||||||||||||||||
| Contractual/ | Estimated | Estimated | Recognized | |||||||||||||
| Notional | Fair Value | Fair Value | Gains | |||||||||||||
| As of and for the year ended December 31, 2005 | Amount | Asset | (Liability) | (Losses) | ||||||||||||
| (In millions) | ||||||||||||||||
General account | ||||||||||||||||
With hedge designation | ||||||||||||||||
| Swaps | $ | 265 | $ | — | $ | (1 | ) | $ | (1 | ) | ||||||
Without hedge designation | ||||||||||||||||
| Swaps | 756 | — | (8 | ) | 46 | |||||||||||
| Futures sold, not yet purchased | — | — | — | 2 | ||||||||||||
| Currency forwards | 15 | — | — | 2 | ||||||||||||
| Equity warrants | 6 | 2 | — | — | ||||||||||||
| Options embedded in convertible debt securities | 12 | 1 | — | (33 | ) | |||||||||||
Trading activities | ||||||||||||||||
| Futures purchased | 1,058 | — | (4 | ) | 18 | |||||||||||
| Futures sold, not yet purchased | 166 | — | — | 2 | ||||||||||||
| Currency forwards | 59 | — | (1 | ) | (1 | ) | ||||||||||
| Commitments to purchase mortgage-backed securities | 21 | — | — | — | ||||||||||||
| Options purchased | 20 | — | — | (2 | ) | |||||||||||
| Options written | 21 | — | — | 2 | ||||||||||||
Total general account | $ | 2,399 | $ | 3 | $ | (14 | ) | $ | 35 | |||||||
Separate accounts | ||||||||||||||||
| Options written | $ | 7 | $ | — | $ | — | $ | — | ||||||||
Total separate accounts | $ | 7 | $ | — | $ | — | $ | — | ||||||||
88
trading activity is included within Other revenues in the Consolidated Statements of Operations. The Company utilizes written options to enhance income in separate accounts.
118
value or other valuation techniques. These techniques are significantly affected by management’s assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair values. The estimates presented herein are not necessarily indicative of the amounts that CNA would realize in a current market exchange.
The fair values for mortgage loans and policy loans were estimated using discounted cash flows utilizing interest rates currently offered for similar loans to borrowers of comparable credit quality. Loans with similar characteristics were aggregated for purposes of these calculations.
89
estimated fair values or policyholder liabilities, net of amounts ceded related to sold business.
The fair values of CDOs were determined largely based on management’s estimates using default probabilities of the debt securities underlying the contract, which were obtained from a rating agency, the term of each contract, and actual default losses recorded on the contract.
The fair values of financial guarantee contracts were estimated using discounted cash flows utilizing interest rates currently offered for similar contracts.
The fair values of guaranteed investment contracts of the separate account business were estimated using discounted cash flow calculations based on interest rates currently offered for similar contracts with similar maturities. The fair values of the liabilities for variable separate account business were based on the quoted market values of the underlying assets of each variable separate account. The fair values of other separate account liabilities approximate their carrying value because of their short term nature.
119
The carrying amount and estimated fair value of the Company’s financial instrument assets and liabilities are listed in the table below. Additional detail related to derivative financial instruments is also provided in Note C.
| 2004 | 2003 | 2006 | 2005 | |||||||||||||||||||||||||||||
| Estimated | Estimated | Estimated | Estimated | |||||||||||||||||||||||||||||
| Carrying | Fair | Carrying | Fair | Carrying | Fair | Carrying | Fair | |||||||||||||||||||||||||
| December 31 (In millions) | Amount | Value | Amount | Value | ||||||||||||||||||||||||||||
| December 31 | Amount | Value | Amount | Value | ||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||
| Investments: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | $ | 31,327 | $ | 31,327 | $ | 28,678 | $ | 28,678 | $ | 35,851 | $ | 35,851 | $ | 33,234 | $ | 33,234 | ||||||||||||||||
| Equity securities | 456 | 456 | 527 | 527 | 657 | 657 | 681 | 681 | ||||||||||||||||||||||||
| Mortgage loans | – | 1 | 15 | 16 | ||||||||||||||||||||||||||||
| Policy loans | 1 | 1 | 175 | 176 | ||||||||||||||||||||||||||||
| Limited partnership investments | 1,549 | 1,549 | 1,117 | 1,117 | 1,852 | 1,852 | 1,509 | 1,509 | ||||||||||||||||||||||||
| Other invested assets | (4 | ) | (4 | ) | 40 | 40 | 12 | 12 | 3 | 3 | ||||||||||||||||||||||
| Separate account business: | ||||||||||||||||||||||||||||||||
| Fixed maturity securities | 486 | 486 | 2,114 | 2,114 | 434 | 434 | 466 | 466 | ||||||||||||||||||||||||
| Equity securities | 55 | 55 | 117 | 117 | 41 | 41 | 44 | 44 | ||||||||||||||||||||||||
| Limited partnership investments | – | – | 419 | 419 | ||||||||||||||||||||||||||||
| Other | – | – | 415 | 415 | ||||||||||||||||||||||||||||
| Notes receivable for the issuance of common stock | 71 | 73 | 76 | 87 | 58 | 56 | 59 | 59 | ||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||
| Premium deposits and annuity contracts | $ | 422 | $ | 428 | $ | 1,282 | $ | 1,261 | $ | 898 | $ | 899 | $ | 1,363 | $ | 1,359 | ||||||||||||||||
| Long term debt | 1,726 | 1,820 | 1,641 | 1,712 | 2,156 | 2,240 | 1,438 | 1,507 | ||||||||||||||||||||||||
| Short-term debt | 531 | 531 | 263 | 263 | ||||||||||||||||||||||||||||
| Collateralized debt obligation liabilities | – | – | 14 | 14 | ||||||||||||||||||||||||||||
| Financial guarantee contracts | 45 | 45 | 50 | 50 | ||||||||||||||||||||||||||||
| Short term debt | — | — | 252 | 252 | ||||||||||||||||||||||||||||
| Separate account business: | ||||||||||||||||||||||||||||||||
| Guaranteed investment contracts | – | – | 211 | 229 | ||||||||||||||||||||||||||||
| Variable separate accounts | 65 | 65 | 540 | 540 | 52 | 52 | 53 | 53 | ||||||||||||||||||||||||
| Other | 503 | 503 | 2,449 | 2,449 | 448 | 448 | 491 | 491 | ||||||||||||||||||||||||
90
120
the results of operations in the period in which the review is finalized. The federal income tax returns for 2002 and 2003 are currently under examination by the IRS.agreed to participate. The Company believes the outcome of the 2002 and 2003 examinations will not have a material effect on the financial condition or results of operations of the CNA Tax Group.
that this approach should reduce tax-related uncertainties, if any.
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||
| Income tax (expense) benefit at statutory rates | $ | (174 | ) | $ | 823 | $ | (110 | ) | ||||
| Tax benefit from tax exempt income | 111 | 101 | 53 | |||||||||
| Other (expense) benefit, including state income taxes | 34 | (11 | ) | (11 | ) | |||||||
Income tax (expense) benefit | $ | (29 | ) | $ | 913 | $ | (68 | ) | ||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||
| (In millions) | ||||||||||||
| Income tax expense at statutory rates | $ | (577 | ) | $ | (57 | ) | $ | (176 | ) | |||
| Tax benefit from tax exempt income | 75 | 116 | 111 | |||||||||
| Other tax benefits, including IRS settlements | 33 | 46 | 34 | |||||||||
Effective income tax (expense) benefit | $ | (469 | ) | $ | 105 | $ | (31 | ) | ||||
On October 22, 2004, At December 31, 2006, the American Jobs Creation Act (AJCA) was signed into law. The AJCA includesCompany has not provided deferred taxes of $104 million, if sold through a provision allowingtaxable sale, on $297 million of undistributed earnings related to a deductiondomestic affiliate. Additionally, at December 31, 2006, the Company has not provided deferred taxes of 85% for certain$32 million on $92 million of undistributed earnings related to a foreign earnings that are repatriated. The AJCA provides Loews the opportunity to elect to apply this provision to qualifying earnings repatriations in 2005. Based on the existing language in the AJCA and current guidance, the CNA Tax Group does not expect to repatriate undistributed earnings. To the extent Congress or the Treasury Department provides additional clarifying language on key elements of the provision, Loews will consider the effects, if any, of such information and will re-evaluate, as necessary, its intentions with respect to the repatriation of certain foreign earnings. Should Loews, upon consideration of any such potential clarifying language, ultimately elect to apply the repatriation provision of the AJCA, the CNA Tax Group does not expect that the impact of such an election would be material to its results of operations.
subsidiary.
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Current tax (expense) benefit | $ | (296 | ) | $ | (115 | ) | $ | 6 | ||||||||||||||||
| Deferred tax (expense) benefit | (173 | ) | 220 | (37 | ) | |||||||||||||||||||
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Current tax (expense) benefit | $ | 6 | $ | 980 | $ | (61 | ) | |||||||||||||||||
| Deferred tax expense | (35 | ) | (67 | ) | (7 | ) | ||||||||||||||||||
Total income tax (expense) benefit | $ | (29 | ) | $ | 913 | $ | (68 | ) | $ | (469 | ) | $ | 105 | $ | (31 | ) | ||||||||
12191
| December 31 (In millions) | 2004 | 2003 | ||||||||||||||
| December 31 | ||||||||||||||||
| (In millions) | 2006 | 2005 | ||||||||||||||
Deferred Tax Assets: | ||||||||||||||||
| Insurance reserves: | ||||||||||||||||
| Property and casualty claim and claim adjustment expense reserves | $ | 701 | $ | 669 | $ | 775 | $ | 807 | ||||||||
| Unearned premium reserves | 233 | 288 | 245 | 232 | ||||||||||||
| Life reserves | 192 | 183 | 132 | 187 | ||||||||||||
| Other insurance reserves | 28 | 30 | 26 | 24 | ||||||||||||
| Receivables | 309 | 288 | 248 | 292 | ||||||||||||
| Employee benefits | 218 | 175 | 187 | 214 | ||||||||||||
| Life settlement contracts | 100 | 109 | 102 | 102 | ||||||||||||
| Investment valuation differences | 149 | 56 | 93 | 130 | ||||||||||||
| Net operating loss and tax credits carried forward | 41 | 158 | ||||||||||||||
| Net operating loss carried forward | 23 | 38 | ||||||||||||||
| Other assets | 215 | 234 | 171 | 194 | ||||||||||||
Gross deferred tax assets | 2,186 | 2,190 | 2,002 | 2,220 | ||||||||||||
| Valuation allowance | (33 | ) | – | — | (30 | ) | ||||||||||
Deferred tax assets after valuation allowance | 2,153 | 2,190 | 2,002 | 2,190 | ||||||||||||
Deferred Tax Liabilities: | ||||||||||||||||
| Deferred acquisition costs | (691 | ) | (769 | ) | 648 | 651 | ||||||||||
| Net unrealized gains | (429 | ) | (508 | ) | 340 | 274 | ||||||||||
| Foreign and other affiliate(s) | (207 | ) | (204 | ) | 11 | 15 | ||||||||||
| Other liabilities | (134 | ) | (109 | ) | 148 | 145 | ||||||||||
Gross deferred tax liabilities | (1,461 | ) | (1,590 | ) | 1,147 | 1,085 | ||||||||||
Net deferred tax asset | $ | 692 | $ | 600 | $ | 855 | $ | 1,105 | ||||||||
12292
Catastrophe losses, net of reinsurance, were $59 million, $493 million and $278 million $143 million and $59 million pretax for the years ended December 31, 2004, 20032006, 2005 and 2002.2004. The catastrophe losses in 2005 related primarily to Hurricanes Katrina, Wilma, Rita, Dennis and Ophelia. The catastrophe losses in 2004 related primarily to Hurricanes Charley, Frances, Ivan and Jeanne. TheThere can be no assurance that CNA’s ultimate cost for these catastrophes will not exceed current estimates.
reinsurance program.
company(ies).
| As of and for the years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| As of and for the years ended December 31 | ||||||||||||||||||||||||
| (In millions) | 2006 | 2005 | 2004 | |||||||||||||||||||||
| Reserves, beginning of year: | ||||||||||||||||||||||||
| Gross | $ | 31,730 | $ | 27,370 | $ | 31,266 | $ | 30,938 | $ | 31,523 | $ | 31,732 | ||||||||||||
| Ceded | 14,216 | 10,727 | 12,105 | 10,605 | 13,879 | 14,066 | ||||||||||||||||||
| Net reserves, beginning of year | 17,514 | 16,643 | 19,161 | 20,333 | 17,644 | 17,666 | ||||||||||||||||||
| Reduction of net reserves (a) | – | – | (1,316 | ) | ||||||||||||||||||||
| Reduction of net reserves (b) | – | (1,309 | ) | – | ||||||||||||||||||||
| Reduction of net reserves | (42 | ) | – | – | — | — | (42 | ) | ||||||||||||||||
| Net incurred claim and claim adjustment expenses: | ||||||||||||||||||||||||
| Provision for insured events of current year | 6,062 | 6,745 | 8,248 | 4,840 | 5,516 | 6,062 | ||||||||||||||||||
| Increase in provision for insured events of prior years | 241 | 2,409 | 35 | 361 | 1,100 | 240 | ||||||||||||||||||
| Amortization of discount | 135 | 115 | 72 | 121 | 115 | 135 | ||||||||||||||||||
| Total net incurred (d) | 6,438 | 9,269 | 8,355 | |||||||||||||||||||||
| Total net incurred (b) | 5,322 | 6,731 | 6,437 | |||||||||||||||||||||
| Net payments attributable to: | ||||||||||||||||||||||||
| Current year events | 1,936 | 2,192 | 3,137 | |||||||||||||||||||||
| Current year events (c) | 784 | 1,341 | 1,936 | |||||||||||||||||||||
| Prior year events | 4,479 | 4,936 | 6,553 | 3,439 | 2,711 | 4,522 | ||||||||||||||||||
| Reinsurance recoverable against net reserve transferred under retroactive reinsurance agreements (See Note P) | (41 | ) | (39 | ) | (133 | ) | ||||||||||||||||||
| Reinsurance recoverable against net reserve transferred under retroactive reinsurance agreements | (13 | ) | (10 | ) | (41 | ) | ||||||||||||||||||
| Total net payments | 6,374 | 7,089 | 9,557 | 4,210 | 4,042 | 6,417 | ||||||||||||||||||
| Net reserves, end of year | 17,536 | 17,514 | 16,643 | 21,445 | 20,333 | 17,644 | ||||||||||||||||||
| Ceded reserves, end of year | 13,984 | 14,216 | 10,727 | 8,191 | 10,605 | 13,879 | ||||||||||||||||||
Gross reserves, end of year | $ | 31,520 | $ | 31,730 | $ | 27,370 | $ | 29,636 | $ | 30,938 | $ | 31,523 | ||||||||||||
| (a) | ||||
| In 2004, the net reserves were reduced by $42 million as a result of the sale of the individual life insurance business. See Note P for further discussion of this sale. | ||||
| (b) | Total net incurred above does not agree to | |||
| (c) | In 2006, net payments were decreased by $935 million due to the impact of significant commutations. In 2005, net payments were decreased by $1,581 million due to the impact of significant commutations. See Note H for further discussion related to commutations. | |||
93
123
Reserve Development
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | ||||||||||||||||||||||||
| (In millions) | 2006 | 2005 | 2004 | |||||||||||||||||||||
| Environmental pollution and mass tort | $ | 1 | $ | 153 | $ | – | $ | 63 | $ | 53 | $ | 1 | ||||||||||||
| Asbestos | 54 | 642 | – | — | 10 | 54 | ||||||||||||||||||
| Other | 186 | 1,614 | 35 | 269 | 1,044 | 179 | ||||||||||||||||||
| Property and casualty reserve development | 332 | 1,107 | 234 | |||||||||||||||||||||
| Life reserve development in life company | 29 | (7 | ) | 6 | ||||||||||||||||||||
Total | $ | 241 | $ | 2,409 | $ | 35 | $ | 361 | $ | 1,100 | $ | 240 | ||||||||||||
2005.
2006
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
| Life and | Corporate | Life and | Corporate | |||||||||||||||||||||||||||||||||||||
| Standard | Specialty | Group | and Other | Standard | Specialty | Group | and Other | |||||||||||||||||||||||||||||||||
| (In millions) | Lines | Lines | Non-Core | Non-Core | Total | Lines | Lines | Non-Core | Non-Core | Total | ||||||||||||||||||||||||||||||
| Gross Case Reserves | $ | 6,904 | $ | 1,659 | $ | 2,800 | $ | 3,803 | $ | 15,166 | $ | 6,746 | $ | 1,715 | $ | 2,366 | $ | 2,511 | $ | 13,338 | ||||||||||||||||||||
| Gross IBNR Reserves | 7,398 | 3,201 | 880 | 4,875 | 16,354 | 8,188 | 3,814 | 768 | 3,528 | 16,298 | ||||||||||||||||||||||||||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 14,302 | $ | 4,860 | $ | 3,680 | $ | 8,678 | $ | 31,520 | $ | 14,934 | $ | 5,529 | $ | 3,134 | $ | 6,039 | $ | 29,636 | ||||||||||||||||||||
| Net Case Reserves | $ | 4,759 | $ | 1,191 | $ | 1,394 | $ | 1,485 | $ | 8,829 | $ | 5,234 | $ | 1,350 | $ | 1,496 | $ | 1,453 | $ | 9,533 | ||||||||||||||||||||
| Net IBNR Reserves | 4,544 | 2,042 | 430 | 1,691 | 8,707 | 6,632 | 2,921 | 360 | 1,999 | 11,912 | ||||||||||||||||||||||||||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 9,303 | $ | 3,233 | $ | 1,824 | $ | 3,176 | $ | 17,536 | $ | 11,866 | $ | 4,271 | $ | 1,856 | $ | 3,452 | $ | 21,445 | ||||||||||||||||||||
2005
| Life and | Corporate | Life and | Corporate | |||||||||||||||||||||||||||||||||||||
| Standard | Specialty | Group | and Other | Standard | Specialty | Group | and Other | |||||||||||||||||||||||||||||||||
| (In millions) | Lines | Lines | Non-Core | Non-Core | Total | Lines | Lines | Non-Core | Non-Core | Total | ||||||||||||||||||||||||||||||
| Gross Case Reserves | $ | 6,416 | $ | 1,605 | $ | 2,539 | $ | 4,342 | $ | 14,902 | $ | 7,033 | $ | 1,907 | $ | 2,542 | $ | 3,297 | $ | 14,779 | ||||||||||||||||||||
| Gross IBNR Reserves | 7,866 | 2,595 | 1,037 | 5,330 | 16,828 | 8,051 | 3,298 | 735 | 4,075 | 16,159 | ||||||||||||||||||||||||||||||
Total Gross Carried Claim and Claim Adjustment Expense Reserves | $ | 14,282 | $ | 4,200 | $ | 3,576 | $ | 9,672 | $ | 31,730 | $ | 15,084 | $ | 5,205 | $ | 3,277 | $ | 7,372 | $ | 30,938 | ||||||||||||||||||||
| Net Case Reserves | $ | 4,585 | $ | 1,087 | $ | 1,477 | $ | 1,879 | $ | 9,028 | $ | 5,165 | $ | 1,442 | $ | 1,456 | $ | 1,554 | $ | 9,617 | ||||||||||||||||||||
| Net IBNR Reserves | 4,382 | 1,832 | 414 | 1,858 | 8,486 | 6,081 | 2,352 | 381 | 1,902 | 10,716 | ||||||||||||||||||||||||||||||
Total Net Carried Claim and Claim Adjustment Expense Reserves | $ | 8,967 | $ | 2,919 | $ | 1,891 | $ | 3,737 | $ | 17,514 | $ | 11,246 | $ | 3,794 | $ | 1,837 | $ | 3,456 | $ | 20,333 | ||||||||||||||||||||
12494
With respect to other court cases and how they might affect the Company’s reserves and reasonably possible losses, the following should be noted. State and federal courts issue numerous decisions each year, which potentially impact losses and reserves in both a favorable and unfavorable manner. Examples of favorable developments include decisions to allocate defense and indemnity payments in a manner so as to limit carriers’ obligations to damages taking place during the effective dates of their policies; decisions holding that injuries occurring after asbestos operations are completed are subject to the completed operations aggregate limits of the policies; and decisions ruling that carriers’ loss control inspections of their insured’s premises do not give rise to a duty to warn third parties to the dangers of asbestos.
125
Examples of unfavorable developments include decisions limiting the application of the “absolute pollution” exclusion; and decisions holding carriers liable for defense and indemnity of asbestos and pollution claims on a joint and several basis.
The Company’s ultimate liability for its environmental pollution and mass tort claims is impacted by several factors including ongoing disputes with policyholders over scope and meaning of coverage terms and, in the area of environmental pollution, court decisions that continue to restrict the scope and applicability of the absolute pollution exclusion contained in policies issued by the Company after 1989. Due to the inherent uncertainties described above, including the inconsistency of court decisions, the number of waste sites subject to cleanup, and in the area of environmental pollution, the standards for cleanup and liability, the ultimate liability of CNA for environmental pollution and mass tort claims may vary substantially from the amount currently recorded.
Due to the inherent uncertainties in estimating claim and claim adjustment expense reserves for APMT and due to the significant uncertainties previously described related to APMT claims, the ultimate liability for these cases, both individually and in aggregate, may exceed the recorded reserves. Any such potential additional liability, or any range of potential additional amounts, cannot be reasonably estimated currently, but could be material to the Company’s business, results of operations, equity, and insurer financial strength and debt ratings. Due to, among other things, the factors described above, it may be necessary for the Company to record material changes in its APMT claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge.
The following table provides data related to CNA’s APMT claim and claim adjustment expense reserves.
| December 31, 2004 | December 31, 2003 | December 31, 2006 | December 31, 2005 | |||||||||||||||||||||||||||||
| Environmental | Environmental | Environmental | Environmental | |||||||||||||||||||||||||||||
| Pollution and | Pollution and | Pollution and | Pollution and | |||||||||||||||||||||||||||||
| (In millions) | Asbestos | Mass Tort | Asbestos | Mass Tort | Asbestos | Mass Tort | Asbestos | Mass Tort | ||||||||||||||||||||||||
| Gross reserves | $ | 3,218 | $ | 755 | $ | 3,347 | $ | 839 | $ | 2,635 | $ | 647 | $ | 2,992 | $ | 680 | ||||||||||||||||
| Ceded reserves | (1,532 | ) | (258 | ) | (1,580 | ) | (262 | ) | (1,183 | ) | (231 | ) | (1,438 | ) | (257 | ) | ||||||||||||||||
Net reserves | $ | 1,686 | $ | 497 | $ | 1,767 | $ | 577 | $ | 1,452 | $ | 416 | $ | 1,554 | $ | 423 | ||||||||||||||||
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The Company recorded $1,826 million and $642 million in unfavorable gross and net prior year development for the year ended December 31, 2003 for reported and unreported asbestos-related claims, principally due to potential losses from policies issued by the Company with high attachment points, which previous exposure analysis indicated would not be reached. The Company examined the claims filing trends to determine timeframes within which high excess policies issued by the Company could be reached. Elevated claims volumes and increased claims values, together with certain adverse court decisions affecting the ability of policyholders to access excess policies, supported the conclusion that excess policies with high attachment points previously thought not to be exposed may now potentially be exposed. The ceded reinsurance arrangements on these excess policies are different from the primary policies. In general, more extensive reinsurance arrangements apply to the excess policies. As a result, the prior year development shows a higher ratio of ceded to gross amounts than the reserves established in prior periods, resulting in a higher percentage of reserves ceded as of December 31, 2003 versus prior periods.
Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. CNA has such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called “non-products” liability coverage contained within their policies rather than products liability coverage, and that the claimed “non-products” coverage is not subject to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what extent, if any, the attempts to assert “non-products” claims outside the products liability aggregate will succeed. The Company’s policies also contain other limits applicable to these claims, and the Company has additional coverage defenses to certain claims. The Company has attempted to manage itsCertain asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to CNA. Where CNA cannot settle a claim on acceptable terms, the Company aggressively litigates the claim. A recent court ruling by the United States Court of Appeals for the Fourth Circuit has supported certain of the Company’s positions with respect to coverage for “non-products” claims. However, adverse developments with respect to such matters could have a material adverse effect on CNA’s results of operations and/or equity.
Certain asbestos litigation in which CNA is currently engaged is described below:
claims and the parties are awaiting a ruling on confirmation.
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CNA has insurance coverage disputes related to asbestos bodily injury claims against a bankrupt insured, Burns & Roe Enterprises, Inc. (Burns & Roe). Originally raised in litigation, now stayed, theseThese disputes are currently part of coverage litigation (stayed in view of the bankruptcy) and an adversary proceeding in In re: Burns & Roe Enterprises, Inc., pending in the U.S. Bankruptcy Court for the District of New Jersey, No. 00-41610. Burns & Roe provided engineering and related services in connection with construction projects. At the time of its bankruptcy filing, on December 4, 2000, Burns & Roe asserted that it faced approximately 11,000 claims alleging bodily injury resulting from exposure to asbestos as a result of construction projects in which Burns & Roe was involved. CNA allegedly provided primary liability coverage to Burns & Roe from 1956-1969 and 1971-1974, along with certain project-specific policies from 1964-1970. The partieslitigation involves disputes over the confirmation of the Plan of Reorganization in the litigation are seeking a declaration ofbankruptcy, the scope and extent of coverage, if any, afforded to Burns & Roe for its asbestos liabilities. The litigation has been stayed since May 14, 2003 pending resolutionOn December 5, 2005, Burns & Roe filed its Third Amended Plan of the bankruptcy proceedings.Reorganization (“Plan”). A confirmation hearing relating to that Plan is anticipated in 2007. Coverage issues will be determined in a later proceeding. With respect to both confirmation of the Burns & Roe litigationPlan and the pending bankruptcy proceeding, numerous unresolved factual and legalcoverage issues, will impact the ultimate exposure to the Company. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether the Company has any further responsibility to compensate claimants against Burns & Roe under its policies and, if so, under which; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’claimant’s entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions, including professional liability exclusions, in some of the Company’s policies apply to exclude certain claims; (e) the extent to which claimants can establish exposuresexposure to asbestos materials as to which Burns & Roe has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Burns & Roe and whether such theories can, in fact, be established; (g) the diseases and damages claimedalleged by such claimants; (h) the extent that any liability of Burns & Roe would be shared with other potentially responsible parties; and (i) and the impact of bankruptcy proceedings on claims and coverage issue resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
CIC issued certain primary and excess policies to Bendix Corporation (Bendix), now part of Honeywell International, Inc. (Honeywell). Honeywell faces approximately 75,403 pending asbestos bodily injury claims resulting from alleged exposure to Bendix friction products. CIC’s primary policies allegedly covered the period from at least 1939 (when Bendix began to use asbestos in its friction products) to 1983, although the parties disagree about whether CIC’s policies provided product liability coverage before 1940 and from 1945 to 1956. CIC asserts that it owes no further material obligations to Bendix under any primary policy. Honeywell alleges that two primary policies issued by CIC covering 1969-1975 contain occurrence limits but not product liability aggregate limits for asbestos bodily injury claims. CIC has asserted, among other things, even if Honeywell’s allegation is correct, which CNA denies, its liability is limited to a single occurrence limit per policy or per year, and in the alternative, a proper allocation of losses would substantially limit its exposure under the 1969-1975 policies to asbestos claims. These and other issues are being litigated inContinental Insurance Co., et al. v. Honeywell International Inc., No. MRS-L-1523-00 (Morris County, New Jersey) which was filed on May 15, 2000. In the litigation, the parties are seeking declaratory relief of the scope and extent of coverage, if any, afforded to Bendix under the policies issued by the Company. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether certain of the primary policies issued by the Company contain aggregate limits of liability; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether some of the claims against Bendix arise out of events which took place after expiration of the Company’s policies; (e) the extent to which claimants can establish exposures to asbestos materials as to which Bendix has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Bendix and whether such theories can, in fact, be established; (g) the diseases and damages claimed by such claimants; (h) the extent that any liability of Bendix would be shared with other responsible parties; and (i) whether Bendix is responsible for reimbursement of funds advanced by the Company for defense and indemnity in the past. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
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that insurers had no duty to warn plaintiffs about the dangers of asbestos. The summary judgment ruling is on appeal. substantive grounds. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date are barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; and (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
Similar lawsuits have also been filed in Texas against CNA beginning in 2002, and other insurers and non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos (Boson v. Union Carbide Corp., et al. (District Court of Nueces County, Texas)). During 2003, many of the Texas claims have been dismissed as time-barred by the applicable Statute of Limitations. In other claims, the Texas courts have ruled that the carriers did not owe any duty to the plaintiffs or the general public to advise on the effects of asbestos thereby dismissing these claims. Certain of the Texas courts’ rulings have been appealed. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date are barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
CNA
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Statutes of Limitation to many of the claims which may be made depending on the nature and scope of the alleged duties; (c) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; (d) the diseases and damages claimed by such claimants; (e) and the extent that such liability would be shared with other potentially responsible parties; and (f) the impact of bankruptcy proceedings on claims resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.
As a result of the uncertainties and complexities involved, reserves for asbestos claims cannot be estimated with traditional actuarial techniques that rely on historical accident year loss development factors. In establishing asbestos reserves, CNA evaluates the exposure presented by each insured. As part of this evaluation, CNA considers the available insurance coverage; limits and deductibles; the potential role of other insurance, particularly underlying coverage below any CNA excess liability policies; and applicable coverage defenses, including asbestos exclusions. Estimation of asbestos-related claim and claim adjustment expense reserves involves a high degree of judgment on the part of management and consideration of many complex factors, including: inconsistency of court decisions, jury attitudes and future court decisions; specific policy provisions; allocation of liability among insurers and insureds; missing policies and proof of coverage; the proliferation of bankruptcy proceedings and attendant uncertainties; novel theories asserted by policyholders and their counsel; the targeting of a broader range of businesses and entities as defendants; the uncertainty as to which other insureds may be targeted in the future and the uncertainties inherent in predicting the number of future claims; volatility in claim numbers and settlement demands; increases in the number of non-impaired claimants and the extent to which they can be precluded from making claims; the efforts by insureds to obtain coverage not subject to aggregate limits; the long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims; medical inflation trends; the mix of asbestos-related diseases presented and the ability to recover reinsurance.
Environmental pollution cleanup is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and restoration by “Potentially Responsible Parties” (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs fail to do so and assign liability to PRPs. The extent of liability to be allocated to a PRP is dependent upon a variety of factors. Further, the number of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been identified by the Environmental Protection Agency (EPA) and included on its National Priorities List (NPL). State authorities have designated many cleanup sites as well.
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Many policyholders have made claims against various CNA insurance subsidiaries for defense costs and indemnification in connection with environmental pollution matters. The vast majority of these claims relate to accident years 1989 and prior, which coincides with CNA’s adoption of the Simplified Commercial General Liability coverage form, which includes what is referred to in the industry as an absolute pollution exclusion. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether cleanup costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and the definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues.
A number of proposals to modify Superfund have been made by various parties. However, no modifications were enacted by Congress during 2004 or 2003, and it is unclear what positions Congress or the Administration will take and what legislation, if any, will result in the future. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental cleanup may be significantly reduced in favor of state action. Substantial changes in the federal statute or the activity of the EPA may cause states to reconsider their environmental cleanup statutes and regulations. There can be no meaningful prediction of the pattern of regulation that would result or the possible effect upon CNA’s results of operations or equity.
As of December 31, 20042006 and 2003,2005, CNA carried approximately $497$416 million and $577$423 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and mass tort claims. There was $1$63 million, $53 million and $153$1 million of unfavorable environmental pollution and mass tort net claim and claim adjustment expense reserve development recorded for the years ended December 31, 20042006, 2005 and 2003. There was no environmental pollution and mass tort net claim and claim adjustment expense reserve development recorded for the year ended December 31, 2002. Additionally, the2004. The Company recorded $40 million, $20 million and $15 million of current accident year losses related to mass tort infor the years ended December 31, 2006, 2005 and 2004. The Company paid environmental pollution-related claims and mass tort-related claims, net of reinsurance recoveries, of $96$110 million, $93$147 million and $116$96 million for the years ended December 31, 2004, 20032006, 2005 and 2002.
CNA2004.
In 2003, CNA observed a marked increase in silica claims frequency in Mississippi, where plaintiff attorneys appear to have filed claims to avoid the effect of tort reform. In 2004, silica claims frequency in Mississippi has moderated notably due to implementation of tort reform measures and favorable court decisions. To date, the most significant silica exposures identified included a relatively small number of
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prior accident years by $50 million in 2005.
2004 Net Prior Year Development
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2004. The development discussed below includes premium development due to its direct relationship to claim and claim adjustment expense reserve development. The development discussed below isexcludes the amount priorimpact of the provision for uncollectible reinsurance, but includes the impact of commutations. See Note H for further discussion of the provision for uncollectible reinsurance.
treaty and in 2006, the Company commuted its remaining corporate aggregate reinsurance treaty. See Note H for further discussion of the corporate aggregate reinsurance treaties.
2004 Net Prior Year Development
| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| (In millions) | Lines | Lines | Non-Core | Total | ||||||||||||
| Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of corporate aggregate reinsurance treaties: | ||||||||||||||||
| Property and casualty, excluding APMT | $ | 105 | $ | 75 | $ | 23 | $ | 203 | ||||||||
| APMT | – | – | 55 | 55 | ||||||||||||
| Total | 105 | 75 | 78 | 258 | ||||||||||||
| Ceded losses related to corporate aggregate reinsurance treaties | 8 | (17 | ) | 9 | – | |||||||||||
| Pretax unfavorable net prior year development before impact of premium development | 113 | 58 | 87 | 258 | ||||||||||||
| Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties | (96 | ) | (33 | ) | 12 | (117 | ) | |||||||||
| Ceded premiums related to corporate aggregate reinsurance treaties | (1 | ) | 5 | (3 | ) | 1 | ||||||||||
| Pretax unfavorable (favorable) premium development | (97 | ) | (28 | ) | 9 | (116 | ) | |||||||||
Total 2004 unfavorable net prior year development (pretax) | $ | 16 | $ | 30 | $ | 96 | $ | 142 | ||||||||
Also included infor the 2004 net prior year development is Life and Group Non-Core and unallocated loss adjustment expense reserve development.
Standard Lines
The gross and net carried claim and claim adjustment expense reserves were $14,302 million and $9,303 million atyears ended December 31, 2004. The gross2006, 2005 and net carried claim and claim adjustment expense reserves for Standard Lines were $14,282 million and $8,967 million at December 31, 2003.2004. Unfavorable net prior year development of $16$13 million including $113was recorded in the Life and Group Non-Core segment for the year ended December 31, 2006. Favorable net prior year development of $5 million and $7 million was recorded in the Life and Group Non-Core segment for the years ended December 31, 2005 and 2004.
| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| (In millions) | Lines | Lines | Non-Core | Total | ||||||||||||
| Pretax unfavorable (favorable) net prior year claim and allocated claim adjustment expense reserve development: | ||||||||||||||||
| Core (Non-APMT) | $ | 157 | $ | (10 | ) | $ | 23 | $ | 170 | |||||||
| APMT | — | — | 63 | 63 | ||||||||||||
| Pretax unfavorable (favorable) net prior year development before impact of premium development | 157 | (10 | ) | 86 | 233 | |||||||||||
| Total unfavorable (favorable) premium development | (88 | ) | 25 | 2 | (61 | ) | ||||||||||
Total 2006 unfavorable net prior year development (pretax) | $ | 69 | $ | 15 | $ | 88 | $ | 172 | ||||||||
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| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| (In millions) | Lines | Lines | Non-Core | Total | ||||||||||||
| Pretax unfavorable net prior year claim and allocated claim adjustment expense reserve development, excluding the impact of corporate aggregate reinsurance treaties: | ||||||||||||||||
| Core (Non-APMT) | $ | 376 | $ | 42 | $ | 171 | $ | 589 | ||||||||
| APMT | — | — | 63 | 63 | ||||||||||||
| Total | 376 | 42 | 234 | 652 | ||||||||||||
| Ceded losses related to corporate aggregate reinsurance treaties | 183 | 5 | 57 | 245 | ||||||||||||
| Pretax unfavorable net prior year development before impact of premium development | 559 | 47 | 291 | 897 | ||||||||||||
| Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties | (101 | ) | (12 | ) | 11 | (102 | ) | |||||||||
| Ceded premiums related to corporate aggregate reinsurance treaties | (6 | ) | 19 | 4 | 17 | |||||||||||
| Total unfavorable (favorable) premium development | (107 | ) | 7 | 15 | (85 | ) | ||||||||||
Total 2005 unfavorable net prior year development (pretax) | $ | 452 | $ | 54 | $ | 306 | $ | 812 | ||||||||
| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| (In millions) | Lines | Lines | Non-Core | Total | ||||||||||||
| Pretax unfavorable net prior year claim and allocated claim adjustment expense reserve development, excluding the impact of corporate aggregate reinsurance treaties: | ||||||||||||||||
| Core (Non-APMT) | $ | 107 | $ | 75 | $ | 20 | $ | 202 | ||||||||
| APMT | — | — | 55 | 55 | ||||||||||||
| Total | 107 | 75 | 75 | 257 | ||||||||||||
| Ceded losses related to corporate aggregate reinsurance treaties | 8 | (17 | ) | 9 | — | |||||||||||
| Pretax unfavorable net prior year development before impact of premium development | 115 | 58 | 84 | 257 | ||||||||||||
| Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties | (96 | ) | (33 | ) | 12 | (117 | ) | |||||||||
| Ceded premiums related to corporate aggregate reinsurance treaties | (1 | ) | 5 | (3 | ) | 1 | ||||||||||
| Total unfavorable (favorable) premium development | (97 | ) | (28 | ) | 9 | (116 | ) | |||||||||
Total 2004 unfavorable net prior year development (pretax) | $ | 18 | $ | 30 | $ | 93 | $ | 141 | ||||||||
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101
102
103
Lines
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claim and allocated claim adjustment expense reserve development was primarily due to increased severity trends for workersworkers’ compensation exposures in older years.
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The improvements in severity and frequency are substantially due to underwriting actions taken by the Company that have significantly improved the results on this business. Other favorable net prior year premium development of approximately $50 million resulted primarily from higher audit and endorsement premiums on workersworkers’ compensation policies.
The gross and net carried claim and claim adjustment expense reserves were $4,860 million and $3,233 million at December 31, 2004. The gross and net carried claim and claim adjustment expense reserves for Specialty Lines were $4,200 million and $2,919 million at December 31, 2003. Unfavorable net prior year development of $30 million, including $58 million of unfavorable net claim and allocated claim adjustment expense reserve development and $28 million of favorable premium development, was recorded in 2004 for Specialty Lines.
The gross and net carried claim and claim adjustment expense reserves were $8,678 million and $3,176 million at December 31, 2004. The gross and net carried claim and claim adjustment expense reserves for Corporate and Other Non-Core were $9,672 million and $3,737 million at December 31, 2003. Unfavorable net prior year development of $96 million, including $87 million of net unfavorable claim and allocated claim adjustment expense reserve development and $9 million of unfavorable premium development was recorded in 2004 for Corporate and Other Non-Core.
Unfavorable net prior year development
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2003. The development discussed below includes premium development due
The following table summarizes the pretax 2003 net prior year development for the Standard Lines, Specialty Lines and Corporate and Other Non-Core segments.
2003 Net Prior Year Development
| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| (In millions) | Lines | Lines | Non-Core | Total | ||||||||||||
| Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of corporate aggregate reinsurance treaties: | ||||||||||||||||
| Property and casualty, excluding APMT | $ | 1,424 | $ | 313 | $ | 355 | $ | 2,092 | ||||||||
| APMT | – | – | 795 | 795 | ||||||||||||
| Total | 1,424 | 313 | 1,150 | 2,887 | ||||||||||||
| Ceded losses related to corporate aggregate reinsurance treaties | (485 | ) | (56 | ) | (102 | ) | (643 | ) | ||||||||
| Pretax unfavorable net prior year development before impact of premium development | 939 | 257 | 1,048 | 2,244 | ||||||||||||
| Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties | 211 | 6 | (32 | ) | 185 | |||||||||||
| Ceded premiums related to corporate aggregate reinsurance treaties | 269 | 31 | 58 | 358 | ||||||||||||
| Pretax unfavorable premium development | 480 | 37 | 26 | 543 | ||||||||||||
Total 2003 unfavorable net prior year development (pretax) | $ | 1,419 | $ | 294 | $ | 1,074 | $ | 2,787 | ||||||||
Also included in the 2003 net prior year development is Life and Group Non-Core and unallocated loss adjustment expense reserve development.
Standard Lines
Unfavorable net prior year development of $1,419 million, including $939 million of unfavorable claim and allocated claim adjustment expense reserve development and $480 million of unfavorable premium development, was recorded in 2003 for Standard Lines.
Approximately $495 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was recorded related to construction defectremaining claims in 2003. Based on analyses completed during 2003, it became apparent that the assumptions regarding the number of claims, which were used to estimate the expected losses, were no longer appropriate. The analyses indicated that the actual number of claims reported during 2003 was higher than expected primarily in states other than California. States where this activity is most evident include Texas, Arizona, Nevada, Washingtonaction and Colorado. The number of claims reported in states other than California during the first six months of 2003 was almost 35% higher than the last six months of 2002. The number of claims reported during the last six months of 2002 increased by less than 10% from the first six months of 2002. In California, claims resulting from additional insured endorsements increased throughout 2003. Additional insured endorsements are regularly included on policies provided to subcontractors. The additional insured endorsement names general contractors and developers as additional insureds covered by the policy. Current California case law (Presley Homes, Inc. v. American States Insurance Company,(June 11, 2001) 90 Cal App. 4th 571, 108 Cal. Rptr. 2d 686) specifies that an individual subcontractor with an additional insured obligation has a dutyintends to defend the additional insuredcase vigorously.
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for a longer period of time than other construction defect claims because the additional insured defense obligation can continue until the entire case is resolved. The adverse reserve development recorded related to construction defect claims was primarily related to accident years 1999 and prior.
Unfavorable net prior year development of approximately $595 million, including $518 million of unfavorable claim and allocated claim adjustment expense reserve development and $77 million of unfavorable premium development, was recorded for large account business including workers compensation coverages in 2003. Manyequity of the policies issued to these large accounts include provisions tailored specifically to the individual accounts. Such provisions effectively result in the insured being responsible for a portion of the loss. An example of such a provision is a deductible arrangement where the insured reimburses the Company, for all amounts less than a specified dollar amount. These arrangements often limit the aggregate amount the insured is required to reimburse the Company. Analyses indicated that the provisions that result in the insured being responsible for a portion would have less of an impact due to the larger size of claims as well as the increased number of claims. The unfavorable net prior year development recorded was primarily related to accident years 2000 and prior.
Approximately $98 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003, resulted from a program covering facilities that provide services to developmentally disabled individuals. This net prior year development was due to an increase in the size of known claims and increases in policyholder defense costs. With regard to average claim size, updated data showed the average claim increasing at an annual rate of approximately 20%. Prior data had shown average claim size to be level. Similar to the average claim size, updated data showed the average policyholder defense cost increasing at an annual rate of approximately 20%. Prior data had shown average policyholder defense cost to be level. The net prior year development recorded was primarily for accident years 2001 and prior.
Approximately $40 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was for excess workers compensation coverages due to increasing severity. The increase in severity means that a higher percentage of the total loss dollars will be the Company’s responsibility since more claims will exceed the point at which the Company’s coverage begins. The net prior year development recorded was primarily for accident year 2000.
Approximately $73 million of unfavorable development recorded in 2003 was the result of a commutation of all ceded reinsurance treaties with Gerling Global Group of companies (Gerling), related to accident years 1999 through 2001, including $41 million of unfavorable claim and allocated claim adjustment expense development and $32 million of unfavorable premium development. Unfavorable net prior year claim and allocated claim adjustment expense reserve development of approximately $40 million recorded in 2003 was related to a program covering tow truck and ambulance operators, primarily impacting the 2001 accident year. The Company had previously expected that loss ratios for this business would be similar to its middle market commercial automobile liability business. During 2002, the Company ceased writing business under this program.
Approximately $25 million of unfavorable net prior year premium development recorded in 2003 was related to 2003 reevaluation of losses ceded to a reinsurance contract covering middle market workers compensation exposures. The reevaluation of losses led to a new estimate of the number and dollar amount of claims that would be ceded under the reinsurance contract. As a result of the reevaluation of losses, the Company recorded approximately $36 million of unfavorable claim and allocated claim adjustment expense reserve development, which was ceded under the contract. The net prior year development was recorded for accident year 2000.
Approximately $11 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded for the year ended December 31, 2003 was related to directors and officers exposures in Global Lines. The unfavorable net prior year reserve development was primarily due to securities class action cases related to certain known corporate malfeasance cases and investment banking firms. This net prior year development recorded was primarily for accident years 2000 through 2002.
The following premium and claim and allocated claim adjustment expense development was recorded in the third quarter of 2003 as a result of the elimination of deficiencies and redundancies in reserve positions within the segment. Unfavorable net prior year development of approximately $210 million related to small and middle market workers compensation exposures and approximately $110 million related to E&S lines was recorded in 2003. Offsetting these increases was $210 million of favorable net prior year development in the property line of business,
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including $79 million related to the September 11, 2001 World Trade Center Disaster and related events (WTC event).
Also, offsetting the unfavorable premium and claim and allocated claim adjustment expense development was a $216 million underwriting benefit from cessions to corporate aggregate reinsurance treaties recorded in 2003. The benefit is comprised of $485 million of ceded losses and $269 million of ceded premiums for accident years 2000 and 2001.
Specialty Lines
Unfavorable net prior year development of $294 million, including $257 million of unfavorable net claim and allocated claim adjustment expense reserve development and $37 million of unfavorable premium development, was recorded in 2003 for Specialty Lines.
Approximately $50 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was related to increased severity in excess coverages provided to facilities providing health care services. The increase in reserves is based on reviews of individual accounts where claims had been expected to be less than the point at which the Company’s coverage applies. The current claim trends indicated that the layers of coverage provided by the Company would be impacted. The net prior year development recorded was primarily for accident years 2001 and prior.
Approximately $68 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was for surety coverages primarily related to workers compensation bond exposure from accident years 1990 and prior and large losses for accident years 1999 and 2002. Approximately $21 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was recorded in the surety line of business in 2003 as the result of recent developments on one large claim.
Approximately $75 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development recorded in 2003 was related to directors and officers exposures in CNA Pro. The unfavorable net prior year reserve development was primarily due to securities class action cases related to certain known corporate malfeasance cases and investment banking firms. This net prior year development recorded was primarily for accident years 2000 through 2002.
Approximately $84 million of losses was recorded for during 2003 as the result of a commutation of ceded reinsurance treaties with Gerling covering CNA Health Pro, relating to accident years 1999 through 2002.
The following development was recorded in 2003 as a result of the elimination of deficiencies and redundancies in reserve positions within the segment. An additional $50 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was recorded related to medical malpractice and long term care facilities. Partially offsetting this unfavorable net prior year claim and allocated claim adjustment expense reserve development was a $25 million underwriting benefit from cessions to corporate aggregate reinsurance treaties. The benefit was comprised of $56 million of ceded losses and $31 million of ceded premiums for accident years 2000 and 2001. See Note H for further discussion of the Company’s aggregate reinsurance treaties.
Corporate and Other Non-Core
Unfavorable net prior year development of $1,074 million, including $1,048 million of net unfavorable claim and allocated claim adjustment expense reserve development and $26 million of unfavorable premium development was recorded in 2003 for Corporate and Other Non-Core.
This development was primarily driven by $795 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development related to APMT.
In addition to APMT development, there was unfavorable net prior year development recorded in 2003 related to CNA Re of $149 million and $75 million related to voluntary pools.
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Unfavorable net prior year claim and allocated claim adjustment expense reserve development of approximately $25 million was recorded in CNA Re primarily for directors and officers exposures. The unfavorable net prior year development was a result of a claims review that was completed during the second quarter of 2003. The unfavorable net prior year development was primarily due to securities class action cases related to certain known corporate malfeasance cases and investment banking firms. The unfavorable net prior year development recorded was for accident years 2000 and 2001.
The CNA Re unfavorable net prior year development for 2003 was also due to a general change in the pattern of how losses emerged over time as reported by the companies that purchased reinsurance from CNA Re. Losses have continued to show large increases for accident years in the late 1990s and into 2000 and 2001. These increases are greater than the increases indicated by patterns from older accident years and had a similar effect on several lines of business. Approximately $67 million unfavorable net prior year development recorded in 2003 was related to proportional liability exposures, primarily from multi-line and umbrella treaties in accident years 1997 through 2001. Approximately $32 million of unfavorable net prior year development recorded in 2003 was related to assumed financial reinsurance for accident years 2001 and prior and approximately $24 million of unfavorable net prior year development was related to professional liability exposures in accident years 2001 and prior.
Additionally, CNA Re recorded $15 million of unfavorable net prior year development for construction defect related exposures. Because of the unique nature of this exposure, losses have not followed expected development patterns. The continued reporting of claims in California, the increase in the number of claims from states other than California and a review of individual ceding companies’ exposure to this type of claim resulted in an increase in the estimated reserve.
The following premium and claim and allocated claim adjustment expense development, was recorded in 2003 as a result of the elimination of deficiencies and redundancies in the reserve positions of individual products within CNA Re. Unfavorable net prior year premium and claim and allocated claim adjustment expense development of approximately $42 million related to Surety exposures, $32 million related to excess of loss liability exposures and $12 million related to facultative liability exposures were recorded in the third quarter of 2003.
Offsetting this unfavorable net prior year development was approximately $55 million of favorable net prior year development related to the WTC event as well as a $45 million underwriting benefit from cessions to corporate aggregate reinsurance treaties recorded in 2003. The benefit from cessions to the corporate aggregate reinsurance treaties was comprised of $102 million of ceded losses and $57 million of ceded premiums for accident years 2000 and 2001.
Unfavorable net prior year claim and allocated claim adjustment expense reserve development of approximately $75 million was recorded during the third quarter of 2003 related to an adverse arbitration decision involving a single large property and business interruption loss on a voluntary insurance pool. The decision was rendered against a voluntary insurance pool in which the Company was a participant. The loss was caused by a fire which occurred in 1995. The Company no longer participates in this pool.
2002 Net Prior Year Development
Unfavorable net prior year development of $126 million, including $35 million of unfavorable claim and claim adjustment expense reserve development and $91 million of unfavorable premium development, was recorded in 2002. The development discussed below includes premium development due to its direct relationship to claim and claim adjustment expense reserve development. The development discussed below is the amount prior to consideration of any related reinsurance allowance impacts.
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The following table summarizes the pretax 2002 net prior year development for the Standard Lines, Specialty Lines and Corporate and Other Non-Core segments.
2002 Net Prior Year Development
| Corporate | ||||||||||||||||
| Standard | Specialty | and Other | ||||||||||||||
| (In millions) | Lines | Lines | Non-Core | Total | ||||||||||||
| Pretax unfavorable (favorable) net prior year claim and allocated claim adjustment expense development excluding the impact of corporate aggregate reinsurance treaties: | ||||||||||||||||
| Property and casualty, excluding APMT | $ | (191 | ) | $ | 55 | $ | 248 | $ | 112 | |||||||
| APMT | – | – | – | – | ||||||||||||
| Total | (191 | ) | 55 | 248 | 112 | |||||||||||
| Ceded losses related to corporate aggregate reinsurance treaties | (14 | ) | (41 | ) | (93 | ) | (148 | ) | ||||||||
| Pretax unfavorable (favorable) net prior year development before impact of premium development | (205 | ) | 14 | 155 | (36 | ) | ||||||||||
| Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties | 76 | 17 | (103 | ) | (10 | ) | ||||||||||
| Ceded premiums related to corporate aggregate reinsurance treaties | 10 | 29 | 62 | 101 | ||||||||||||
| Pretax unfavorable (favorable) premium development | 86 | 46 | (41 | ) | 91 | |||||||||||
Total 2002 unfavorable (favorable) net prior year development (pretax) | $ | (119 | ) | $ | 60 | $ | 114 | $ | 55 | |||||||
Also included in the 2002 net prior year development is Life and Group Non-Core and unallocated loss adjustment expense reserve development.
Standard Lines
Favorable net prior year development of $119 million, including $205 million of favorable claim and allocated claim adjustment expense reserve development and $86 million of unfavorable premium development, was recorded in 2002 for Standard Lines. Approximately $140 million of favorable net prior year development was attributable to participation in the Workers Compensation Reinsurance Bureau (WCRB), a reinsurance pool, and residual markets. The favorable net prior year development for WCRB was the result of information received from the WCRB that reported thealthough results of a recent actuarial review. This information indicated that the Company’s net required reserves for accident years 1970 through 1996 were $60 million less than the carried reserves. In addition, during 2002, the Company commuted accident years 1965 through 1969 for a payment of approximately $5 million to cover carried reserves of approximately $13 million, resulting in further favorable net prior year development of $8 million. The favorable residual market net prior year development was the result of lower than expected paid loss activity during recent periods for accident years dating back to 1984. The paid losses during 2002 on prior accident years were approximately 60% of the previously expected amount.
In addition, Standard Lines had favorable net prior year development, primarily in the package liability and auto liability lines of business due to new claims initiatives. These new claims initiatives, which included specialized training on specific areas of the claims adjudication process, enhanced claims litigation management, enhanced adjuster-level metrics to monitor performance and more focused metric-based claim file review and oversight, are expected to produce significant reductions in ultimate claim costs. Based on management’s best estimate of the reduction in ultimate claim costs, approximately $100 million of favorable prior year reserve development was recorded in 2002. Approximately one-half of this favorable net prior year development was recorded in accident years prior to 1999, with the remainder of the favorable net prior year development recorded in accident years 1999 to 2001.
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Approximately $50 million of favorable net prior year development during 2002 was recorded in commercial automobile liability. Most of the favorable net prior year development was from accident year 2000. An actuarial review completed during 2002 showed that underwriting actions had resulted in reducing the number of commercial automobile liability claims for recent accident years, especially the number of large losses.
Approximately $45 million of favorable net prior year development was recorded in property lines during 2002. The favorable net prior year development was principally from accident years 1999 through 2001, and was the result of the low number of large losses in recent years. Although property claims are generally reported relatively quickly, determining the ultimate cost of the claim can involve a significant amount of time between the occurrence of the claim and settlement.
Offsetting these favorable net prior year reserve development was approximately $100 million of unfavorable premium development in middle market workers compensation, approximately $70 million of unfavorable net prior year development in programs written in CNA E&S, approximately $30 million of unfavorable net prior year development on a contractors account package policy program and approximately $20 million of unfavorable net prior year development on middle market general liability coverages. The unfavorable net prior year development on workers compensation was principally due to additional reinsurance premiums for accident years 1999 through 2001.
A CNA E&S program, covering facilities that provide services to developmentally disabled individuals, accounts for approximately $50 million of the unfavorable net prior year development. The unfavorable net prior year development was due to an increase in the size of known claims and increases in policyholder defense costs. These increases became apparent as the result of an actuarial review completed during 2002, with most of the development recorded in accident years 1999 and 2000. The other program which contributed to the CNA E&S unfavorable net prior year development covers tow truck and ambulance operators in the 2000 and 2001 accident years. This program was started in 1999. The Company expected that loss ratios for this business wouldoperations may be similar to its middle market commercial automobile liability business. Reviews completed during the year resulted in estimated loss ratios on the tow truck and ambulance business that were 25 points higher than the middle market commercial automobile liability loss ratios.
The marine business recorded unfavorable net prior year development of approximately $15 million during 2002. The remaining unfavorable net prior year development for the Marine business was due principally to unfavorable net prior year development on hull and liability coverages from accident years 1999 and 2000 offset by favorable reserve development on cargo coverages recorded for accident year 2001. Reviews completed during 2002 showed additional reported losses on individual large accounts and other bluewater business that drove the unfavorable hull and liability reserve development.
The unfavorable net prior year development on contractors account package policies was the result of an actuarial review completed during 2002. Since this program is no longer being written, the Company expected that the change in reported losses would decrease each quarterly period. However, in then recent quarterly periods, the change in reported losses was higher than prior quarters, resulting in the unfavorable net prior year development.
adversely affected.
Unfavorable net prior year development of $60 million, including $14 million of unfavorable claim and allocated claim adjustment expense reserve development and $46 million of unfavorable premium development, was recorded in 2002 for Specialty Lines. Unfavorable net prior year development of approximately $180 million was recorded for CNA HealthPro in 2002 and was driven principally by medical malpractice excess products provided to hospitals and physicians and coverages provided to long term care facilities, principally national for-profit nursing homes. Approximately $100 million of the unfavorable net prior year development was related to assumed excess products and loss portfolio transfers, and was primarily driven by unexpected increases in the number of excess claims in accident years 1999 and 2000. The percentage of total claims greater than $1 million has increased by 33%, from less than 3% of all claims to more than 4% of all claims. CNA HealthPro no longer writes assumed excess products and loss portfolio transfers.
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Approximately $50 million of the unfavorable net prior year unfavorable development was related to long term care facilities. The unfavorable net prior year development principally impacted accident years 1997 through 2000. The average value of claims closed during the first several months of 2002 increased by more than 50% when compared to claims closed during 2001. In response to those trends, CNA HealthPro has reduced its writings of national for-profit nursing home chains. Excess products provided to healthcare institutions and physician coverages in a limited number of states was responsible for the remaining development in CNA HealthPro. The unfavorable net prior year development on excess products provided to institutions for accident years 1996 through 1999 resulted from increases in the size of claims experienced by these institutions. Due to the increase in the size of claims, more claims were exceeding the point at which these excess products apply. The unfavorable net prior year development on physician coverages was recorded for accident years 1999 through 2001 in Oregon, California, Arizona and Nevada. The average claim size in these states has increased by 20%, driving the change in losses.
Offsetting this unfavorable net prior year development was favorable net prior year development in CNA Pro and for Enron-related exposures. Programs providing professional liability coverage to accountants, lawyers and realtors primarily drove favorable net prior year development of approximately $110 million in CNA Pro. Reviews of this business completed during 2002 indicated little activity for older accident years (principally prior to 1999), which reduced the need for reserves on these years. The reported losses on these programs for accident years prior to 1999 increased by approximately $5 million during 2002. This increase compared to the total reserve at the beginning of 2002 of approximately $180 million, net of reinsurance. Additionally, favorable net prior year development of $20 million was associated with a settlement with Enron. The Company had established a $20 million reserve for accident year 2001 for an excess layer associated with Enron related surety losses; however the case was settled for less than the attachment point of this excess layer.
A $12 million underwriting benefit was recorded for the corporate aggregate reinsurance treaties in 2002, comprised of $41 million of ceded losses and $29 million of ceded premiums for accident year 2001.
Corporate and Other Non-Core
Unfavorable net prior year development of $114 million, including $155 million of unfavorable claim and allocated claim adjustment expense reserve development and $41 million of favorable premium development, was recorded in 2002 for Corporate and Other Non-Core. The development recorded in 2002 consisted primarily of CNA Re development.
The unfavorable net prior year development recorded in 2002 related primarily to CNA Re and was the result of an actuarial review completed during 2002 and was primarily recorded in the directors and officers, professional liability errors and omissions, and surety lines of business. Several large losses, as well as continued increases in the overall average size of claims for these lines, have resulted in higher than expected loss ratios.
Additionally, during 2002, CNA Re revised its estimate of premiums and losses related to the WTC event. In estimating CNA Re’s WTC event losses, the Company performed a treaty-by-treaty analysis of exposure. The Company’s original loss estimate was based on a number of assumptions including the loss to the industry, the loss to individual lines of business and the market share of CNA Re’s cedants. Information that became available in the first quarter of 2002 resulted in CNA Re increasing its estimate of WTC event related premiums and losses on its property facultative and property catastrophe business. The impact of increasing the estimate of gross WTC event losses by $144 million was fully offset on a net of reinsurance basis (before the impact of the CCC Cover) by higher reinstatement premiums and a reduction of return premiums. Approximately $95 million of CNA Re’s net WTC loss estimate was attributable to CNA Re U.K., which was sold in 2002.
A $32 million underwriting benefit was recorded for CNA Re for the corporate aggregate reinsurance treaties in 2002. The benefit was comprised of $93 million of ceded losses and $62 million of ceded premiums for accident year 2001.
Concerns about reinsurance security, prompted in part by rating agency downgrades of several reinsurers’ financial strength ratings, have impacted the reinsurance marketplace. Many ceding companies have sought provisions for
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the collateralization of assumed reserves in the event of a financial strength ratings downgrade or other triggers. Before exiting the reinsurance market, CNA Re had been impacted by this trend and had entered into several contracts with rating or other triggers. Additionally, personal insurance unfavorable net prior year development of $35 million was recorded in 2002 on accident years 1997 through 1999. The unfavorable net prior year development was principally due to the then continuing policyholder defense costs associated with remaining open personal insurance claims. The unfavorable net prior year development was partially offset by favorable reserve development on other run-off business driven principally by financial and mortgage guarantee coverages from accident years 1997 and prior. The favorable net prior year development on financial and mortgage guarantee coverages resulted from a review of the underlying exposures and the outstanding losses, which showed that salvage and subrogation continues to be collected on these types of claims, thereby reducing estimated future losses net of anticipated reinsurance recoveries.
Note G. Legal Proceedings and Related Contingent Liabilities
IGI Contingency
In addition,
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CNA has established reserves for its estimated exposure under the IGI Program, other than that derived from John Hancock, and an estimate for recoverables from retrocessionaires. CNA has not established any reserve for any exposure derived from John Hancock because, as indicated, CNA believes the contract will be rescinded. Although the results of the Company’s various loss mitigation strategies with respect to the entire IGI Program to date support the recorded reserves, the estimate of ultimate losses is subject to considerable uncertainty due to the complexities described above.above, and the Company’s inability to guarantee any outcome in the arbitration proceedings. As a result of these uncertainties, the results of operations in future periods may be adversely affected by potentially significant reserve additions. However, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. Management does not believe that any such reserve additions would be material to the equity of the Company, although results of operations may be adversely affected.Company. The Company’s position in relation to the IGI Program was unaffected by the sale of CNA Re Ltd. in 2002.
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Numerous unresolved factualclaims on numerous substantive and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. However, based on facts and circumstances presently known in the opinion of management, an unfavorable outcome would not materially adversely affect the equity of the Company, although results of operations may be adversely affected.
Voluntary Market Premium Litigation
CNA, along with dozens of other insurance companies, is currently a defendant in nine cases, including eight purported class actions, brought by large policyholders. procedural grounds.
Numerous unresolved factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. However, based on facts and circumstances presently known, in the opinion of management, an unfavorable outcome will not materially affect the equity of the Company, although results of operations may be adversely affected.
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Other Litigation
Property and casualty reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA’s retained amount varies by type of coverage. Treaty reinsurance isReinsurance contracts are purchased to protect specific lines of business such as property, workersworkers’ compensation and professional liability. Corporate catastrophe reinsurance is also purchased for property and workers
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The Company’s overall In addition, CNA assumes reinsurance program includes certain propertyas a member of various reinsurance pools and casualty contracts, such as the corporate aggregate reinsurance treaties discussed in more detail below, that are entered into and accounted for on a “funds withheld” basis. Under the funds withheld basis, the Company records the cash remitted to the reinsurer for the reinsurer’s margin, or cost of the reinsurance contract, as ceded premiums. The remainder of the premiums ceded under the reinsurance contract not remitted in cash is recorded as funds withheld liabilities. The Company is required to increase the funds withheld balance at stated interest crediting rates applied to the funds withheld balance or as otherwise specified under the terms of the contract. The funds withheld liability is reduced by any cumulative claim payments made by the Company in excess of the Company’s retention under the reinsurance contract. If the funds withheld liability is exhausted, interest crediting will cease and additional claim payments are recoverable from the reinsurer. The funds withheld liability is recorded in reinsurance balances payable in the Consolidated Balance Sheets.
Interest cost on funds withheld and other deposits is credited during all periods in which a funds withheld liability exists. Pretax interest cost, which is included in net investment income, was $267 million, $344 million and $239 million in 2004, 2003 and 2002. The amount subject to interest crediting rates on such contracts was $2,570 million and $2,789 million at December 31, 2004 and 2003. Certain funds withheld reinsurance contracts, including the corporate aggregate reinsurance treaties, require interest on additional premiums arising from ceded losses as if those premiums were payable at the inception of the contract. Additionally, on the corporate aggregate reinsurance treaties discussed below, if the Company exceeds certain aggregate loss ratio thresholds, the rate on which interest charges are accrued would increase and be retroactively applied to the inception of the contract or to a specified date. Any such retroactive interest is accrued in the period the additional premiums arise or the loss ratio thresholds are met. The amount of retroactive interest, included in the totals above, was $46 million, $147 million and $10 million in 2004, 2003 and 2002.
The amount subject to interest crediting on these funds withheld contracts will vary over time based on a number of factors, including the timing of loss payments and ultimate gross losses incurred. The Company expects that it will continue to incur significant interest costs on these contracts for several years.
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The following table summarizes the amounts receivable from reinsurers at December 31, 20042006 and 2003.
Components2005.
| Components of reinsurance receivables | ||||||||
| (In millions) | December 31, 2006 | December 31, 2005 | ||||||
| Reinsurance receivables related to insurance reserves: | ||||||||
| Ceded claim and claim adjustment expense | $ | 8,191 | $ | 10,605 | ||||
| Ceded future policy benefits | 1,050 | 1,193 | ||||||
| Ceded policyholders’ funds | 48 | 56 | ||||||
| Reinsurance receivables related to paid losses | 658 | 582 | ||||||
Reinsurance receivables | 9,947 | 12,436 | ||||||
| Allowance for uncollectible reinsurance | (469 | ) | (519 | ) | ||||
Reinsurance receivables, net of allowance for uncollectible reinsurance | $ | 9,478 | $ | 11,917 | ||||
| (In millions) | December 31, 2004 | December 31, 2003 | ||||||
| Reinsurance receivables related to insurance reserves: | ||||||||
| Ceded claim and claim adjustment expense | $ | 13,984 | $ | 14,216 | ||||
| Ceded future policy benefits | 1,260 | 1,218 | ||||||
| Ceded policyholders’ funds | 65 | 7 | ||||||
| Billed reinsurance receivables | 685 | 813 | ||||||
Reinsurance receivables | 15,994 | 16,254 | ||||||
| Allowance for uncollectible reinsurance | (531 | ) | (573 | ) | ||||
Reinsurance receivables, net of allowance for uncollectible reinsurance | $ | 15,463 | $ | 15,681 | ||||
The Company has established an allowance for uncollectible reinsurance receivables. The allowance for uncollectible reinsurance receivables was $531 million and $573 million at December 31, 2004 and 2003. The net decrease in the allowance was primarily due to a release of a previously established allowance relateddue to The Trenwick Group resulting from the execution of a significant commutation agreements, partially offset by a net increase in the allowance for other reinsurance receivables.agreement, as discussed further below. The provision for uncollectible reinsurance receivables is presented aswas $23 million, $35 million and $95 million in 2006, 2005 and 2004.
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Subject to certain exceptions, The Company attempts to mitigate itsHartford assumed 50% of the credit risk relatedof the business that was previously reinsured to reinsurance by entering into reinsurance arrangements only with reinsurers that haveother carriers. As of December 31, 2006 and 2005, the assumed credit ratings above certain levels and by obtaining substantial amounts of collateral. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances. Such collateralrisk was approximately $4,561$21 million and $5,255 million at December 31, 2004 and 2003.
In 2003, the Company commuted all remaining ceded and assumed reinsurance contracts with four Gerling entities. The commutations resulted in a pretax loss of $109 million, which was net of a previously established allowance for doubtful accounts of $47$26 million. The Company has no further exposure to the Gerling companies that are in run-off.
CNA’s largest recoverables from a single reinsurer at December 31, 2004, including prepaid reinsurance premiums, were approximately $2,236 million from subsidiaries of The Allstate Corporation (Allstate), $2,163 million from subsidiaries of Swiss Reinsurance Group, $1,843 million from subsidiaries of Hannover Reinsurance (Ireland), Ltd., $1,726 million from Hartford Life Group Insurance Company, $944 million from American Reinsurance Company, and $603 million from subsidiaries of the Berkshire Hathaway Group.
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The effects of reinsurance on earned premiums and written premiums for the years ended December 31, 2004, 20032006, 2005 and 20022004 are shown in the following tables.
| Assumed/ | Assumed/ | |||||||||||||||||||||||||||||||||||||||
| (In millions) | Direct | Assumed | Ceded | Net | Net % | Direct | Assumed | Ceded | Net | Net % | ||||||||||||||||||||||||||||||
2006 Earned Premiums | ||||||||||||||||||||||||||||||||||||||||
| Property and casualty | $ | 9,125 | $ | 120 | $ | 2,283 | $ | 6,962 | 1.7 | % | ||||||||||||||||||||||||||||||
| Accident and health | 718 | 59 | 138 | 639 | 9.2 | |||||||||||||||||||||||||||||||||||
| Life | 100 | — | 98 | 2 | — | |||||||||||||||||||||||||||||||||||
Total earned premiums | $ | 9,943 | $ | 179 | $ | 2,519 | $ | 7,603 | 2.4 | % | ||||||||||||||||||||||||||||||
2005 Earned Premiums | ||||||||||||||||||||||||||||||||||||||||
| Property and casualty | $ | 10,354 | $ | 186 | $ | 3,675 | $ | 6,865 | 2.7 | % | ||||||||||||||||||||||||||||||
| Accident and health | 1,040 | 60 | 400 | 700 | 8.6 | |||||||||||||||||||||||||||||||||||
| Life | 140 | — | 136 | 4 | — | |||||||||||||||||||||||||||||||||||
Total earned premiums | $ | 11,534 | $ | 246 | $ | 4,211 | $ | 7,569 | 3.3 | % | ||||||||||||||||||||||||||||||
2004 Earned Premiums | ||||||||||||||||||||||||||||||||||||||||
| Property and casualty | $ | 10,739 | $ | 199 | $ | 3,634 | $ | 7,304 | 2.7 | % | $ | 10,739 | $ | 199 | $ | 3,634 | $ | 7,304 | 2.7 | % | ||||||||||||||||||||
| Accident and health | 1,228 | 63 | 507 | 784 | 8.0 | 1,228 | 63 | 507 | 784 | 8.0 | ||||||||||||||||||||||||||||||
| Life | 419 | – | 298 | 121 | – | 419 | — | 298 | 121 | — | ||||||||||||||||||||||||||||||
Total earned premiums | $ | 12,386 | $ | 262 | $ | 4,439 | $ | 8,209 | 3.2 | % | ||||||||||||||||||||||||||||||
2003 Earned Premiums | ||||||||||||||||||||||||||||||||||||||||
| Property and casualty | $ | 10,661 | $ | 726 | $ | 4,452 | $ | 6,935 | 10.5 | % | ||||||||||||||||||||||||||||||
| Accident and health | 1,602 | 92 | 59 | 1,635 | 5.6 | |||||||||||||||||||||||||||||||||||
| Life | 1,102 | 7 | 465 | 644 | 1.0 | |||||||||||||||||||||||||||||||||||
Total earned premiums | $ | 13,365 | $ | 825 | $ | 4,976 | $ | 9,214 | 9.0 | % | $ | 12,386 | $ | 262 | $ | 4,439 | $ | 8,209 | 3.2 | % | ||||||||||||||||||||
2002 Earned Premiums | ||||||||||||||||||||||||||||||||||||||||
| Property and casualty | $ | 9,694 | $ | 946 | $ | 3,812 | $ | 6,828 | 13.9 | % | ||||||||||||||||||||||||||||||
| Accident and health | 2,612 | 153 | 15 | 2,750 | 5.6 | |||||||||||||||||||||||||||||||||||
| Life | 1,089 | (5 | ) | 449 | 635 | (0.7 | ) | |||||||||||||||||||||||||||||||||
Total earned premiums | $ | 13,395 | $ | 1,094 | $ | 4,276 | $ | 10,213 | 10.7 | % | ||||||||||||||||||||||||||||||
Components of Written Premiums
| Assumed/ | ||||||||||||||||||||
| (In millions) | Direct | Assumed | Ceded | Net | Net % | |||||||||||||||
2004 Written Premiums | ||||||||||||||||||||
| Property and casualty | $ | 10,289 | $ | 48 | $ | 3,376 | $ | 6,961 | 0.7 | % | ||||||||||
| Accident and health | 1,241 | 62 | 508 | 795 | 7.8 | |||||||||||||||
| Life | 426 | – | 305 | 121 | – | |||||||||||||||
Total written premiums | $ | 11,956 | $ | 110 | $ | 4,189 | $ | 7,877 | 1.4 | % | ||||||||||
2003 Written Premiums | ||||||||||||||||||||
| Property and casualty | $ | 10,880 | $ | 649 | $ | 4,450 | $ | 7,079 | 9.2 | % | ||||||||||
| Accident and health | 1,601 | 92 | 59 | 1,634 | 5.6 | |||||||||||||||
| Life | 1,098 | 6 | 465 | 639 | 1.0 | |||||||||||||||
Total written premiums | $ | 13,579 | $ | 747 | $ | 4,974 | $ | 9,352 | 8.0 | % | ||||||||||
2002 Written Premiums | ||||||||||||||||||||
| Property and casualty | $ | 9,978 | $ | 953 | $ | 3,936 | $ | 6,995 | 13.6 | % | ||||||||||
| Accident and health | 2,618 | 187 | 13 | 2,792 | 6.7 | |||||||||||||||
| Life | 1,091 | (5 | ) | 449 | 637 | (0.7 | ) | |||||||||||||
Total written premiums | $ | 13,687 | $ | 1,135 | $ | 4,398 | $ | 10,424 | 10.9 | % | ||||||||||
145109
| Assumed/ | ||||||||||||||||||||
| (In millions) | Direct | Assumed | Ceded | Net | Net % | |||||||||||||||
2006 Written Premiums | ||||||||||||||||||||
| Property and casualty | $ | 9,193 | $ | 111 | $ | 2,282 | $ | 7,022 | 1.6 | % | ||||||||||
| Accident and health | 719 | 59 | 139 | 639 | 9.2 | |||||||||||||||
| Life | 86 | — | 84 | 2 | — | |||||||||||||||
Total written premiums | $ | 9,998 | $ | 170 | $ | 2,505 | $ | 7,663 | 2.2 | % | ||||||||||
2005 Written Premiums | ||||||||||||||||||||
| Property and casualty | $ | 9,546 | $ | 203 | $ | 2,934 | $ | 6,815 | 3.0 | % | ||||||||||
| Accident and health | 1,037 | 58 | 395 | 700 | 8.3 | |||||||||||||||
| Life | 136 | — | 132 | 4 | — | |||||||||||||||
Total written premiums | $ | 10,719 | $ | 261 | $ | 3,461 | $ | 7,519 | 3.5 | % | ||||||||||
2004 Written Premiums | ||||||||||||||||||||
| Property and casualty | $ | 10,289 | $ | 48 | $ | 3,375 | $ | 6,962 | 0.7 | % | ||||||||||
| Accident and health | 1,241 | 62 | 508 | 795 | 7.8 | |||||||||||||||
| Life | 427 | — | 305 | 122 | — | |||||||||||||||
Total written premiums | $ | 11,957 | $ | 110 | $ | 4,188 | $ | 7,879 | 1.4 | % | ||||||||||
| (In millions) | Direct | Assumed | Ceded | Net | ||||||||||||
| 2004 (a) | $ | 56,610 | $ | 35 | $ | 54,486 | $ | 2,159 | ||||||||
| 2003 | 388,380 | 588 | 295,659 | 93,309 | ||||||||||||
| 2002 | 423,151 | 14,600 | 340,520 | 97,231 | ||||||||||||
| (In millions) | Direct | Assumed | Ceded | Net | ||||||||||||
| 2006 | $ | 15,652 | $ | 1 | $ | 15,633 | $ | 20 | ||||||||
| 2005 | 20,548 | 1 | 20,528 | 21 | ||||||||||||
| 2004 | 56,610 | 35 | 54,486 | 2,159 | ||||||||||||
For 2002, the Company entered into a corporate aggregate reinsurance treaty covering substantially all of the Company’s
The Company has an aggregate reinsurance treaty related to the 1999 through 2001 accident years that covers substantially allor cost of the Company’s property and casualty linesreinsurance contract, as ceded premiums. The remainder of business (the Aggregate Cover). The Aggregate Cover provides for two sections of coverage. These coverages attach at defined loss ratios for each accident year. Coverage under the first section of the Aggregate Cover, which is available for all accident years covered by the treaty, has a $500 million limit per accident year of ceded losses and an aggregate limit of $1 billion of ceded losses for the three accident years. The ceded premiums associated with the first section are a percentage of ceded losses and for each $500 million of limit the ceded premium is $230 million. The second section of the Aggregate Cover, which only relates to accident year 2001, provides additional coverage of up to $510 million of ceded losses for a maximum ceded premium of $310 million. Under the Aggregate Cover, interest charges on the funds withheld liability accrue at 8% per annum. The aggregate loss ratio for the three-year period has exceeded certain thresholds which requires additional premiums to be paid and an increase in the rate at which interest charges are accrued. This rate will increase to 8.25% per annum commencing in 2006. Also, if an additional aggregate loss ratio threshold is exceeded, additional premiums of 10% of amounts in excess of the aggregate loss ratio threshold are to be paid retroactively with interest.
In 2001, as a result of reserve additions including those related to accident year 1999, the remaining $500 million limit related to the 1999 accident year under the first section was fully utilized and losses of $510 million were ceded under the second section as a result of losses related to the WTC event. During 2003, as a result of the unfavorable net prior year development recorded related to accident years 2000 and 2001, the $500 million limit related to the 2000 and 2001 accident years under the first section was fully utilized and losses of $500 million were ceded under the first section of the Aggregate Cover. The aggregate limits for the Aggregate Cover have been fully utilized.
The impact of the Aggregate Cover was as follows:
Impact of Aggregate Cover
| Year ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||
| Ceded earned premium | $ | (1 | ) | $ | (258 | ) | $ | – | ||||
| Ceded claim and claim adjustment expenses | – | 500 | – | |||||||||
| Interest charges | (82 | ) | (147 | ) | (51 | ) | ||||||
Pretax benefit (expense) | $ | (83 | ) | $ | 95 | $ | (51 | ) | ||||
In 2001, the Company entered into a one-year aggregate reinsurance treaty related to the 2001 accident year covering substantially all property and casualty lines of business in the Continental Casualty Company pool (the
146110
CCC Cover).
Aton specified portions of the Company’s discretion, the contract can be commuted annually on the anniversary date of the contract.domestic property and casualty business. The CCC Cover requires mandatory commutation onremaining treaty is fully utilized and had no related funds withheld liability at December 31, 2010, if the agreement has not been commuted on or before such date. Upon mandatory commutation of the CCC Cover, the reinsurer is required to release to2006. In 2003, the Company the existing balancediscontinued purchases of the funds withheld account if the unpaid ultimate ceded losses at the time of commutation are less than or equal to the funds withheld account balance. If the unpaid ultimate ceded losses at the time of commutation are greater than the funds withheld account balance, the reinsurer will release the existing balance of the funds withheld account and pay CNA the present value of the projected amount the reinsurer would have had to pay from its own funds absent a commutation. The present value is calculated using 1-year LIBOR as of the date of the commutation.
The impact of the CCC Cover was as follows:
Impact of CCC Cover
| Year ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||
| Ceded earned premium | $ | – | $ | (100 | ) | $ | (101 | ) | ||||
| Ceded claim and claim adjustment expenses | – | 143 | 148 | |||||||||
| Interest charges | (91 | ) | (59 | ) | (37 | ) | ||||||
Pretax (expense) benefit | $ | (91 | ) | $ | (16 | ) | $ | 10 | ||||
147111
| Years ended December 31 | ||||||||||||||||
| (In millions) | Aggregate Cover | CCC Cover | All Other | Total | ||||||||||||
2006 | ||||||||||||||||
| Ceded earned premium | $ | — | $ | — | $ | (11 | ) | $ | (11 | ) | ||||||
| Ceded claim and claim adjustment expense | — | — | (113 | ) | (113 | ) | ||||||||||
| Ceding commissions | — | — | — | — | ||||||||||||
| Interest charges | — | (40 | ) | (19 | ) | (59 | ) | |||||||||
Pretax expense | $ | — | $ | (40 | ) | $ | (143 | ) | $ | (183 | ) | |||||
2005 | ||||||||||||||||
| Ceded earned premium | $ | (17 | ) | $ | — | $ | 48 | $ | 31 | |||||||
| Ceded claim and claim adjustment expense | (244 | ) | — | (154 | ) | (398 | ) | |||||||||
| Ceding commissions | — | — | (27 | ) | (27 | ) | ||||||||||
| Interest charges | (57 | ) | (66 | ) | (34 | ) | (157 | ) | ||||||||
Pretax expense | $ | (318 | ) | $ | (66 | ) | $ | (167 | ) | $ | (551 | ) | ||||
2004 | ||||||||||||||||
| Ceded earned premium | $ | (1 | ) | $ | — | $ | (19 | ) | $ | (20 | ) | |||||
| Ceded claim and claim adjustment expense | — | — | 15 | 15 | ||||||||||||
| Ceding commissions | — | — | 2 | 2 | ||||||||||||
| Interest charges | (82 | ) | (91 | ) | (72 | ) | (245 | ) | ||||||||
Pretax expense | $ | (83 | ) | $ | (91 | ) | $ | (74 | ) | $ | (248 | ) | ||||
| Years ended December 31 | ||||||||||||
| (In millions) | 2006 | 2005 | 2004 | |||||||||
| Standard Lines | $ | (155 | ) | $ | (399 | ) | $ | (185 | ) | |||
| Specialty Lines | (4 | ) | (41 | ) | (1 | ) | ||||||
| Corporate and Other | (24 | ) | (111 | ) | (62 | ) | ||||||
Pretax benefit (expense) | $ | (183 | ) | $ | (551 | ) | $ | (248 | ) | |||
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| December 31 (In millions) | 2004 | 2003 | ||||||||||||||
| December 31 | ||||||||||||||||
| (In millions) | 2006 | 2005 | ||||||||||||||
| Variable rate debt: | ||||||||||||||||
| Credit facility – CNA Surety, due September 30, 2005 | $ | 25 | $ | 30 | ||||||||||||
| Term loan – CNA Surety, due through September 30, 2005 | 10 | 20 | ||||||||||||||
| Credit facility – CNA Surety, due June 30, 2008 | $ | — | $ | 20 | ||||||||||||
| Debenture – CNA Surety, face amount of $31, due April 29, 2034 | 30 | – | 31 | 31 | ||||||||||||
| Credit facility – CNAF, due April 30, 2004 | – | 250 | ||||||||||||||
| Senior notes: | ||||||||||||||||
| 6.500%, face amount of $493, due April 15, 2005 | 493 | 492 | ||||||||||||||
| 6.750%, face amount of $250, due November 15, 2006 | 249 | 249 | — | 250 | ||||||||||||
| 6.450%, face amount of $150, due January 15, 2008 | 149 | 149 | 150 | 149 | ||||||||||||
| 6.600%, face amount of $200, due December 15, 2008 | 199 | 199 | 200 | 199 | ||||||||||||
| 6.000%, face amount of $400, due August 15, 2011 | 398 | — | ||||||||||||||
| 8.375%, face amount of $70, due August 15, 2012 | 69 | 69 | 69 | 69 | ||||||||||||
| 5.850%, face amount of $549, due December 15, 2014 | 546 | – | 546 | 546 | ||||||||||||
| 6.500%, face amount of $350, due August 15, 2016 | 348 | — | ||||||||||||||
| 6.950%, face amount of $150, due January 15, 2018 | 149 | 149 | 149 | 149 | ||||||||||||
| Debenture, 7.250%, face amount of $243, due November 15, 2023 | 241 | 241 | 241 | 241 | ||||||||||||
| Capital leases, 10.400%-11.500%, due through December 31, 2011 | – | 33 | ||||||||||||||
| Other debt, 1.000%-11.500%, due through 2019 | 47 | 23 | ||||||||||||||
| Surplus notes: | ||||||||||||||||
| Encompass Insurance Company of America (EICA) surplus note, face amount of $50, due March 31, 2006 | 50 | – | ||||||||||||||
| Other debt, 1.000%-6.850%, due through 2019 | 24 | 36 | ||||||||||||||
Total debt | $ | 2,257 | $ | 1,904 | $ | 2,156 | $ | 1,690 | ||||||||
| Short term debt | $ | 531 | $ | 263 | $ | — | $ | 252 | ||||||||
| Long term debt | 1,726 | 1,641 | 2,156 | 1,438 | ||||||||||||
Total debt | $ | 2,257 | $ | 1,904 | $ | 2,156 | $ | 1,690 | ||||||||
proceeds from the public offering discussed below were used to repay these notes.
On December 15, 20042006, CNAF completed its sale of $549sold $400 million of 5.85%6.0% five-year senior notes and $350 million of 6.5% ten-year senior notes in a public offering. During 2004, Encompass Insurance Company of America (EICA), a wholly owned subsidiary of the Company, sold a $50 million surplus note to Allstate Insurance Company. The EICA note bears interest semi-annually at 2.5% per annum and is due on March 31, 2006. CNA plans to seek approval from the insurance regulatory authority for repayment of the surplus note at maturity.
In May of 2004, CNA Surety, a 64% owned and consolidated subsidiary of CNA, issued privately, through a wholly-owned trust, $30 million of preferred securities through two pooled transactions. These securities bear interest at a rate of LIBOR plus 337.5 basis points with a thirty-year term and are redeemable after five years. The securities were issued by CNA Surety Capital Trust I (Issuer Trust). The sole asset of the Issuer Trust consists of a $31 million junior subordinated debenture issued by CNA Surety to the Issuer Trust. The subordinated debenture bears interest at a rate of LIBOR plus 337.5 basis points and matures in April of 2034. As of December 31, 2004, the interest rate on the junior subordinated debenture was 5.7%.
148
On September 30, 2003, CNA Surety entered into a $50 million credit agreement, which consisted of a $30 million two-year revolving credit facility and a $20 million two-year term loan, with semi-annual principal payments of $5 million. The credit agreement is an amendment to a $65 million credit agreement, extending the revolving loan termination date from September 30, 2003 to September 30, 2005. The new revolving credit facility was fully utilized at inception. In June of 2004, CNA Surety reduced the outstanding borrowings under the credit facility by $10 million, and in September of 2004, CNA Surety increased the outstanding borrowings under the credit facility by $5 million to fund the semi-annual term loan payment.
Under the amended credit facility agreement, CNA Surety pays a facility fee of 35.0 basis points on the revolving credit portion of the facility, interest at LIBOR plus 90 basis points, and for utilization greater than 50% of the amount available to borrow an additional fee of 5.0 basis points. On the term loan, CNA Surety pays interest at LIBOR plus 62.5 basis points. At December 31, 2004, the weighted-average interest rate on the $35 million of outstanding borrowings under the credit agreement, including facility fees and utilization fees, was 3.3%. Effective January 30, 2003, CNA Surety entered into a swap agreement on the term loan portion of the agreement which uses the 3-month LIBOR to determine the swap increment. As a result, the effective interest rate on the $10 million in outstanding borrowings on the term loan was 2.77% at December 31, 2004. On the $25 million revolving credit agreement, the effective interest rate at December 31, 2004 was 3.49%.
The combined aggregate maturities for debt at December 31, 20042006 are presented in the following table.
| (In millions) | ||||||||
| 2005 | $ | 531 | ||||||
| 2006 | 304 | |||||||
| 2007 | 12 | $ | — | |||||
| 2008 | 354 | 350 | ||||||
| 2009 | 5 | — | ||||||
| 2010 | — | |||||||
| 2011 | 400 | |||||||
| Thereafter | 1,061 | 1,418 | ||||||
| Less original issue discount | (10 | ) | (12 | ) | ||||
Total | $ | 2,257 | $ | 2,156 | ||||
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CNA’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements. The assets of the plans are invested primarily in U.S. government and mortgage-backed securities with the balance in short term investments, equity securities and limited partnerships.
CNA provides certain healthcare and life insurance benefits to eligible retired employees, their covered dependents and their beneficiaries. The funding for these plans is generally to pay covered expenses as they are incurred.
In September of 2004, the Company announced significant changes to the CNA Retiree Health and Group Benefits plan affecting current and future retirees. Benefit changes were effective January 1, 2005 and include: elimination of dental plan subsidy, elimination of Medicare Part B premium reimbursement, reduction of retiree life insurance to a maximum of $10,000 per retiree and elimination of various medical plan options. The effects of these changes are
149
reflected in the 2004 actuarial valuation beginning October 1, 2004, resulting in a reduction to the accumulated postretirement benefit obligation of $137 million at December 31, 2004 and a reduction in the net periodic benefit cost of $5 million for the year ended December 31, 2004.
In 2000, approximately 60% of CCC’s eligible employees elected to forego earning additional benefits in CNA’sthe CNA Retirement Plan, a defined benefit pension plan. These employees maintain an “accrued pension account” within the defined benefit pension plan that is credited with interest annually at the 30-year treasury rate. Instead, employees who elected to discontinue accruing benefits in the defined benefit pension plan receive certain enhanced employer contributions in the CNA Savings and Capital Accumulation Plan (discussed below).discussed below. Employees hired on or after January 1, 2000 are not eligible to participate in the CNA Retirement Plan.
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| Pension Benefits | Postretirement Benefits | Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||
| (In millions) | 2004 | 2003 | 2004 | 2003 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||||||||
| Benefit obligation at January 1 | $ | 2,403 | $ | 2,243 | $ | 345 | $ | 385 | $ | 2,636 | $ | 2,527 | $ | 210 | $ | 180 | ||||||||||||||||
| Changes in benefit obligation: | ||||||||||||||||||||||||||||||||
| Service cost | 31 | 33 | 4 | 7 | 26 | 27 | 2 | 3 | ||||||||||||||||||||||||
| Interest cost | 145 | 146 | 17 | 22 | 142 | 145 | 10 | 10 | ||||||||||||||||||||||||
| Participants’ contributions | – | – | 9 | 8 | — | — | 7 | 8 | ||||||||||||||||||||||||
| Plan amendments | – | 1 | (138 | ) | (30 | ) | — | 1 | — | — | ||||||||||||||||||||||
| Actuarial gain (loss) | 104 | 150 | (26 | ) | (16 | ) | ||||||||||||||||||||||||||
| Curtailment/settlement | 2 | (25 | ) | – | – | |||||||||||||||||||||||||||
| Actuarial loss (gain) | (60 | ) | 87 | (34 | ) | 21 | ||||||||||||||||||||||||||
| Benefits paid | (164 | ) | (151 | ) | (31 | ) | (31 | ) | (152 | ) | (146 | ) | (19 | ) | (12 | ) | ||||||||||||||||
| Foreign currency translation | 6 | 6 | – | – | ||||||||||||||||||||||||||||
| Special termination benefits | 2 | — | — | — | ||||||||||||||||||||||||||||
| Foreign currency translation and other | 8 | (5 | ) | 1 | — | |||||||||||||||||||||||||||
| Benefit obligations at December 31 | 2,527 | 2,403 | 180 | 345 | 2,602 | 2,636 | 177 | 210 | ||||||||||||||||||||||||
| Fair value of plan assets at January 1 | 1,988 | 1,938 | – | – | 2,107 | 2,029 | — | — | ||||||||||||||||||||||||
| Change in plan assets: | ||||||||||||||||||||||||||||||||
| Actual return on plan assets | 164 | 200 | – | – | 226 | 161 | — | — | ||||||||||||||||||||||||
| Company contributions | 37 | 25 | 22 | 23 | 79 | 67 | 12 | 4 | ||||||||||||||||||||||||
| Participants’ contributions | – | – | 9 | 8 | — | — | 7 | 8 | ||||||||||||||||||||||||
| Curtailment/settlement | (1 | ) | (28 | ) | – | – | ||||||||||||||||||||||||||
| Benefits paid | (164 | ) | (151 | ) | (31 | ) | (31 | ) | (152 | ) | (146 | ) | (19 | ) | (12 | ) | ||||||||||||||||
| Foreign currency translation | 5 | 4 | – | – | ||||||||||||||||||||||||||||
| Foreign currency translation and other | (2 | ) | (4 | ) | — | — | ||||||||||||||||||||||||||
| Fair value of plan assets at December 31 | 2,029 | 1,988 | – | – | 2,258 | 2,107 | — | — | ||||||||||||||||||||||||
| Funded status | (498 | ) | (415 | ) | (180 | ) | (345 | ) | (344 | ) | (529 | ) | (177 | ) | (210 | ) | ||||||||||||||||
| Unrecognized net actuarial loss | 468 | 390 | 77 | 108 | 528 | 94 | ||||||||||||||||||||||||||
| Unrecognized net transition asset | (1 | ) | — | |||||||||||||||||||||||||||||
| Unrecognized prior service cost (benefit) | 9 | 11 | (202 | ) | (85 | ) | 9 | (174 | ) | |||||||||||||||||||||||
| Prepaid (accrued) benefit cost | $ | (21 | ) | $ | (14 | ) | $ | (305 | ) | $ | (322 | ) | $ | 7 | $ | (290 | ) | |||||||||||||||
| Amounts recognized in the Consolidated Balance Sheets: | ||||||||||||||||||||||||||||||||
| Amounts recognized in the Consolidated Balance Sheet: | ||||||||||||||||||||||||||||||||
| Prepaid benefit cost | $ | 21 | $ | 10 | $ | – | $ | – | 20 | — | ||||||||||||||||||||||
| Accrued benefit liability | (352 | ) | (235 | ) | (305 | ) | (322 | ) | (372 | ) | (290 | ) | ||||||||||||||||||||
| Intangible assets | 11 | 13 | – | – | 9 | — | ||||||||||||||||||||||||||
| Accumulated other comprehensive income | 299 | 198 | – | – | 350 | — | ||||||||||||||||||||||||||
| Prepaid (accrued) benefit cost | $ | (21 | ) | $ | (14 | ) | $ | (305 | ) | $ | (322 | ) | ||||||||||||||||||||
| Net amount recognized | $ | 7 | $ | (290 | ) | |||||||||||||||||||||||||||
| Amounts recognized in the Consolidated Balance Sheet: | ||||||||||||||||||||||||||||||||
| Other liabilities | (344 | ) | (177 | ) | ||||||||||||||||||||||||||||
| Net benefit plan liability at December 31 | $ | (344 | ) | $ | (177 | ) | ||||||||||||||||||||||||||
| Amounts recognized in Accumulated other comprehensive income, not yet recognized in net periodic benefit cost: | ||||||||||||||||||||||||||||||||
| Net transition asset | (1 | ) | — | |||||||||||||||||||||||||||||
| Prior service cost (credit) | 6 | (146 | ) | |||||||||||||||||||||||||||||
| Net actuarial loss | 381 | 55 | ||||||||||||||||||||||||||||||
| Net amount recognized | $ | 386 | $ | (91 | ) | |||||||||||||||||||||||||||
115
150
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets as of December 31, 2006 and 2005 are presented in the following table.
| Pension Plans with Accumulated Benefit Obligation | ||||||||
| in Excess of Plan Assets | ||||||||
| (In millions) | 2006 | 2005 | ||||||
| Projected benefit obligation | $ | 2,485 | $ | 2,567 | ||||
| Accumulated benefit obligation | 2,351 | 2,408 | ||||||
| Fair value of plan assets | 2,148 | 2,036 | ||||||
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
Pension benefits | ||||||||||||||||||||||||
| Service cost | $ | 31 | $ | 33 | $ | 34 | $ | 26 | $ | 27 | $ | 31 | ||||||||||||
| Interest cost on projected benefit obligation | 145 | 146 | 141 | 142 | 145 | 145 | ||||||||||||||||||
| Expected return on plan assets | (152 | ) | (146 | ) | (141 | ) | (162 | ) | (156 | ) | (152 | ) | ||||||||||||
| Prior service cost amortization | 2 | 3 | 3 | 2 | 2 | 2 | ||||||||||||||||||
| Actuarial loss | 13 | 8 | 4 | 25 | 21 | 13 | ||||||||||||||||||
| Curtailment gain | – | – | (8 | ) | ||||||||||||||||||||
| Settlement loss | 5 | 8 | 11 | — | — | 5 | ||||||||||||||||||
Net periodic pension cost | $ | 44 | $ | 52 | $ | 44 | $ | 33 | $ | 39 | $ | 44 | ||||||||||||
Postretirement benefits | ||||||||||||||||||||||||
| Service cost | $ | 4 | $ | 6 | $ | 5 | $ | 2 | $ | 3 | $ | 4 | ||||||||||||
| Interest cost on projected benefit obligation | 17 | 22 | 25 | 10 | 10 | 17 | ||||||||||||||||||
| Prior service cost amortization | (20 | ) | (16 | ) | (16 | ) | (28 | ) | (28 | ) | (20 | ) | ||||||||||||
| Actuarial loss | 3 | 4 | 5 | 4 | 4 | 3 | ||||||||||||||||||
Net periodic postretirement cost | $ | 4 | $ | 16 | $ | 19 | ||||||||||||||||||
Pension benefits | ||||||||||||||||||||||||
| Increase (decrease) in minimum liability included in other comprehensive income | $ | 101 | $ | 176 | $ | (2 | ) | |||||||||||||||||
Net periodic postretirement (benefit) cost | $ | (12 | ) | $ | (11 | ) | $ | 4 | ||||||||||||||||
Pension and postretirement benefits | ||||||||||||||||||||||||
| Increase (decrease) in FAS 87 minimum liability included in other comprehensive income | $ | (124 | ) | $ | 51 | $ | 101 | |||||||||||||||||
| Increase in FAS 158 liability included in accumulated other comprehensive income | 71 | — | — | |||||||||||||||||||||
| Total increase (decrease) | $ | (53 | ) | $ | 51 | $ | 101 | |||||||||||||||||
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Weighted-average
| December 31, 2006 | Before Application of | After Application of | ||||||||||
| (In millions) | SFAS 158 | Adjustments | SFAS 158 | |||||||||
| Deferred income taxes | $ | 830 | $ | 25 | $ | 855 | ||||||
| Other assets | 614 | (22 | ) | 592 | ||||||||
| Total assets | 60,280 | 3 | 60,283 | |||||||||
| Other liabilities | 2,691 | 49 | 2,740 | |||||||||
| Total liabilities | 50,131 | 49 | 50,180 | |||||||||
| Minority interest | 337 | (2 | ) | 335 | ||||||||
| Accumulated other comprehensive income, net of minority interest of $2 million | 593 | (44 | ) | 549 | ||||||||
| Total stockholders’ equity | 9,812 | (44 | ) | 9,768 | ||||||||
| December 31 | 2004 | 2003 | 2002 | 2006 | 2005 | |||||||||||||||
Pension benefits | ||||||||||||||||||||
| Discount rate | 5.875 | % | 6.25 | % | 6.75 | % | 5.750 | % | 5.625 | % | ||||||||||
| Expected return on plan assets | 8.00 | 8.00 | 8.00 | |||||||||||||||||
| Expected long term rate of return | 8.00 | 8.00 | ||||||||||||||||||
| Rate of compensation increases | 5.83 | 5.83 | 5.83 | 5.83 | 5.83 | |||||||||||||||
Postretirement benefits | ||||||||||||||||||||
| Discount rate | 5.875 | % | 6.25 | % | 6.75 | % | 5.625 | % | 5.500 | % | ||||||||||
Weighted-average
| December 31 | 2004 | 2003 | 2002 | 2006 | 2005 | 2004 | ||||||||||||||||||
Pension benefits | ||||||||||||||||||||||||
| Discount rate | 6.22 | % | 6.75 | % | 7.25 | % | 5.625 | % | 5.875 | % | 6.22 | % | ||||||||||||
| Expected return on plan assets | 8.00 | 8.00 | 8.00 | |||||||||||||||||||||
| Expected long term rate of return | 8.00 | 8.00 | 8.00 | |||||||||||||||||||||
| Rate of compensation increases | 5.83 | 5.83 | 5.83 | 5.83 | 5.83 | 5.83 | ||||||||||||||||||
Postretirement benefits | ||||||||||||||||||||||||
| Discount rate | 6.19 | % | 6.75 | % | 7.25 | % | 5.500 | % | 5.875 | % | 6.190 | % | ||||||||||||
| (In millions) | Pension Benefits | Postretirement Benefits | ||||||
| Amortization of net actuarial loss | $ | 13 | $ | 2 | ||||
| Amortization of prior service cost (benefit) | 1 | (18 | ) | |||||
Total estimated amounts to be recognized | $ | 14 | $ | (16 | ) | |||
151117
| Percentage of Plan Assets | Percentage of Plan Assets | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2004 | 2003 | 2006 | 2005 | |||||||||||||
Asset Category | ||||||||||||||||
| Fixed maturity securities | 47 | % | 56 | % | 48 | % | 24 | % | ||||||||
| Equity securities | 17 | 13 | 26 | 25 | ||||||||||||
| Limited Partnerships | 15 | 11 | ||||||||||||||
| Limited partnerships | 22 | 15 | ||||||||||||||
| Short term investments | 21 | 20 | 2 | 33 | ||||||||||||
| Other | 2 | 3 | ||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
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2006.
| Pension | Postretirement | |||||||||||||||
| Pension | Postretirement | Benefits | Benefits | |||||||||||||
| (In millions) | Benefits | Benefits | ||||||||||||||
| 2005 | $ | 137 | $ | 15 | ||||||||||||
| 2006 | 138 | 14 | ||||||||||||||
| 2007 | 139 | 14 | 150 | 12 | ||||||||||||
| 2008 | 141 | 13 | 148 | 12 | ||||||||||||
| 2009 | 144 | 13 | 149 | 13 | ||||||||||||
| Thereafter | 777 | 71 | ||||||||||||||
Total | $ | 1,476 | $ | 140 | ||||||||||||
| 2010 | 150 | 13 | ||||||||||||||
| 2011 | 153 | 14 | ||||||||||||||
| 2012-2016 | 826 | 71 | ||||||||||||||
152
In 2005,2007, CNA expects to contribute $7$58 million to its pension planplans and $14$12 million to its postretirement healthcare and life insurance benefit plans.
In addition, these employees are eligible to receive additional discretionary contributions of up to 2% of eligible compensation and an additional Company match of up to 80% of the first 6% of eligible compensation contributed by the employee. These contributions are made at the discretion of management and are contributed to participant accounts in the first quarter of the year following management’s determination of the discretionary amounts. EmployeesAs of December 31, 2006, employees do not vest in these contributions until reaching five years of service.
Effective January 1, 2007, employees vest in these contributions ratably over five years, retroactively applied.
2004.
119
2004.
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Option | Option | Option | ||||||||||||||||||||||
| Number | Price per | Number | Price per | Number | Price per | |||||||||||||||||||
| Of Shares | Share | Of Shares | Share | Of Shares | Share | |||||||||||||||||||
| Balance at January 1 | 1,434,800 | $ | 29.97 | 1,146,850 | $ | 31.80 | 892,100 | $ | 33.43 | |||||||||||||||
| Options granted | 350,400 | 26.30 | 384,000 | 24.61 | 440,200 | 28.93 | ||||||||||||||||||
| Options exercised | (2,900 | ) | 26.28 | – | – | – | – | |||||||||||||||||
| Options forfeited | (308,300 | ) | 29.63 | (96,050 | ) | 30.51 | (185,450 | ) | 32.79 | |||||||||||||||
Balance at December 31 | 1,474,000 | $ | 29.17 | 1,434,800 | $ | 29.97 | 1,146,850 | $ | 31.80 | |||||||||||||||
Options exercisable at December 31 | 827,450 | $ | 31.16 | 551,575 | $ | 32.73 | 306,975 | $ | 33.63 | |||||||||||||||
Weighted-average fair value per share of options granted | $ | 7.74 | $ | 5.43 | $ | 6.45 | ||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Option | Option | Option | ||||||||||||||||||||||
| Number | Price per | Number | Price per | Number | Price per | |||||||||||||||||||
| of Awards | Award | of Awards | Award | of Awards | Award | |||||||||||||||||||
| Balance at January 1 | 1,628,600 | $ | 28.71 | 1,474,000 | $ | 29.17 | 1,434,800 | $ | 29.97 | |||||||||||||||
| Awards granted | 327,000 | 30.98 | 328,800 | 27.27 | 350,400 | 26.30 | ||||||||||||||||||
| Awards exercised | (236,500 | ) | 30.71 | (42,050 | ) | 28.60 | (2,900 | ) | 26.28 | |||||||||||||||
| Awards forfeited | (24,200 | ) | 29.05 | (132,150 | ) | 30.38 | (308,300 | ) | 29.63 | |||||||||||||||
Balance at December 31 | 1,694,900 | $ | 28.86 | 1,628,600 | $ | 28.71 | 1,474,000 | $ | 29.17 | |||||||||||||||
Awards exercisable at December 31 | 965,400 | $ | 29.13 | 963,650 | $ | 30.17 | 827,450 | $ | 31.16 | |||||||||||||||
Weighted average fair value per share of awards granted | $ | 10.73 | $ | 7.48 | $ | 7.74 | ||||||||||||||||||
153
During 2006, the Company awarded SARs totaling 327,000 shares. The weighted-averageSARs balance at December 31, 2006 was 319,000 shares with 8,000 shares forfeited.
$2 million.
120
2006.
| Future | Future | |||||||||||||||
| Future | Future | Minimum | Minimum | |||||||||||||
| Minimum | Minimum | Lease | Sublease | |||||||||||||
| Lease | Sublease | Payments | Receipts | |||||||||||||
| (In millions) | Payments | Receipts | ||||||||||||||
| 2005 | $ | 64 | $ | 4 | ||||||||||||
| 2006 | 55 | 3 | ||||||||||||||
| 2007 | 46 | 1 | $ | 49 | $ | 7 | ||||||||||
| 2008 | 33 | 1 | 43 | 6 | ||||||||||||
| 2009 | 23 | 1 | 35 | 5 | ||||||||||||
| 2010 | 31 | 5 | ||||||||||||||
| 2011 | 25 | 4 | ||||||||||||||
| Thereafter | 72 | 4 | 51 | 5 | ||||||||||||
Total | $ | 293 | $ | 14 | $ | 234 | $ | 32 | ||||||||
CNAF has provided parent company guarantees, which expire in 2015, related to lease obligations of certain subsidiaries. Certain of those subsidiaries have been sold; however, the lease guarantees remain in effect. CNAF would be required to remit prompt payment on leases in question if the primary obligor fails to observe and perform its covenants under the lease agreements. The maximum potential amount of future payments that the Company could be required to pay under these guarantees are approximately $8 million at December 31, 2004.
154
shareholders, on a joint and several basis, have guaranteed an operating lease for an office building, which expires in 2016.
2008.
121
During 2002, CNAF sold $750 million of a new issue of preferred stock, designated Series H Cumulative Preferred Issue (Series H Issue), to Loews. The Series H Issue accrues cumulative dividends at an initial rate of 8% per year, compounded annually. As of December 31, 2004, the Company had $127 million of undeclared (and therefore unrecorded) but accumulated dividends.
The Company has provided guarantees related to irrevocable standby letters of credit for certain of its subsidiaries. Certain of these subsidiaries have been sold; however, the irrevocable standby letter of credit guarantees remain in effect. The Company would be required to make payment on the letters of credit in question if the primary obligor drew down on these letters of credit and failed to repay such loans in accordance with the terms of the letters of credit. The maximum potential amount of future payments that CNA could be required to pay under these guarantees is approximately $30 million at December 31, 2004.
2006.
155
date to the expiration of the relevant statutes of limitation. As of December 31, 2004,2006, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and assetsthird party loans was $950$933 million.
Capital stock (in whole numbers) is composed of the following:
| December 31 | 2004 | 2003 | ||||||
Preferred stock, without par value, non-voting | ||||||||
| Authorized | 12,500,000 | 12,500,000 | ||||||
| Issued and outstanding: | ||||||||
| Series H (stated value $100,000 per share, held by Loews) | 7,500 | 7,500 | ||||||
| Series I (stated value $23,200 per share, held by Loews) | – | 32,327 | ||||||
Common stock, par value $2.50 | ||||||||
| Authorized | 500,000,000 | 500,000,000 | ||||||
| Issued | 258,177,285 | 225,850,270 | ||||||
| Outstanding | 255,953,958 | 223,617,337 | ||||||
| Treasury stock | 2,223,327 | 2,232,933 | ||||||
On April 20, 2004, CNAF issued 32,327,015 shares of common stock to Loews in conjunction with the conversion of the $750 million Series I convertible preferred stock issued during 2003. The number of shares was determined utilizing a conversion price per share of common stock that was based on average market prices of CNAF common stock from November 17, 2003 through November 21, 2003. The Series I convertible preferred stock was sold to Loews during 2003 and the proceeds were applied by CNAF to increase the statutory surplus of CNAF’s principal insurance subsidiary, CCC.
During 2002, CNAF sold $750 million of a then new issue of preferred stock, designated Series H Cumulative Preferred Issue (Series H Issue), to Loews. The terms of the Series H Issue were approved by a special committee of independent members of CNAF’s Board of Directors. The proceeds from the Series H Issue were applied by CNAF to increase the statutory surplus of CNAF’s principal insurance subsidiary, CCC.
The Series H Issue accrueswas held by Loews and accrued cumulative dividends at an initial rate of 8% per year, compounded annually. It will be adjusted quarterly to a rate equal to 400 basis points aboveIn August 2006, the ten-year U.S. Treasury rate beginning with the quarterly dividend after the first triggering event to occur of either (i) an increase by two intermediate rating levels of the financial strength rating of CCC from its rating at the time of issuance by any of A.M. Best Company Standard & Poor’s or Moody’s or (ii) one year following an increase by one intermediate rating level of the financial strength rating of CCC by any one of those rating agencies. Accrued but unpaid cumulative dividends cannot be paid onrepurchased the Series H Issue unless and until one of the two triggering events described above has occurred. Beginning with the quarter following an increase of one intermediate rating level in CCC’s financial strength rating,
156
however, current (but not accrued cumulative) quarterly dividends can be paid. As of December 31, 2004, the Company has $127for approximately $993 million, of undeclared (and therefore unrecorded) but accumulated dividends.
The Series H Issue is senior to CNAF’s common stock asa price equal to the paymentliquidation preference.
private placement for approximately $264.5 million.
2005.
122
During 2003 and 2004,
During 2003, two of the Company’s insurance subsidiaries received approval from their respective domiciliary state insurance departments for two permitted practices related to the statutory provision for reinsurance, or the uncollectible reinsurance reserve. The two permitted practices allowed CCC to reflect in its financial statements the statutory provision for reinsurance attributable to The Continental Insurance Company (CIC) as a result of a reinsurance agreement implemented in the fourth quarter of 2003 between these two companies. During 2004, the Company’s subsidiaries continued to utilize this accounting treatment with the approval of the respective domiciliary state insurance departments. However, in 2004 it was determined by the domiciliary state insurance departments that this accounting treatment is no longer considered a permitted practice. This accounting treatment had no effect on the combined statutory surplus for these two subsidiaries in 2004 or 2003.
During 2004, CIC received approval from its domiciliary state insurance department for a permitted practice that allows CIC to classify voluntary pools as authorized, that are unauthorized in South Carolina but were classified as authorized in New Hampshire, CIC’s former state of domicile, in order to allow credit for the related reinsurance balances. Due to CIC’s redomestication to South Carolina effective January 1, 2004, this permitted practice was requested and has been granted for the reporting periods March 31, 2004 through December 31, 2004. This permitted practice was intended to allow CIC time to work with its domiciliary state insurance department to better understand the appropriate treatment of voluntary pools for Schedule F purposes on a South Carolina basis. The Company has now determined that pool members representing approximately 80% of the participation in the underlying pools are either currently licensed or authorized in the State of South Carolina. As of December 31, 2004, the ceded reserve credit for the entire reinsurance recoverable from voluntary pools classified as authorized is $306 million. The
157
impact of this permitted practice on CIC’s statutory surplus has not been fully quantified as the Company’s review with its domiciliary state insurance department is still in process.
CNAF’s ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from its subsidiaries. The payment of dividends to CNAF by its insurance subsidiaries without prior approval of the insurance department of each subsidiary’s domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments.
CNA’sapplicable insurance company.
As a result of the adverse charges taken in 2003, a capital plan was developed which involved, among other actions, the issuance of CCC surplus notes to Loews. Surplus notes are financial instruments with a stated maturity date and scheduled interest payments, issued by insurance enterprises with the approval of the insurer’s domiciliary state. All payments of interest and principal on these notes are subject to the prior approval of the Illinois Insurance Department. Surplus notes are included as surplus for statutory accounting purposes, but are classified as debt instruments under GAAP. The CCC surplus notes issued in February of 2004 were repaid to Loews as of December 31, 2004.
| Statutory Capital and Surplus | Statutory Net Income | |||||||||||||||||||||||||||||||||||||||
| Statutory Capital and Surplus | Statutory Net (Loss) Income | December 31 | Years Ended December 31 | |||||||||||||||||||||||||||||||||||||
| December 31 (a) | Years Ended December 31 | 2006 | 2005 | 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||||||||
(In millions) | 2004 | 2003 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||||||
| Property and casualty companies | $ | 6,998 | $ | 6,170 | $ | 661 | $ | (1,484 | ) | $ | 731 | $ | 8,137 | $ | 6,940 | $ | 721 | $ | 550 | $ | 694 | |||||||||||||||||||
| Life and group insurance companies | 1,178 | 707 | 334 | 115 | 37 | 687 | 627 | 67 | 65 | 334 | ||||||||||||||||||||||||||||||
| (a) | Surplus includes the property and casualty companies’ equity ownership of the life |
158123
(Loss)
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||
| Net income (loss) | $ | 441 | $ | (1,433 | ) | $ | 155 | |||||
| Other comprehensive income (loss): | ||||||||||||
| Change in unrealized gains/losses on general account investments: | ||||||||||||
| Holding gains arising during the period | 486 | 262 | 305 | |||||||||
| Net unrealized gains/losses at beginning of period included in realized gains/losses during the period | (637 | ) | 199 | 237 | ||||||||
| Net change in unrealized gains/losses on general account investments | (151 | ) | 461 | 542 | ||||||||
| Net change in unrealized gains on separate accounts and other | (66 | ) | 6 | 53 | ||||||||
| Foreign currency translation adjustment | 22 | 50 | (18 | ) | ||||||||
| Net change in derivative instruments designated as cash flow hedge | (4 | ) | – | – | ||||||||
| Net change in minimum pension liability | (101 | ) | (176 | ) | 2 | |||||||
| Allocation to participating policyholders’ and minority interests | 19 | (7 | ) | (19 | ) | |||||||
| Other comprehensive income (loss), before tax and cumulative effect of change in accounting principles | (281 | ) | 334 | 560 | ||||||||
| Deferred income tax (expense) benefit related to other comprehensive income (loss) | 90 | (97 | ) | (182 | ) | |||||||
| Other comprehensive income (loss), net of tax | (191 | ) | 237 | 378 | ||||||||
Total comprehensive income (loss) | $ | 250 | $ | (1,196 | ) | $ | 533 | |||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||
| (In millions) | ||||||||||||
| Net income | $ | 1,108 | $ | 264 | $ | 425 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Change in unrealized gains (losses) on general account investments: | ||||||||||||
| Holding gains (losses) arising during the period, net of tax benefit (expense) of $(68), $72 and $(170) | 127 | (136 | ) | 316 | ||||||||
| Net unrealized (gains) losses at beginning of period included in realized gains (losses) during the period, net of tax expense of $6, $71 and $223 | (11 | ) | (131 | ) | (414 | ) | ||||||
| Net change in unrealized gains (losses) on general account investments, net of tax benefit (expense) of $(62), $143 and $53 | 116 | (267 | ) | (98 | ) | |||||||
| Net change in unrealized gains (losses) on discontinued operations, separate accounts and other, net of tax benefit of $4, $16 and $0 | (6 | ) | 4 | (68 | ) | |||||||
| Net change in foreign currency translation adjustment | 42 | (24 | ) | 24 | ||||||||
| Net change in derivative instruments designated as cash flow hedge, net of tax benefit of $0, $0 and $1 | — | — | (3 | ) | ||||||||
| Net change in minimum pension liability, net of tax benefit (expense) of $(44), $18 and $36 | 80 | (33 | ) | (65 | ) | |||||||
| Allocation to participating policyholders’ and minority interests | 4 | 18 | 19 | |||||||||
| Other comprehensive income (loss), net of tax benefit (expense) of $(102), $177 and $90 | 236 | (302 | ) | (191 | ) | |||||||
Total comprehensive income (loss) | $ | 1,344 | $ | (38 | ) | $ | 234 | |||||
In the preceding table, deferred income tax benefit and expense related to other comprehensive income is attributable to each of the components of other comprehensive income in equal proportion except for the foreign currency translation adjustment, for which there are no deferred taxes.
| December 31 (In millions) | 2004 | 2003 | ||||||
| Cumulative foreign currency translation adjustment | $ | 63 | $ | 41 | ||||
| Minimum pension liability, net of tax of $105 and $69 | (194 | ) | (129 | ) | ||||
| Net unrealized gains on investments and other, net of tax of $430 and $484 | 781 | 929 | ||||||
Accumulated other comprehensive income | $ | 650 | $ | 841 | ||||
| December 31 | 2006 | 2005 | ||||||
| (In millions) | ||||||||
| Cumulative foreign currency translation adjustment | $ | 93 | $ | 51 | ||||
| Minimum pension liability, net of tax benefit of $79 and $123 | (147 | ) | (227 | ) | ||||
| Adjustment to initially apply FAS 158, net of tax benefit of $25 | (46 | ) | — | |||||
| Net unrealized gains on investments and other, net of tax expense of $329 and $271 | 649 | 535 | ||||||
Accumulated other comprehensive income | $ | 549 | $ | 359 | ||||
As a result of the Company’s decisions to focus on property and casualty operations and to exit certain businesses, the Company revised its reportable segment structure in the first quarter of 2004 to reflect the changes in its core operations and how management makes business decisions.
159
products sold to large corporations in the U.S. as well as globally. Specialty Lines provides a broad array of professional, financial and specialty property and casualty products and services. Life and Group Non-Core primarily includes the results of the life and group lines of business that have either been sold or placed in run-off. Corporate and Other Non-Core primarily includes the results of certain property and casualty lines of business placed in run-off, including CNA Re (formerly a stand-alone property and casualty segment).Re. This segment also includes the results related to the centralized adjusting and settlement of APMT claims as well as the results of
124
The changes made to the Company’s reportable segments were as follows: 1) CNA Global (formerly included in Specialty Lines) which consists of marine and global standard lines is now included in Standard Lines; 2) CNA Guaranty and Credit (formerly included in Specialty Lines) is currently in run-off and is now included in the Corporate and Other Non-Core segment; 3) CNA Re is currently in run-off and is also now included in the Corporate and Other Non-Core segment; 4) Group Operations and Life Operations (formerly separate reportable segments) have now been combined into one reportable segment where the run-off of the retained group and life products will be managed; 5) certain run-off life and group operations formerly included in the Corporate and Other segment are now included in the Life and Group Non-Core segment.
2004.
160
The Company’s investment portfolio is monitored by management through analyses of various factors including unrealized gains and losses on securities, portfolio duration and exposure to interest rate, market and credit risk. Based on such analyses, the Company may impair an investment security in accordance with its policy, or sell a security. Such activities will produce realized gains and losses.
161125
| Corporate | Corporate | |||||||||||||||||||||||||||||||||||||||||||||||
| Standard | Specialty | Life and Group | and Other | Standard | Specialty | Life and Group | and Other | |||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2004 (In millions) | Lines | Lines | Non-Core | Non-Core | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2006 | Lines | Lines | Non-Core | Non-Core | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net earned premiums | $ | 4,917 | $ | 2,277 | $ | 921 | $ | 128 | $ | (34 | ) | $ | 8,209 | $ | 4,413 | $ | 2,555 | $ | 641 | $ | (1 | ) | $ | (5 | ) | $ | 7,603 | |||||||||||||||||||||
| Net investment income | 495 | 246 | 692 | 241 | – | 1,674 | 991 | 403 | 698 | 320 | — | 2,412 | ||||||||||||||||||||||||||||||||||||
| Other revenues | 129 | 121 | 91 | 40 | (86 | ) | 295 | 96 | 154 | 66 | 9 | (50 | ) | 275 | ||||||||||||||||||||||||||||||||||
| Total operating revenues | 5,541 | 2,644 | 1,704 | 409 | (120 | ) | 10,178 | 5,500 | 3,112 | 1,405 | 328 | (55 | ) | 10,290 | ||||||||||||||||||||||||||||||||||
| Claims, benefits and expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net incurred claims and benefits | 3,478 | 1,441 | 1,372 | 165 | (21 | ) | 6,435 | 3,093 | 1,546 | 1,195 | 190 | 1 | 6,025 | |||||||||||||||||||||||||||||||||||
| Policyholders’ dividends | 9 | 5 | (3 | ) | – | – | 11 | 18 | 4 | — | — | — | 22 | |||||||||||||||||||||||||||||||||||
| Amortization of deferred acquisition costs | 1,109 | 506 | 36 | 29 | – | 1,680 | 981 | 538 | 14 | 1 | — | 1,534 | ||||||||||||||||||||||||||||||||||||
| Other insurance related expenses | 593 | 88 | 291 | 10 | (13 | ) | 969 | 393 | 145 | 201 | 24 | (6 | ) | 757 | ||||||||||||||||||||||||||||||||||
| Other operating expenses | 94 | 113 | 76 | 141 | (86 | ) | 338 | |||||||||||||||||||||||||||||||||||||||||
| Restructuring and other related charges | — | — | — | (13 | ) | — | (13 | ) | ||||||||||||||||||||||||||||||||||||||||
| Other expenses | 128 | 139 | 58 | 126 | (50 | ) | 401 | |||||||||||||||||||||||||||||||||||||||||
| Total claims, benefits and expenses | 5,283 | 2,153 | 1,772 | 345 | (120 | ) | 9,433 | 4,613 | 2,372 | 1,468 | 328 | (55 | ) | 8,726 | ||||||||||||||||||||||||||||||||||
| Operating income (loss) from continuing operations before income tax and minority interest | 258 | 491 | (68 | ) | 64 | – | 745 | 887 | 740 | (63 | ) | — | — | 1,564 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on operating income | (27 | ) | (150 | ) | 39 | 14 | – | (124 | ) | |||||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on operating income (loss) | (258 | ) | (245 | ) | 49 | 4 | — | (450 | ) | |||||||||||||||||||||||||||||||||||||||
| Minority interest | (10 | ) | (17 | ) | – | – | – | (27 | ) | (12 | ) | (31 | ) | — | (1 | ) | — | (44 | ) | |||||||||||||||||||||||||||||
| Net operating income (loss) from continuing operations | 221 | 324 | (29 | ) | 78 | – | 594 | 617 | 464 | (14 | ) | 3 | — | 1,070 | ||||||||||||||||||||||||||||||||||
| Realized investment gains (losses), net of participating policyholders’ and minority interests | 219 | 84 | (615 | ) | 64 | – | (248 | ) | 76 | 28 | (50 | ) | 32 | — | 86 | |||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on realized investment gains (losses) | (80 | ) | (30 | ) | 230 | (25 | ) | – | 95 | (21 | ) | (10 | ) | 17 | (5 | ) | — | (19 | ) | |||||||||||||||||||||||||||||
Net income (loss) | $ | 360 | $ | 378 | $ | (414 | ) | $ | 117 | $ | – | $ | 441 | |||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations | $ | 672 | $ | 482 | $ | (47 | ) | $ | 30 | $ | — | $ | 1,137 | |||||||||||||||||||||||||||||||||||
As of December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance receivables | $ | 5,135 | $ | 1,682 | $ | 3,284 | $ | 5,893 | $ | – | $ | 15,994 | $ | 3,260 | $ | 1,296 | $ | 2,378 | $ | 3,013 | $ | — | $ | 9,947 | ||||||||||||||||||||||||
Insurance receivables | $ | 2,013 | $ | 340 | $ | 153 | $ | 61 | $ | – | $ | 2,567 | $ | 2,053 | $ | 424 | $ | 52 | $ | (53 | ) | $ | — | $ | 2,476 | |||||||||||||||||||||||
Insurance reserves: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Claim and claim adjustment expense | $ | 14,302 | $ | 4,860 | $ | 3,680 | $ | 8,678 | $ | – | $ | 31,520 | $ | 14,934 | $ | 5,529 | $ | 3,134 | $ | 6,039 | $ | — | $ | 29,636 | ||||||||||||||||||||||||
| Unearned premiums | 1,978 | 1,546 | 164 | 834 | – | 4,522 | 2,007 | 1,599 | 173 | 5 | — | 3,784 | ||||||||||||||||||||||||||||||||||||
| Future policy benefits | – | – | 5,883 | – | – | 5,883 | — | — | 6,645 | — | — | 6,645 | ||||||||||||||||||||||||||||||||||||
| Policyholders’ funds | 43 | – | 1,682 | – | – | 1,725 | 35 | — | 980 | — | — | 1,015 | ||||||||||||||||||||||||||||||||||||
Deferred acquisition costs | $ | 444 | $ | 285 | $ | 537 | $ | 2 | $ | – | $ | 1,268 | $ | 407 | $ | 283 | $ | 500 | $ | — | $ | — | $ | 1,190 | ||||||||||||||||||||||||
162126
| Corporate | Corporate | |||||||||||||||||||||||||||||||||||||||||||||||
| Standard | Specialty | Life and Group | and Other | Standard | Specialty | Life and Group | and Other | |||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2003 (In millions) | Lines | Lines | Non-Core | Non-Core | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2005 | Lines | Lines | Non-Core | Non-Core | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net earned premiums | $ | 4,530 | $ | 1,840 | $ | 2,376 | $ | 582 | $ | (114 | ) | $ | 9,214 | $ | 4,410 | $ | 2,475 | $ | 704 | $ | (8 | ) | $ | (12 | ) | $ | 7,569 | |||||||||||||||||||||
| Net investment income | 407 | 201 | 821 | 218 | – | 1,647 | 767 | 281 | 593 | 251 | — | 1,892 | ||||||||||||||||||||||||||||||||||||
| Other revenues | 199 | 116 | 163 | 36 | (119 | ) | 395 | 98 | 124 | 95 | 159 | (65 | ) | 411 | ||||||||||||||||||||||||||||||||||
| Total operating revenues | 5,136 | 2,157 | 3,360 | 836 | (233 | ) | 11,256 | 5,275 | 2,880 | 1,392 | 402 | (77 | ) | 9,872 | ||||||||||||||||||||||||||||||||||
| Claims, benefits and expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net incurred claims and benefits | 4,442 | 1,648 | 2,384 | 1,814 | (115 | ) | 10,173 | 3,857 | 1,617 | 1,160 | 343 | (2 | ) | 6,975 | ||||||||||||||||||||||||||||||||||
| Policyholders’ dividends | 100 | 3 | 10 | 1 | – | 114 | 19 | 4 | 1 | — | — | 24 | ||||||||||||||||||||||||||||||||||||
| Amortization of deferred acquisition costs | 1,195 | 408 | 224 | 138 | – | 1,965 | 986 | 532 | 22 | 3 | — | 1,543 | ||||||||||||||||||||||||||||||||||||
| Other insurance related expenses | 741 | 100 | 530 | 40 | – | 1,411 | 444 | 115 | 257 | 23 | (10 | ) | 829 | |||||||||||||||||||||||||||||||||||
| Other operating expenses | 197 | 101 | 66 | 159 | (118 | ) | 405 | |||||||||||||||||||||||||||||||||||||||||
| Other expenses | 110 | 108 | 61 | 115 | (65 | ) | 329 | |||||||||||||||||||||||||||||||||||||||||
| Total claims, benefits and expenses | 6,675 | 2,260 | 3,214 | 2,152 | (233 | ) | 14,068 | 5,416 | 2,376 | 1,501 | 484 | (77 | ) | 9,700 | ||||||||||||||||||||||||||||||||||
| Operating income (loss) from continuing operations before income tax and minority interest | (1,539 | ) | (103 | ) | 146 | (1,316 | ) | – | (2,812 | ) | (141 | ) | 504 | (109 | ) | (82 | ) | — | 172 | |||||||||||||||||||||||||||||
| Income tax (expense) benefit on operating income | 592 | 59 | (33 | ) | 470 | – | 1,088 | |||||||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on operating income (loss) | 110 | (154 | ) | 58 | 91 | — | 105 | |||||||||||||||||||||||||||||||||||||||||
| Minority interest | (4 | ) | 10 | – | – | – | 6 | (10 | ) | (14 | ) | — | — | — | (24 | ) | ||||||||||||||||||||||||||||||||
| Net operating income (loss) from continuing operations | (951 | ) | (34 | ) | 113 | (846 | ) | – | (1,718 | ) | (41 | ) | 336 | (51 | ) | 9 | — | 253 | ||||||||||||||||||||||||||||||
| Realized investment gains (losses), net of participating policyholders’ and minority interests | 361 | 114 | (141 | ) | 126 | – | 460 | 20 | 14 | (30 | ) | (14 | ) | — | (10 | ) | ||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on realized investment gains (losses) | (127 | ) | (40 | ) | 33 | (41 | ) | – | (175 | ) | (11 | ) | (2 | ) | 11 | 2 | — | — | ||||||||||||||||||||||||||||||
Net income (loss) | $ | (717 | ) | $ | 40 | $ | 5 | $ | (761 | ) | $ | – | $ | (1,433 | ) | |||||||||||||||||||||||||||||||||
Income (loss) from continuing operations | $ | (32 | ) | $ | 348 | $ | (70 | ) | $ | (3 | ) | $ | — | $ | 243 | |||||||||||||||||||||||||||||||||
As of December 31, 2005 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance receivables | $ | 5,508 | $ | 1,497 | $ | 2,999 | $ | 6,250 | $ | – | $ | 16,254 | $ | 3,968 | $ | 1,493 | $ | 2,707 | $ | 4,268 | $ | — | $ | 12,436 | ||||||||||||||||||||||||
Insurance receivables | $ | 2,264 | $ | 320 | $ | 282 | $ | 216 | $ | – | $ | 3,082 | $ | 2,056 | $ | 375 | $ | 105 | $ | 5 | $ | — | $ | 2,541 | ||||||||||||||||||||||||
Insurance reserves: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Claim and claim adjustment expense | $ | 14,282 | $ | 4,200 | $ | 3,576 | $ | 9,672 | $ | – | $ | 31,730 | $ | 15,084 | $ | 5,205 | $ | 3,277 | $ | 7,372 | $ | — | $ | 30,938 | ||||||||||||||||||||||||
| Unearned premiums | 2,267 | 1,480 | 153 | 1,100 | – | 5,000 | 1,952 | 1,577 | 168 | 9 | — | 3,706 | ||||||||||||||||||||||||||||||||||||
| Future policy benefits | – | – | 8,161 | – | – | 8,161 | — | — | 6,297 | — | — | 6,297 | ||||||||||||||||||||||||||||||||||||
| Policyholders’ funds | 79 | 3 | 522 | (3 | ) | – | 601 | 30 | — | 1,465 | — | — | 1,495 | |||||||||||||||||||||||||||||||||||
Deferred acquisition costs | $ | 499 | $ | 257 | $ | 1,745 | $ | 32 | $ | – | $ | 2,533 | $ | 408 | $ | 274 | $ | 515 | $ | — | $ | — | $ | 1,197 | ||||||||||||||||||||||||
163127
| Corporate | Corporate | |||||||||||||||||||||||||||||||||||||||||||||||
| Standard | Specialty | Life and Group | and Other | Elimi- | Standard | Specialty | Life and Group | and Other | ||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2002 (In millions) | Lines | Lines | Non-Core | Non-Core | nations | Total | ||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2004 | Lines | Lines | Non-Core | Non-Core | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net earned premiums | $ | 4,678 | $ | 1,451 | $ | 3,408 | $ | 714 | $ | (38 | ) | $ | 10,213 | $ | 4,917 | $ | 2,277 | $ | 921 | $ | 128 | $ | (34 | ) | $ | 8,209 | ||||||||||||||||||||||
| Net investment income | 475 | 172 | 821 | 262 | – | 1,730 | 496 | 246 | 692 | 246 | — | 1,680 | ||||||||||||||||||||||||||||||||||||
| Other revenues | 355 | 108 | 199 | 79 | (146 | ) | 595 | 129 | 109 | 91 | 40 | (86 | ) | 283 | ||||||||||||||||||||||||||||||||||
| Total operating revenues | 5,508 | 1,731 | 4,428 | 1,055 | (184 | ) | 12,538 | 5,542 | 2,632 | 1,704 | 414 | (120 | ) | 10,172 | ||||||||||||||||||||||||||||||||||
| Claims, benefits and expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net incurred claims and benefits | 3,418 | 1,066 | 3,210 | 681 | (41 | ) | 8,334 | 3,480 | 1,441 | 1,372 | 162 | (21 | ) | 6,434 | ||||||||||||||||||||||||||||||||||
| Policyholders’ dividends | 73 | 3 | 10 | – | – | 86 | 9 | 5 | (3 | ) | — | — | 11 | |||||||||||||||||||||||||||||||||||
| Amortization of deferred acquisition costs | 1,125 | 349 | 162 | 155 | – | 1,791 | 1,109 | 506 | 36 | 29 | — | 1,680 | ||||||||||||||||||||||||||||||||||||
| Other insurance related expenses | 354 | 77 | 630 | 163 | (131 | ) | 1,093 | 593 | 88 | 291 | 13 | (13 | ) | 972 | ||||||||||||||||||||||||||||||||||
| Other operating expenses | 308 | 94 | 103 | 185 | (12 | ) | 678 | |||||||||||||||||||||||||||||||||||||||||
| Restructuring and other related charges | — | — | — | (3 | ) | — | (3 | ) | ||||||||||||||||||||||||||||||||||||||||
| Other expenses | 94 | 101 | 76 | 141 | (86 | ) | 326 | |||||||||||||||||||||||||||||||||||||||||
| Total claims, benefits and expenses | 5,278 | 1,589 | 4,115 | 1,184 | (184 | ) | 11,982 | 5,285 | 2,141 | 1,772 | 342 | (120 | ) | 9,420 | ||||||||||||||||||||||||||||||||||
| Restructuring and other related charges | (8 | ) | (1 | ) | (1 | ) | (27 | ) | – | (37 | ) | |||||||||||||||||||||||||||||||||||||
| Operating income (loss) from continuing operations before income tax and minority interest | 238 | 143 | 314 | (102 | ) | – | 593 | 257 | 491 | (68 | ) | 72 | — | 752 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on operating income | (56 | ) | (40 | ) | (108 | ) | 33 | – | (171 | ) | ||||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit on operating income (loss) | (27 | ) | (150 | ) | 39 | 12 | — | (126 | ) | |||||||||||||||||||||||||||||||||||||||
| Minority interest | (13 | ) | (13 | ) | – | – | – | (26 | ) | (10 | ) | (17 | ) | — | — | — | (27 | ) | ||||||||||||||||||||||||||||||
| Net operating income (loss) from continuing operations | 169 | 90 | 206 | (69 | ) | – | 396 | 220 | 324 | (29 | ) | 84 | — | 599 | ||||||||||||||||||||||||||||||||||
| Realized investment gains (losses), net of participating policyholders’ and minority interests | (119 | ) | (39 | ) | (175 | ) | 81 | – | (252 | ) | 219 | 84 | (615 | ) | 64 | — | (248 | ) | ||||||||||||||||||||||||||||||
| Income tax (expense) benefit on realized investment gains (losses) | 40 | 14 | 60 | (11 | ) | – | 103 | (80 | ) | (30 | ) | 230 | (25 | ) | — | 95 | ||||||||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax of $9 | – | – | (35 | ) | – | – | (35 | ) | ||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of a change in accounting principle, net of tax of $7 | (43 | ) | (5 | ) | (8 | ) | (1 | ) | – | (57 | ) | |||||||||||||||||||||||||||||||||||||
Net income | $ | 47 | $ | 60 | $ | 48 | $ | – | $ | – | $ | 155 | ||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations | $ | 359 | $ | 378 | $ | (414 | ) | $ | 123 | $ | — | $ | 446 | |||||||||||||||||||||||||||||||||||
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| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
Standard Lines | ||||||||||||||||||||||||
| Property | $ | 664 | $ | 668 | $ | 589 | $ | 1,249 | $ | 1,108 | $ | 1,180 | ||||||||||||
| Casualty | 4,195 | 3,944 | 4,049 | 3,576 | 3,532 | 3,938 | ||||||||||||||||||
| CNA Global | 901 | 885 | 751 | 751 | 655 | 643 | ||||||||||||||||||
Standard Lines revenue | 5,760 | 5,497 | 5,389 | 5,576 | 5,295 | 5,761 | ||||||||||||||||||
Specialty Lines | ||||||||||||||||||||||||
| Professional Liability Insurance (CNA Pro) | 2,053 | 1,612 | 1,083 | |||||||||||||||||||||
| US Specialty Lines | 2,417 | 2,205 | 2,053 | |||||||||||||||||||||
| Surety | 361 | 346 | 325 | 436 | 393 | 361 | ||||||||||||||||||
| Warranty | 314 | 313 | 284 | 287 | 296 | 302 | ||||||||||||||||||
Specialty Lines revenue | 2,728 | 2,271 | 1,692 | 3,140 | 2,894 | 2,716 | ||||||||||||||||||
Life and Group Non-Core | ||||||||||||||||||||||||
| Life & Annuity | (45 | ) | 1,030 | 911 | 384 | 311 | 435 | |||||||||||||||||
| Health | 1,053 | 2,026 | 3,098 | 889 | 900 | 1,025 | ||||||||||||||||||
| Other | 81 | 163 | 244 | 82 | 151 | (371 | ) | |||||||||||||||||
Life and Group Non-Core revenue | 1,089 | 3,219 | 4,253 | 1,355 | 1,362 | 1,089 | ||||||||||||||||||
Corporate and Other Non-Core revenue | ||||||||||||||||||||||||
| CNA Re | 220 | 688 | 869 | 129 | 71 | 225 | ||||||||||||||||||
| Other | 253 | 274 | 267 | 231 | 317 | 253 | ||||||||||||||||||
Corporate and Other Non-Core revenue | 473 | 962 | 1,136 | 360 | 388 | 478 | ||||||||||||||||||
Intersegment eliminations | (120 | ) | (233 | ) | (184 | ) | ||||||||||||||||||
Eliminations | (55 | ) | (77 | ) | (120 | ) | ||||||||||||||||||
Total revenue | $ | 9,930 | $ | 11,716 | $ | 12,286 | $ | 10,376 | $ | 9,862 | $ | 9,924 | ||||||||||||
2001 Plan
The overall goallocations. During the second quarter of 2006, management reevaluated the sufficiency of the 2001 Plan wasremaining accrual, which related to createlease termination costs, and determined that the liability is no longer required as the Company has completed its lease obligations. As a simplified and leaner organization for customers and business partners. The major components ofresult, the plan included a reduction in the number of strategic business units (SBUs) in the property and casualty operations, changes in the strategic focus of the Life and Group Non-Core segment (formerly Life Operations and Group Operations) and consolidation of real estate locations. The reduction in the number of property and casualty SBUs resulted in consolidation of SBU functions, including underwriting, claims, marketing and finance. The strategic changes in Group Operations included a decision to discontinue the variable life and annuity business.
165
The following table summarizes the 2001 Plan accrual and the activity in that accrual since inception.
2001 Plan Accrual
| Employee | ||||||||||||||||||||
| Termination | Lease | Impaired | ||||||||||||||||||
| and Related | Termination | Asset | Other | |||||||||||||||||
(In millions) | Benefit Costs | Costs | Charges | Costs | Total | |||||||||||||||
| 2001 Plan Initial Accrual | $ | 68 | $ | 56 | $ | 30 | $ | 35 | $ | 189 | ||||||||||
| Costs that did not require cash | – | – | – | (35 | ) | (35 | ) | |||||||||||||
| Payments charged against liability | (2 | ) | – | – | – | (2 | ) | |||||||||||||
| Accrued costs December 31, 2001 | 66 | 56 | 30 | – | 152 | |||||||||||||||
| Costs that did not require cash | (1 | ) | (3 | ) | (9 | ) | – | (13 | ) | |||||||||||
| Payments charged against liability | (53 | ) | (12 | ) | (4 | ) | – | (69 | ) | |||||||||||
| Reduction of accrual | (10 | ) | (7 | ) | (15 | ) | – | (32 | ) | |||||||||||
| Accrued costs December 31, 2002 | 2 | 34 | 2 | – | 38 | |||||||||||||||
| Costs that did not require cash | – | – | (1 | ) | – | (1 | ) | |||||||||||||
| Payments charged against liability | (2 | ) | (15 | ) | – | – | (17 | ) | ||||||||||||
| Accrued costs December 31, 2003 | – | 19 | 1 | – | 20 | |||||||||||||||
| Payments charged against liability | – | (5 | ) | – | – | (5 | ) | |||||||||||||
Accrued costs December 31, 2004 | $ | – | $ | 14 | $ | 1 | $ | – | $ | 15 | ||||||||||
During 2002, $32 million pretax, or $21 million after-tax, of thisexcess remaining accrual was reduced. Noreleased in 2006, resulting in pretax income of $13 million for the year ended December 31, 2006. During 2005 and 2004, approximately $1 million and $5 million of costs were paid. The initial restructuring and other related charges relatedamounted to the 2001 Plan were incurred$189 million in 2003 or 2004.
2001.
Union Bank assumed assets and liabilities of $172 million and $172 million at August 1, 2004. The assets and liabilities of CNA Trust were $216 million and $184 million at December 31, 2003.in 2005. The revenues of the business sold through the sale date were $11 million, $27$17 million and $28$166 million for the years ended December 31, 2004, 20032005 and 2002.2004. Net results of operations ofincome related to this business through the sale date were a net loss of $2was $18 million and net income of $0 million and $2$16 million for the years ended December 31, 2004, 20032005 and 2002.2004.
129
On November 19, 2004, the charter of CNA Trust was sold to Nevada Security Bank for a nominal fee. As part of the sale, CNA Trust was merged into Nevada Security Bank, and is no longer a subsidiary of CNA.
166
assumed the credit risk of the business that was previously reinsured to other carriers. As a result of this reinsurance agreement with Swiss Re, approximately $1 billion of future policy benefit reserves were ceded.ceded to Swiss Re. CNA received consideration of approximately $700 million and recorded a realized investment loss of $622 million pretax ($389 million after-tax).
Swiss Re assumed assets and liabilities of $6.6 billion and $5.2 billion at April 30, 2004. The assets and liabilities of the individual life business sold were $6.6 billion and $5.4 billion at December 31, 2003.
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||
| (In millions) | ||||||||||||
| Revenues: | ||||||||||||
| Net investment income | $ | 17 | $ | 15 | $ | 17 | ||||||
| Realized investment gains (losses) and other | (2 | ) | 7 | (7 | ) | |||||||
| Total revenues | 15 | 22 | 10 | |||||||||
| Insurance related (expenses) benefits | (51 | ) | 1 | (30 | ) | |||||||
| �� | ||||||||||||
| Income (loss) before income taxes | (36 | ) | 23 | (20 | ) | |||||||
| Income tax (expense) benefit | 7 | (2 | ) | (1 | ) | |||||||
| Income (loss) from discontinued operations, net of tax | $ | (29 | ) | $ | 21 | $ | (21 | ) | ||||
Group Benefits Sale
On December 31, 2003, the Company completed the sale of the majority of its Group Benefits business through the sale of CNAGLA to Hartford Financial Services Group, Inc. (Hartford). The business sold included group life and accident, short and long term disability and certain other products. CNA’s group long term care and specialty medical businesses were excluded from the sale. In connection with the sale, CNA received consideration of approximately $530 million and recorded a realized investment loss on the sale of $163 million pretax ($122 million after-tax), including an after-tax realized investment gain of $8 million ($13 million pretax) recorded in the second quarter of 2004.
As a result of this agreement, Hartford assumed assets and liabilities of $2.4 billion and $1.6 billion at December 31, 2003. The assets and liabilities of the CNA Group Benefits business sold were $2.2 billion and $1.6 billion at December 31, 2002. The revenues of the Group Benefits business were $1,204 million and $1,137 million for the years ended December 31, 2003 and 2002. Netnet income was $52 million and $38 million for the years ended December 31, 2003 and 2002.
Assumed Reinsurance Renewal Rights Sale
In October of 2003, the Company entered into an agreement to sell the renewal rights for most of the treaty business of CNA Re to Folksamerica Reinsurance Company (Folksamerica). Under the terms of the transaction, Folksamerica will compensate CNA based upon the amount of premiums renewed by Folksamerica over the next two contract renewals. The renewal rights transaction did not have a material effect on results of operations. Concurrent with the sale, CNA withdrew from the assumed reinsurance business (the CNA Re segment) and is managing the run-off of its retained liabilities.
National Postal Mail Handlers Union Contract Termination
In 2002, the Company sold Claims Administration Corporation and transferred the National Postal Handlers Union group benefits plan (the Mail Handlers Plan) to First Health Group Corporation. As a result of this transaction, the Company recognized a $7 million pretax realized loss on the sale of Claims Administration Corporation and $15 million of pretax non-recurring fee income, related to the transfer of the Mail Handlers Plan. The revenues of Claims Administration Corporation and the Mail Handlers Plan were $1,151$13 million for the year ended December 31, 2002. Net income from Claims Administration2005. The Company’s subsidiary, The Continental Corporation, and Mail Handlers Plan was $5 million, includingprovides a guarantee for a portion of the non-recurring fee income forsubject liabilities related to certain marine products. Any sale is expected to include provisions that would significantly limit the year ended December 31, 2002.
CNA Re U.K. and Other Dispositions of Certain Businesses
On October 31, 2002, the Company completed the sale of CNA Re U.K.Company’s exposure related to Tawa UK Limited (Tawa), a subsidiary of Artemis Group, a diversified French-based holding company. The sale includes business underwritten since inception by CNA Re U.K., except for certain risks retained by CCC as discussed below.
167130
The purchase price was $1, subject to adjustments based primarily upon the results of operations and realized foreign currency losses of CNA Re U.K. The purchase price adjustment recorded in 2003 related to foreign currency losses and resulted in CNA contributing additional capital to CNA Re U.K. of $11 million. Also in 2003, the Company finalized its impairment analysis based upon the terms of the completed transactions and reduced a previously recorded impairment loss by approximately $39 million after-tax. The reduction of the impairment was included in net realized investment gains.
Under the terms of the purchase price adjustment, CCC was entitled to receive $5 million from Tawa after Tawa was able to legally withdraw funds from the former CNA Re U.K. entities; at December 31, 2004, CCC had received all amounts owed to it, totaling approximately $5 million. CNA has also committed to contribute up to $5 million to the former CNA Re U.K. entities over a four-year period beginning in 2010 should the Financial Services Authority (FSA) deem those entities to be undercapitalized.
Concurrent with the sale, several reinsurance agreements under which CCC had provided retrocessional protection to CNA Re U.K. were terminated. As part of the sale, CNA Re U.K.’s net exposure to all IGI Program liabilities was assumed by CCC. Further, CCC provided a $100 million stop loss cover attaching at carried reserves on CNA Re U.K.’s 2001 underwriting year exposures for which CCC received premiums of $25 million.
Personal Insurance Transaction
As part of the sale of CNA’s personal insurance business to The Allstate Corporation on October 1, 1999, the Company shared in payments of claim and allocated claim adjustment expenses related to losses incurred prior to October 1, 1999 on the CNA policies transferred to Allstate when they exceeded the claim and allocated claim adjustment expense reserves of approximately $1 billion at the date of sale. The Company’s remaining obligation with respect to claim and allocated claim adjustment expense reserves, valued as of October 1, 2003, was settled in March of 2004 and the sharing agreement was terminated. This settlement did not have a material impact on the 2004 results of operations of the Company.
Note Q. Discontinued Operations
CNA reports net
| December 31 | 2006 | 2005 | ||||||
| (In millions) | ||||||||
| Assets: | ||||||||
| Investments | $ | 317 | $ | 358 | ||||
| Reinsurance receivables | 33 | 78 | ||||||
| Cash | 40 | 29 | ||||||
| Other assets | 3 | 5 | ||||||
| Total assets | 393 | 470 | ||||||
| Liabilities: | ||||||||
| Insurance reserves | 308 | 338 | ||||||
| Other liabilities | 17 | 19 | ||||||
| Total liabilities | 325 | 357 | ||||||
| Net assets of discontinued operations | $ | 68 | $ | 113 | ||||
Discontinued Operations
| December 31 (In millions) | 2004 | 2003 | ||||||
| Total investments | $ | 410 | $ | 458 | ||||
| Other assets | 345 | 358 | ||||||
| Insurance reserves | (439 | ) | (480 | ) | ||||
| Other liabilities | (16 | ) | (28 | ) | ||||
| Net assets of discontinued operations | $ | 300 | $ | 308 | ||||
CNA Vida Disposition
In the first quarter of 2002, the Company completed the sale of the common stock of CNA Holdings Limited and its subsidiaries (CNA Vida), CNA’s life operations in Chile, to Consorcio Financiero S.A. (Consorcio). In connection with the sale, CNA received proceeds of $73Sheets includes $1 million and $11 million related to unrealized gains and $15 million and $6 million related to the cumulative foreign currency translation adjustment for discontinued operations as of December 31, 2006 and 2005.
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| Quarterly Financial Data | Full | |||||||||||||||||||
| First | Second | Third | Fourth | Year | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
2006 | ||||||||||||||||||||
| Revenues | $ | 2,501 | $ | 2,412 | $ | 2,620 | $ | 2,843 | $ | 10,376 | ||||||||||
| Income from continuing operations before income tax | $ | 343 | $ | 341 | $ | 436 | $ | 486 | $ | 1,606 | ||||||||||
| Income tax expense | (108 | ) | (100 | ) | (131 | ) | (130 | ) | (469 | ) | ||||||||||
| Income from continuing operations | 235 | 241 | 305 | 356 | 1,137 | |||||||||||||||
| Income (loss) from discontinued operations, net of tax | (6 | ) | (2 | ) | 6 | (27 | ) | (29 | ) | |||||||||||
Net income | $ | 229 | $ | 239 | $ | 311 | $ | 329 | $ | 1,108 | ||||||||||
Basic Earnings Per Share | ||||||||||||||||||||
| Income from continuing operations | $ | 0.84 | $ | 0.87 | $ | 1.13 | $ | 1.33 | $ | 4.17 | ||||||||||
| Income (loss) from discontinued operations | (0.02 | ) | (0.01 | ) | 0.02 | (0.10 | ) | (0.11 | ) | |||||||||||
Basic earnings per share available to common stockholders | $ | 0.82 | $ | 0.86 | $ | 1.15 | $ | 1.23 | $ | 4.06 | ||||||||||
Diluted Earnings Per Share | ||||||||||||||||||||
| Income from continuing operations | $ | 0.84 | $ | 0.87 | $ | 1.13 | $ | 1.32 | $ | 4.16 | ||||||||||
| Income (loss) from discontinued operations | (0.02 | ) | (0.01 | ) | 0.02 | (0.10 | ) | (0.11 | ) | |||||||||||
Diluted earnings per share available to common stockholders | $ | 0.82 | $ | 0.86 | $ | 1.15 | $ | 1.22 | $ | 4.05 | ||||||||||
| Quarterly Financial Data | Full | |||||||||||||||||||
| First | Second | Third | Fourth | Year | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
2005 | ||||||||||||||||||||
| Revenues | $ | 2,364 | $ | 2,570 | $ | 2,520 | $ | 2,408 | $ | 9,862 | ||||||||||
| Income (loss) from continuing operations before income tax | $ | 234 | $ | 336 | $ | (48 | ) | $ | (384 | ) | $ | 138 | ||||||||
| Income tax (expense) benefit | (56 | ) | (48 | ) | 51 | 158 | 105 | |||||||||||||
| Income (loss) from continuing operations | 178 | 288 | 3 | (226 | ) | 243 | ||||||||||||||
| Income from discontinued operations, net of tax | 7 | 2 | 3 | 9 | 21 | |||||||||||||||
Net income (loss) | $ | 185 | $ | 290 | $ | 6 | $ | (217 | ) | $ | 264 | |||||||||
Basic and Diluted Earnings (Loss) Per Share | ||||||||||||||||||||
| Income (loss) from continuing operations | $ | 0.63 | $ | 1.06 | $ | (0.06 | ) | $ | (0.95 | ) | $ | 0.68 | ||||||||
| Income from discontinued operations | 0.03 | — | 0.02 | 0.03 | 0.08 | |||||||||||||||
Basic and diluted earnings (loss) per share available to common stockholders | $ | 0.66 | $ | 1.06 | $ | (0.04 | ) | $ | (0.92 | ) | $ | 0.76 | ||||||||
132
Quarterly Financial Data
| Full | ||||||||||||||||||||
(In millions, except per share data) | First | Second | Third | Fourth | Year | |||||||||||||||
2004 | ||||||||||||||||||||
| Revenues | $ | 2,265 | $ | 2,663 | $ | 2,317 | $ | 2,685 | $ | 9,930 | ||||||||||
| Income (loss) from continuing operations before income tax | $ | (179 | ) | $ | 318 | $ | (80 | ) | $ | 411 | $ | 470 | ||||||||
| Income tax (expense) benefit | 54 | (29 | ) | 52 | (106 | ) | (29 | ) | ||||||||||||
Net income (loss) | $ | (125 | ) | $ | 289 | $ | (28 | ) | $ | 305 | $ | 441 | ||||||||
Basic and diluted earnings (loss) per share available to common stockholders | $ | (0.55 | ) | $ | 1.07 | $ | (0.17 | ) | $ | 1.12 | $ | 1.47 | ||||||||
2003 | ||||||||||||||||||||
| Revenues | $ | 2,845 | $ | 3,099 | $ | 2,725 | $ | 3,047 | $ | 11,716 | ||||||||||
| Income (loss) from continuing operations before income tax | $ | 101 | $ | 75 | $ | (2,766 | ) | $ | 244 | $ | (2,346 | ) | ||||||||
| Income tax (expense) benefit | (18 | ) | (5 | ) | 1,006 | (70 | ) | 913 | ||||||||||||
Net income (loss) | $ | 83 | $ | 70 | $ | (1,760 | ) | $ | 174 | $ | (1,433 | ) | ||||||||
Basic and diluted earnings (loss) per share available to common stockholders | $ | 0.30 | $ | 0.25 | $ | (7.94 | ) | $ | 0.67 | $ | (6.58 | ) | ||||||||
2004 were less than $1 million.
169133
million and $80 million of total debt outstanding under the credit facility. Additional loans in January and February of 2005 brought the total debt outstanding under the credit facility, less accrued interest, to $104 million as of February 24, 2005. Loews, through a participation agreement with CNAF, provided funds for and owned a participation of $29 million and $25 million of the loans outstanding as of December 31, 2004 and 2003 and has agreed to participation of one-third of any additional loans which may be made above the original $86 million credit facility limit up to the $126 million maximum available line.
In connection with the amendment to increase the maximum available line under the credit facility in December of 2004, the term of the loan under the credit facility was extended to mature in March of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum, effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the facility are at or below the original $86 million limit.
Loans under the credit facility are secured by a pledge of substantially all of the assets of the contractor and certain of its affiliates. In connection with the credit facility, CNAF has also guaranteed or provided collateral for letters of credit which are charged against the maximum available line and, if drawn upon, would be treated as loans under the credit facility. As of December 31, 2004 and 2003, these guarantees and collateral obligations aggregated $13 million and $7 million.
As of December 31, 2004, the aggregate amount of outstanding principal and accrued interest under the credit facility was $70 million, net of participation by Loews in the amount of $29 million.
The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and appointed a chief restructuring officer to manage execution of the plan. In the course of addressing various expense, operational and strategic issues, however, the contractor has decided to substantially reduce the scope of its original business and to concentrate on those segments determined to be potentially profitable. As a consequence, operating cash flow, and in turn the capacity to service debt, has been reduced below previous levels. Restructuring plans have also been extended to accommodate these circumstances. In light of these developments, CNA has taken an impairment charge of $56 million pretax for the fourth quarter of 2004, net of the participation by Loews, with respect to amounts loaned under the facility. Any draws under the credit facility beyond $106 million or further changes in the national contractor’s business plan or projections may necessitate further impairment charges.
As a result of the impairment taken in the fourth quarter of 2004, CNAF plans to recognize income using the effective interest rate method starting in the first quarter of 2005. Under this method, interest income recognized will be accrued on the net carrying amount of the loan at the effective interest rate used to discount the impaired loan’s estimated future cash flows. The excess of the cash received over the interest income recognized will reduce the carrying amount of the loan. The change in present value, if any, of the loan that is attributable to changes in the amount or timing of future cash flows will be recorded similar to the impairment charges previously recorded.
Through facultative reinsurance contracts with CCC,protection to CNA Surety’s exposure on bonds written from October 1, 2002 through October 31, 2003 has been limited to $20 million per bond, with CCC to incur 100%Surety for losses in excess of losses above that level. For bonds written on or subsequent to November 1, 2003, CNA Surety’s exposure is limited to $14.5 million per bond, subject to a per principal retentionan aggregate of $60 million and an aggregate limit of $150 million, under all facultative insurance coverage and two excess of loss treaties between CNA Surety and CCC. The first excess of loss contract, $40 million excess of $60 million,associated with the contractor. This treaty provides CNA Surety coverage exclusively for the national contractor, while the second excess of loss contract, $50 million excess of $100 million, provides CNA Surety with coverage for the national contractor as well as other CNA Surety risks. Forlife of bonds either in force or written prior to September 30, 2002 there is no facultative reinsurance and CCC retains 100% of the losses above the per principal retention of $60 million.
170
Renewals of both excess of loss contracts were effectivefrom January 1, 2005 to December 31, 2005. CCC and CNA Surety are presently discussing a possible restructuring of the reinsurance arrangements discussed in the paragraph above, under which all bonds writtenagreed by addendum to extend this contract for the national contractor would be reinsured by CCC under an excess of $60 million treaty and other CNA Surety accounts would be covered by a separate $50 million excess of $100 million treaty.
twenty four months, expiring on December 31, 2007.
contractor’s letters of credit. As of December 31, 2006 and December 31, 2005, these guarantees and collateral obligations aggregated $9 million and $13 million.
Effective October 1, 2002, CCC provided an excess of loss protection for new and renewal bonds for CNA Surety for each principal exposure that exceeds $60 million since October 1, 2002 in two parts – a) $40 million excess of $60 million and b) $50 million excess of $100 million for CNA Surety. Effective January 1, 2004, this contract was commuted and CCC paid CNA Surety $11 million in return premium in the first quarter of 2004 based on experience under the contract. Effective October 1, 2003, CCC entered into a $3 million excess of $12 million excess of loss contract with CNA Surety. The reinsurance premium for the coverage provided by the $3 million excess of $12 million contract was $0.3 million plus, if applicable, additional premiums based on paid losses. The contract provided for aggregate coverage of $12 million. This contract expired on December 31, 2004. Effective January 1, 2004, the Company obtained replacement coverage from third party reinsurers as part of the 2004 Excess of Loss Treaty.
171134
As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for certain separate account products in 2004.
Deloitte
172135
was effective.
137.
173136
137
Deloitte2006.
174138
effective.
None.
175139
EXECUTIVE OFFICERS OF THE REGISTRANT
| FIRST | ||||||||||||||||||||||||
| POSITION AND | BECAME | |||||||||||||||||||||||
| FIRST BECAME | OFFICES | EXECUTIVE | ||||||||||||||||||||||
| POSITION AND OFFICES | EXECUTIVE OFFICER | HELD WITH | OFFICER OF | |||||||||||||||||||||
| NAME | HELD WITH REGISTRANT | AGE | OF CNA | PRINCIPAL OCCUPATION DURING PAST FIVE YEARS | REGISTRANT | AGE | CNA | PRINCIPAL OCCUPATION DURING PAST FIVE YEARS | ||||||||||||||||
| Stephen W. Lilienthal | Chief Executive Officer, CNA Financial Corporation | 54 | 2001 | Chief Executive Officer of CNA Financial Corporation and subsidiaries since August, 2002. Prior to that, President and Chief Executive Officer, Property and Casualty Operations of the CNA insurance companies since July 2001. From June 1993 to June 1998, senior officer of USF&G Corporation (USF&G). In April 1998, USF&G was acquired by the St. Paul Companies. Mr. Lilienthal was Executive Vice President of the St. Paul Companies until July 2001. | Chief Executive Officer, CNA Financial Corporation | 56 | 2001 | Chief Executive Officer of CNA Financial Corporation and subsidiaries since August, 2002. Prior to that time, President and Chief Executive Officer, Property and Casualty Operations of the CNA insurance companies. | ||||||||||||||||
| Michael Fusco | Executive Vice President, Chief Actuary, CNA insurance companies | 56 | 2004 | Executive Vice President, Chief Actuary of the CNA insurance companies since March, 2002. Prior to that time, he was Senior Vice President of the CNA insurance companies since November, 2000. From 1988 until November of 2000, Mr. Fusco held various positions at Insurance Services Offices, including Executive Vice President. | Executive Vice President, Chief Actuary, CNA insurance companies | 58 | 2004 | Executive Vice President, Chief Actuary of the CNA insurance companies since March, 2002. Prior to that time, Senior Vice President of the CNA insurance companies. | ||||||||||||||||
| Jonathan D. Kantor | Executive Vice President, General Counsel and Secretary | 49 | 1997 | Executive Vice President, General Counsel and Secretary of CNA Financial Corporation since March, 1998. Executive Vice President, General Counsel and Secretary of the CNA insurance companies since April, 1997 to current date. | Executive Vice President, General Counsel and Secretary | 51 | 1997 | Executive Vice President, General Counsel and Secretary of CNA Financial Corporation. | ||||||||||||||||
| James R. Lewis | President and Chief Executive Officer, Property and Casualty Operations, CNA insurance companies | 55 | 2002 | President and Chief Executive Officer, Property and Casualty Operations of the CNA insurance companies since August, 2002. From August 2001 to August 2002, Executive Vice President, U.S. Insurance Operations, Property and Casualty Operations of the CNA insurance companies. From November 1992 to August 2001, Senior Vice President of USF&G Corporation. | President and Chief Executive Officer, Property and Casualty Operations, CNA insurance companies | 57 | 2002 | President and Chief Executive Officer, Property and Casualty Operations of the CNA insurance companies since August, 2002. Prior to that time, Executive Vice President, U.S. Insurance Operations, Property and Casualty Operations of the CNA insurance companies. | ||||||||||||||||
| D. Craig Mense | Executive Vice President & Chief Financial Officer | 53 | 2004 | Executive Vice President and Chief Financial Officer since November, 2004. Prior to that, he served as President and Chief Executive Officer of Global Run-Off Operations at St. Paul Travelers. From May, 2003 to May, 2004, he was Chief Operating Officer of the Gulf Insurance Group at Travelers Property Casualty Corp. Previously, at Travelers Property Casualty Corp., Mr. Mense was Senior Vice President and Chief Financial Officer (Bond) from April, 1996 to July, 2002, and Chief Financial and Administrative Officer (Personal Lines) from July, 2002 to March, 2003. | Executive Vice President & Chief Financial Officer | 55 | 2004 | Executive Vice President and Chief Financial Officer since November, 2004. Prior to that time, President and Chief Executive Officer of Global Run-Off Operations at St. Paul Travelers from June, 2004 to November, 2004. Prior to that time, the following positions at Travelers Property Casualty Corp.: Chief Operating Officer of the Gulf Insurance Group (May, 2003 to May, 2004); Chief Financial and Administrative Officer (Personal Lines) (July, 2002 to March, 2003); and Senior Vice President and Chief Financial Officer (Bond) (April, 1996 to July, 2002). | ||||||||||||||||
140
176
| Number of securities | ||||||||||||
| Number of securities to | remaining available for | |||||||||||
| be issued upon | Weighted-average exercise | future issuance under | ||||||||||
| exercise of outstanding | price of outstanding | equity compensation plans | ||||||||||
| options, warrants and | options, warrants and | (excluding securities | ||||||||||
| rights | rights | reflected in column (a)) | ||||||||||
| December 31, 2004 | (a) | (b) | (c) | |||||||||
| Plan Category | ||||||||||||
| Equity compensation plans approved by security holders | 1,474,000 | $ | 29.17 | 511,175 | ||||||||
| Equity compensation plans not approved by security holders | – | – | – | |||||||||
Total | 1,474,000 | $ | 29.17 | 511,175 | ||||||||
| Number of securities | ||||||||||||
| Number of securities to | remaining available for | |||||||||||
| be issued upon | Weighted average exercise | future issuance under | ||||||||||
| exercise of outstanding | price of outstanding | equity compensation plans | ||||||||||
| options, warrants and | options, warrants and | (excluding securities | ||||||||||
| rights | rights | reflected in column (a)) | ||||||||||
| (a) | (b) | (c) | ||||||||||
| Plan Category | ||||||||||||
| Equity compensation plans approved by security holders | 1,694,900 | $ | 28.86 | 2,011,725 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 1,694,900 | $ | 28.86 | 2,011,725 | ||||||||
177141
| Page | ||||||||||
| Number | ||||||||||
| (a) | 1. | FINANCIAL STATEMENTS: | ||||||||
| Statements of Operations — Years Ended December 31, | ||||||||||
| Balance Sheets — | ||||||||||
| Statements of | ||||||||||
| Statements of Stockholders’ Equity — Years Ended December 31, 2006, 2005 and 2004 | ||||||||||
| Notes to Consolidated Financial Statements | 70 | |||||||||
| Report of Independent Registered Public Accounting Firm | ||||||||||
| (a) | 2. | FINANCIAL STATEMENT SCHEDULES: | ||||||||
| Schedule | ||||||||||
| Schedule | ||||||||||
| Schedule | ||||||||||
| Schedule | ||||||||||
| Schedule V Valuation and Qualifying Accounts | 152 | |||||||||
| Schedule VI Supplemental Information Concerning Property and Casualty Insurance Operations | ||||||||||
| (a) | 3. | EXHIBITS: | ||||||||
| Exhibit | ||||||||||
| Description of Exhibit | Number | |||||||||
| (3 | ) | Articles of | ||||||||
| Certificate of Incorporation of CNA Financial Corporation, as amended May | 3.1 | |||||||||
| Certificate of Amendment of Certificate of Incorporation, dated May 14, 1998 | 3.1a | |||||||||
| Certificate of Amendment of Certificate of Incorporation, dated May 10, 1999 (Exhibit 3.1 to 1999 Form 10-K incorporated herein by | ||||||||||
| By-Laws of CNA Financial Corporation, as amended April 28, 2004 (Exhibit 3.2 to 2004 Form 10-K incorporated herein by reference) | 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 | 4.1 | |||||||||
| (10 | ) | Material contracts: | ||||||||
142
| Exhibit | ||||||||||
| Description of Exhibit | Number | |||||||||
| 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 | 10.1 | |||||||||
178
| 10.2 | ||||||||||
| First Amendment to the CNA | 10.3 | |||||||||
| Second Amendment to the CNA Supplemental Executive Retirement Plan, | 10.4 | |||||||||
| Third Amendment to the CNA Supplemental Executive Retirement Plan, dated December 31, 2004 (Exhibit 99.1 to Form 8-K filed January 6, 2005 incorporated herein by reference) | 10.5 | |||||||||
| CNA Financial Corporation 2000 Long Term Incentive Plan, dated August 4, 1999 (Exhibit 4.1 to 1999 Form S-8 filed August 4, 1999, incorporated herein by reference) | ||||||||||
| CNA Financial Corporation 2000 Incentive Compensation Plan, as amended and restated, effective as of February 9, 2005 (Exhibit A to Form DEF 14A, filed March 31, 2005, incorporated herein by reference (as indicated in Form 8-K, filed May 2, 2005, CNAF shareholders voted to approve this plan on April 27, 2005)) | 10.7 | |||||||||
| Share Purchase Agreement between CNA and TAWA UK Limited, dated July 15, 2002 for the entire issued share capital of CNA Re Management Company Limited (Exhibit 2.1 to September 30, 2002 Form 10-Q incorporated herein by reference) | ||||||||||
| Employment Agreement between CNA Financial Corporation and Stephen W. Lilienthal, dated | ||||||||||
| 10.9 | ||||||||||
| Employment Agreement between | 10.10 | |||||||||
| Employment Agreement between | 10.11 | |||||||||
| Capital Support Agreement among CNA Financial Corporation, Loews Corporation and Continental Casualty Company, dated November 12, 2003 (Exhibit 10.15 to | 10.12 | |||||||||
| Employment Agreement between Continental Casualty Company and D. Craig Mense, dated December 2, 2004 (Exhibit 99.1 to December 8, 2004 Form 8-K incorporated herein by reference) | 10.13 |
179143
| Exhibit | Exhibit | |||||||||||||||||
| Description of Exhibit | Number | Description of Exhibit | Number | |||||||||||||||
| Employment Agreement between CNA Financial Corporation and D. Craig Mense, dated December 2, 2004 (Exhibit 99.1 to December 8, 2004 Form 8-K incorporated herein by reference) | 10.14 | Addendum to Employment Agreement between Continental Casualty Company and D. Craig Mense, dated December 2, 2004 (Exhibit 99.2 to December 8, 2004 Form 8-K incorporated herein by reference) | 10.14 | |||||||||||||||
| Amendment to Employment Agreement between CNA Financial Corporation and D. Craig Mense, dated December 2, 2004 (Exhibit 99.2 to December 8, 2004 Form 8-K incorporated herein by reference) | 10.15 | |||||||||||||||||
| Employment Agreement between CNA Financial Corporation and Michael Fusco, dated August 18, 2004 | 10.16 | Employment Agreement between Continental Casualty Company and Michael Fusco, dated April 1, 2004 (Exhibit 10.16 to 2004 Form 10-K incorporated herein by reference) | 10.15 | |||||||||||||||
| CNA Supplemental Executive Savings and Capital Accumulation Plan, dated July 1, 2003 | 10.17 | |||||||||||||||||
| First Amendment to the CNA Supplemental Executive Savings and Capital Accumulation Plan, dated March 23, 2004 | 10.18 | CNA Supplemental Executive Savings and Capital Accumulation Plan, dated July 1, 2003 (Exhibit 10.17 to 2004 Form 10-K incorporated herein by reference) | 10.16 | |||||||||||||||
| Second Amendment to the CNA Supplemental Executive Savings and Capital Accumulation Plan, dated March 23, 2004 | 10.19 | |||||||||||||||||
| CNA Financial Board of Directors Term Sheet — Director and Committee Member Fee Schedule - 2004 Annual Retainers | 10.20 | First Amendment to the CNA Supplemental Executive Savings and Capital Accumulation Plan, dated February 27, 2004 (Exhibit 10.18 to 2004 Form 10-K incorporated herein by reference) | 10.17 | |||||||||||||||
| (21) | Primary Subsidiaries of CNAF | 21.1 | ||||||||||||||||
| (23) | Consent of Independent Registered Public Accounting Firm | 23.1 | Second Amendment to the CNA Supplemental Executive Savings and Capital Accumulation Plan, dated March 23, 2004 (Exhibit 10.19 to 2004 Form 10-K incorporated herein by reference) | 10.18 | ||||||||||||||
| Exhibits: | ||||||||||||||||||
| Form of Award Letter for Long-Term Incentive Cash Award to Executive Officers for the Performance Period Beginning January 1, 2006 and Ending December 31, 2008, Delivered on April 14, 2006 (Exhibit 99.1 to April 19, 2006 Form 8-K incorporated herein by reference) | 10.19 | |||||||||||||||||
| Form of Award Terms for Long-Term Incentive Cash Award to Executive Officers for the Performance Period Beginning January 1, 2006 and Ending December 31, 2008, Delivered on April 14, 2006 (Exhibit 99.2 to April 19, 2006 Form 8-K incorporated herein by reference) | 10.20 | |||||||||||||||||
| Registration Rights Agreement, dated August 8, 2006, between CNA Financial Corporation and Loews Corporation (Exhibit 10.1 to August 8, 2006 Form 8-K incorporated herein by reference) | 10.21 | |||||||||||||||||
| Amendment to Employment Agreement between Continental Casualty Company and Michael Fusco, dated February 7, 2007 | 10.22 | |||||||||||||||||
| (21 | ) | Significant Subsidiaries of CNAF | 21.1 | |||||||||||||||
| (23 | ) | Consent of Independent Registered Public Accounting Firm | 23.1 | |||||||||||||||
| (31 | ) | Certification of Chief Executive Officer | 31.1 | |||||||||||||||
| Certification of Chief Financial Officer | 31.2 | |||||||||||||||||
| (32 | ) | Written Statement of the Chief Executive Officer of CNA Financial Corporation Pursuant to 18 U.S.C Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002) | 32.1 | |||||||||||||||
| Written Statement of the Chief Financial Officer of CNA Financial Corporation Pursuant to 18 U.S.C Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002) | 32.2 | |||||||||||||||||
| (b) | Exhibits: | |||||||||||||||||
| None. | ||||||||||||||||||
| (c) | None. | Condensed Financial Information of Unconsolidated Subsidiaries: | ||||||||||||||||
| Condensed Financial Information of Unconsolidated Subsidiaries: | None. | |||||||||||||||||
| (d) | None. | |||||||||||||||||
The
180144
| December 31, 2006 | ||||||||||||||||||||||||
| December 31, 2004 | Cost or | Estimated | ||||||||||||||||||||||
| Cost or | Estimated | Amortized | Fair | Carrying | ||||||||||||||||||||
| Amortized | Fair | Carrying | Cost | Value | Value | |||||||||||||||||||
(In millions) | Cost | Value | Value | |||||||||||||||||||||
| Fixed maturity securities available-for-sale: | ||||||||||||||||||||||||
| Bonds: | ||||||||||||||||||||||||
| United States Government and government agencies and authorities – taxable | $ | 4,623 | $ | 4,742 | $ | 4,742 | ||||||||||||||||||
| U.S. Government and government agencies and authorities – taxable | $ | 5,368 | $ | 5,445 | $ | 5,445 | ||||||||||||||||||
| States, municipalities and political subdivisions – tax exempt | 8,699 | 8,857 | 8,857 | 4,915 | 5,146 | 5,146 | ||||||||||||||||||
| Foreign governments and political subdivisions | 1,957 | 2,095 | 2,095 | 2,679 | 2,779 | 2,779 | ||||||||||||||||||
| Public utilities | 856 | 998 | 998 | 753 | 850 | 850 | ||||||||||||||||||
| All other corporate bonds | 13,599 | 14,099 | 14,099 | 20,331 | 20,515 | 20,515 | ||||||||||||||||||
| Redeemable preferred stocks | 142 | 146 | 146 | 885 | 912 | 912 | ||||||||||||||||||
| Total fixed maturity securities available-for-sale | 29,876 | 30,937 | 30,937 | 34,931 | 35,647 | 35,647 | ||||||||||||||||||
| Fixed maturity securities trading: | ||||||||||||||||||||||||
| Bonds: | ||||||||||||||||||||||||
| United States Government and government agencies and authorities – taxable | 27 | 27 | 27 | |||||||||||||||||||||
| U.S. Government and government agencies and authorities – taxable | 2 | 2 | 2 | |||||||||||||||||||||
| Foreign governments and political subdivisions | 32 | 32 | 32 | 14 | 14 | 14 | ||||||||||||||||||
| Public utilities | 3 | 3 | 3 | |||||||||||||||||||||
| All other corporate bonds | 324 | 324 | 324 | 188 | 188 | 188 | ||||||||||||||||||
| Redeemable preferred stocks | 4 | 4 | 4 | |||||||||||||||||||||
| Total fixed maturity securities trading | 390 | 390 | 390 | 204 | 204 | 204 | ||||||||||||||||||
| Equity securities available-for-sale: | ||||||||||||||||||||||||
| Common stocks: | ||||||||||||||||||||||||
| Banks, trusts and insurance companies | 3 | 5 | 5 | 3 | 5 | 5 | ||||||||||||||||||
| Industrial and other | 145 | 255 | 255 | 211 | 447 | 447 | ||||||||||||||||||
| Non-redeemable preferred stocks | 126 | 150 | 150 | 134 | 145 | 145 | ||||||||||||||||||
| Total equity securities available-for-sale | 274 | 410 | 410 | 348 | 597 | 597 | ||||||||||||||||||
| Equity securities trading: | ||||||||||||||||||||||||
| Common stocks: | ||||||||||||||||||||||||
| Industrial and other | 38 | 38 | 38 | 60 | 60 | 60 | ||||||||||||||||||
| Non-redeemable preferred stocks | 8 | 8 | 8 | |||||||||||||||||||||
| Total equity securities trading | 46 | $ | 46 | 46 | 60 | $ | 60 | 60 | ||||||||||||||||
| Limited partnership investments | 1,549 | 1,549 | 1,852 | 1,852 | ||||||||||||||||||||
| Other invested assets | 57 | 36 | 26 | 26 | ||||||||||||||||||||
| Short term investments available-for-sale | 5,403 | 5,404 | 5,537 | 5,538 | ||||||||||||||||||||
| Short term investments trading | 459 | 459 | 172 | 172 | ||||||||||||||||||||
Total investments | $ | 38,054 | $ | 39,231 | $ | 43,130 | $ | 44,096 | ||||||||||||||||
181145
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
| Net investment income | $ | 14 | $ | 16 | $ | 8 | $ | 21 | $ | 18 | $ | 14 | ||||||||||||
| Realized investment gains (losses) | (62 | ) | (3 | ) | 3 | |||||||||||||||||||
| Realized investment losses | (7 | ) | (29 | ) | (62 | ) | ||||||||||||||||||
| Other income | 5 | 12 | 13 | 1 | — | 5 | ||||||||||||||||||
| Total revenues | (43 | ) | 25 | 24 | 15 | (11 | ) | (43 | ) | |||||||||||||||
Expenses: | ||||||||||||||||||||||||
| Administrative and general | 5 | 7 | 3 | 2 | 9 | 5 | ||||||||||||||||||
| Interest | 104 | 120 | 131 | 118 | 110 | 104 | ||||||||||||||||||
| Total expenses | 109 | 127 | 134 | 120 | 119 | 109 | ||||||||||||||||||
| Loss from operations before income taxes, equity in net income of subsidiaries and the cumulative effects of changes in accounting principles | (152 | ) | (102 | ) | (110 | ) | ||||||||||||||||||
| Loss from operations before income taxes and equity in net income of subsidiaries | (105 | ) | (130 | ) | (152 | ) | ||||||||||||||||||
| Income tax benefit | 53 | 36 | 39 | 37 | 46 | 53 | ||||||||||||||||||
| Loss before equity in net income of subsidiaries and the cumulative effects of changes in accounting principles | (99 | ) | (66 | ) | (71 | ) | ||||||||||||||||||
| Equity in net income (loss) of subsidiaries | 540 | (1,367 | ) | 227 | ||||||||||||||||||||
| Cumulative effect of changes in accounting principles, net of tax | – | – | (1 | ) | ||||||||||||||||||||
Net income (loss) | $ | 441 | $ | (1,433 | ) | $ | 155 | |||||||||||||||||
| Loss before equity in net income of subsidiaries | (68 | ) | (84 | ) | (99 | ) | ||||||||||||||||||
| Equity in net income of subsidiaries | 1,176 | 348 | 524 | |||||||||||||||||||||
Net income | $ | 1,108 | $ | 264 | $ | 425 | ||||||||||||||||||
182146
| December 31 (In millions) | 2004 | 2003 | ||||||||||||||
| December 31 | 2006 | 2005 | ||||||||||||||
| (In millions) | ||||||||||||||||
Assets: | ||||||||||||||||
| Investment in subsidiaries | $ | 10,446 | $ | 10,509 | $ | 11,512 | $ | 10,263 | ||||||||
| Fixed maturity securities available-for-sale, at fair value, (amortized cost of $23 and $131) | 23 | 131 | ||||||||||||||
| Equity securities available-for-sale, at fair value, (cost of $1 and $1) | 1 | 1 | ||||||||||||||
| Other invested assets | (1 | ) | (1 | ) | ||||||||||||
| Short term investments, at fair value which approximates cost | 749 | 37 | ||||||||||||||
| Fixed maturity securities available-for-sale, at fair value (amortized cost of $9 and $1) | 9 | 1 | ||||||||||||||
| Equity securities available-for-sale, at fair value (cost of $1 and $1) | 1 | 1 | ||||||||||||||
| Short term investments | 280 | 198 | ||||||||||||||
| Receivables for securities sold | 3 | 1 | 1 | 10 | ||||||||||||
| Amounts due from affiliates | 70 | 18 | 37 | 44 | ||||||||||||
| Other | – | 1 | ||||||||||||||
| Other assets | 7 | — | ||||||||||||||
Total assets | $ | 11,291 | $ | 10,697 | $ | 11,847 | $ | 10,517 | ||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Short term debt | 493 | 250 | — | 250 | ||||||||||||
| Long term debt | 1,536 | 1,482 | 2,035 | 1,287 | ||||||||||||
| Other | 55 | 13 | 44 | 30 | ||||||||||||
Total Liabilities | 2,084 | 1,745 | ||||||||||||||
Total liabilities | 2,079 | 1,567 | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Preferred stock (12,500,000 shares authorized) | ||||||||||||||||
| Series H Issue (no par value; $100,000 stated value; 7,500 shares issued; held by Loews Corporation) | 750 | 750 | ||||||||||||||
| Series I Issue (no par value; $23,200 stated value; 32,327 shares issued; held by Loews Corporation) | – | 750 | ||||||||||||||
| Common stock ($2.50 par value; 500,000,000 shares authorized; 258,177,285 shares and 225,850,270 issued; and 255,953,958 and 223,617,337 shares outstanding) | 645 | 565 | ||||||||||||||
| Preferred stock (12,500,000 shares authorized) Series H Issue (no par value; $100,000 stated value; no shares and 7,500 shares issued; held by Loews Corporation) | — | 750 | ||||||||||||||
| Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,543 and 258,177,285 shares issued; and 271,108,780 and 256,001,968 shares outstanding) | 683 | 645 | ||||||||||||||
| Additional paid-in capital | 1,701 | 1,031 | 2,166 | 1,701 | ||||||||||||
| Retained earnings | 5,601 | 5,160 | 6,486 | 5,621 | ||||||||||||
| Accumulated other comprehensive income | 650 | 841 | 549 | 359 | ||||||||||||
| Treasury stock (2,223,327 and 2,232,933 shares), at cost | (69 | ) | (69 | ) | ||||||||||||
| Treasury stock (1,931,763 and 2,175,317 shares), at cost | (58 | ) | (67 | ) | ||||||||||||
| 9,278 | 9,028 | 9,826 | 9,009 | |||||||||||||
| Notes receivable for the issuance of common stock | (71 | ) | (76 | ) | (58 | ) | (59 | ) | ||||||||
Total stockholders’ equity | 9,207 | 8,952 | 9,768 | 8,950 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 11,291 | $ | 10,697 | $ | 11,847 | $ | 10,517 | ||||||||
183147
| Years ended December 31 (In millions) | 2004 | 2003 | 2002 | |||||||||
Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | 441 | $ | (1,433 | ) | $ | 155 | |||||
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||||||
| Loss (income) of subsidiaries | (540 | ) | 1,367 | (227 | ) | |||||||
| Cumulative effect of a change in accounting principle, net of tax | – | – | 1 | |||||||||
| Dividends received from subsidiaries | 307 | 93 | 118 | |||||||||
| Realized (gains) losses | 62 | 3 | (3 | ) | ||||||||
| Changes in: | ||||||||||||
| Federal income taxes recoverable (amounts due to/from affiliates) | – | (1 | ) | – | ||||||||
| Other, net | 211 | 107 | 148 | |||||||||
| Total Adjustments | 40 | 1,569 | 37 | |||||||||
Net cash flows provided by operating activities | 481 | 136 | 192 | |||||||||
Cash flows from investing activities: | ||||||||||||
| Sales of fixed maturity securities | 86 | 236 | 428 | |||||||||
| Purchases of fixed maturity securities | (27 | ) | (244 | ) | (440 | ) | ||||||
| Purchases of equity securities | – | 2 | (1 | ) | ||||||||
| Change in short term investments | (710 | ) | 349 | (381 | ) | |||||||
| Capital contributions to subsidiaries | (156 | ) | (1,201 | ) | (304 | ) | ||||||
| Return of capital from subsidiaries | 18 | 5 | – | |||||||||
| Change in notes receivable from affiliates | – | 309 | 32 | |||||||||
| Other, net | 7 | (94 | ) | (19 | ) | |||||||
Net cash flows used by investing activities | (782 | ) | (638 | ) | (685 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of debt | 546 | – | – | |||||||||
| Principal payments on debt | (250 | ) | (245 | ) | (252 | ) | ||||||
| Issuance of common stock | – | – | – | |||||||||
| Issuance of cumulative Series I preferred stock | – | – | 750 | |||||||||
| Issuance of cumulative Series H preferred stock | – | 750 | – | |||||||||
| Purchase of treasury stock | – | 1 | – | |||||||||
| Other, net | 5 | (4 | ) | (5 | ) | |||||||
Net cash flows provided by financing activities | 301 | 502 | 493 | |||||||||
| Net change in cash | – | – | – | |||||||||
| Cash, beginning of year | – | – | – | |||||||||
Cash, end of year | $ | – | $ | – | $ | – | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid (received): | ||||||||||||
| Interest | $ | 102 | $ | 123 | $ | 133 | ||||||
| Federal income taxes | (627 | ) | (369 | ) | (616 | ) | ||||||
| Non-cash transactions: | ||||||||||||
| Notes receivable for the issuance of common stock | – | 4 | 4 | |||||||||
| Years ended December 31 | 2006 | 2005 | 2004 | |||||||||
| (In millions) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
| Net income | $ | 1,108 | $ | 264 | $ | 425 | ||||||
| Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||||||
| Income of subsidiaries | (1,176 | ) | (348 | ) | (524 | ) | ||||||
| Dividends received from subsidiaries | 91 | 127 | 307 | |||||||||
| Realized investment losses | 7 | 29 | 62 | |||||||||
| Other, net | 7 | (59 | ) | 233 | ||||||||
| Total adjustments | (1,071 | ) | (251 | ) | 78 | |||||||
Net cash flows provided by operating activities | 37 | 13 | 503 | |||||||||
Cash flows from investing activities: | ||||||||||||
| Sales of fixed maturity securities | 1 | 8 | 85 | |||||||||
| Purchases of fixed maturity securities | — | — | (27 | ) | ||||||||
| Change in short term investments | (60 | ) | 563 | (710 | ) | |||||||
| Capital contributions to subsidiaries | (3 | ) | (41 | ) | (156 | ) | ||||||
| Return of capital from subsidiaries | 19 | — | 18 | |||||||||
| Other, net | (7 | ) | (64 | ) | (14 | ) | ||||||
Net cash flows provided (used) by investing activities | (50 | ) | 466 | (804 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
| Proceeds from the issuance of long-term debt | 746 | — | 546 | |||||||||
| Principal payments on debt | (250 | ) | (493 | ) | (250 | ) | ||||||
| Payment to repurchase Series H issue preferred stock | (993 | ) | — | — | ||||||||
| Proceeds from the issuance of common stock | 499 | — | — | |||||||||
| Stock options exercised | 10 | 2 | — | |||||||||
| Other, net | 1 | 12 | 5 | |||||||||
Net cash flows provided (used) by financing activities | 13 | (479 | ) | 301 | ||||||||
| Net change in cash | — | — | — | |||||||||
| Cash, beginning of year | — | — | — | |||||||||
Cash, end of year | $ | — | $ | — | $ | — | ||||||
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Certain amounts applicable to prior years have been reclassified to conform to classifications followed in 2004.
The preparation of Condensed Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date Loews Corporation (Loews) owned approximately 89% of the financial statements and the reported amountsoutstanding common stock of revenues and expenses during the reporting period. Actual results may differ from those estimates.
CNAF as of December 31, 2006.
CNAF classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity securities as available-for-sale, and as such, they are carried at fair value. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, which are included in net investment income. Changes in fair value are reported as a component of other comprehensive income.
CNAF’s investments in fixed maturity securities are composed entirely of corporate bonds.
185
C. Debt
Debt is composed of the following obligations.
| December 31 (In millions) | 2004 | 2003 | ||||||
| Variable rate debt: | ||||||||
| Credit facility due April 30, 2004 | $ | – | $ | 250 | ||||
| Senior notes: | ||||||||
| 6.50%, face amount of $493, due April 15, 2005 | 493 | 492 | ||||||
| 6.75%, face amount of $250, due November 15, 2006 | 249 | 249 | ||||||
| 6.45%, face amount of $150, due January 15, 2008 | 149 | 149 | ||||||
| 6.60%, face amount of $200, due December 15, 2008 | 199 | 199 | ||||||
| 5.85%, face amount of $549, due December 15, 2014 | 546 | – | ||||||
| 6.95%, face amount of $150, due January 15, 2018 | 149 | 149 | ||||||
| Debenture, 7.25%, face amount of $243, due November 15, 2023 | 241 | 241 | ||||||
| Urban Development Action Grant, 1.00%, due May 7, 2019 | 3 | 3 | ||||||
Total | $ | 2,029 | $ | 1,732 | ||||
| Short term debt | $ | 493 | $ | 250 | ||||
| Long term debt | 1,536 | 1,482 | ||||||
Total | $ | 2,029 | $ | 1,732 | ||||
| December 31 | 2006 | 2005 | ||||||
| (In millions) | ||||||||
| Senior notes: | ||||||||
| 6.750%, face amount of $250, due November 15, 2006 | $ | — | $ | 250 | ||||
| 6.450%, face amount of $150, due January 15, 2008 | 150 | 149 | ||||||
| 6.600%, face amount of $200, due December 15, 2008 | 200 | 199 | ||||||
| 6.000%, face amount of $400, due August 15, 2011 | 398 | — | ||||||
| 5.850%, face amount of $549, due December 15, 2014 | 546 | 546 | ||||||
| 6.500%, face amount of $350, due August 15, 2016 | 348 | — | ||||||
| 6.950%, face amount of $150, due January 15, 2018 | 149 | 149 | ||||||
| Debenture, 7.250%, face amount of $243, due November 15, 2023 | 241 | 241 | ||||||
| Urban Development Action Grant, 1.00%, due May 7, 2019 | 3 | 3 | ||||||
Total | $ | 2,035 | $ | 1,537 | ||||
| Short term debt | $ | — | $ | 250 | ||||
| Long term debt | 2,035 | 1,287 | ||||||
Total | $ | 2,035 | $ | 1,537 | ||||
On December 15, 2004 CNA Financial completed
D. Management and Administrative Expenses
Certain administrative expenses resulting principally from shareholder expenses, consulting and fees and dues to states of incorporation of $5 million, $7 million and $3 million were paid directly by CNAF in 2004, 2003 and 2002.
E.
2006.
CNA Surety has provided significant surety bond protection for a large national contractor that undertakes projects for the construction of government and private facilities, a substantial portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has provided loans to the contractor through a credit facility. In December of 2004, the credit facility was amended to increase the maximum available loans to $106 million from $86 million. The amendment also provides that CNAF may in its sole discretion further increase the amounts available for loans
186149
under
In connection with the amendment to increase the maximum available line under the credit facility in December of 2004, the term of the loan under the credit facility was extended to mature in March of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum, effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the facility are at or below the original $86 million limit.
Loans under the credit facility are secured by a pledge of substantially all of the assets of the contractor and certain of its affiliates. In connection with the credit facility, CNAF has also guaranteed or provided collateral for letters of credit which are charged against the maximum available line and, if drawn upon, would be treated as loans under the credit facility. As of December 31, 2004 and 2003, these guarantees and collateral obligations aggregated $13 million and $7 million.
As of December 31, 2004, the aggregate amount of outstanding principal and accrued interest under the credit facility was $70 million, net of participation by Loews in the amount of $29 million.
The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and appointed a chief restructuring officer to manage execution of the plan. In the course of addressing various expense, operational and strategic issues, however, the contractor has decided to substantially reduce the scope of its original business and to concentrate on those segments determined to be potentially profitable. As a consequence, operating cash flow, and in turn the capacity to service debt, has been reduced below previous levels. Restructuring plans have also been extended to accommodate these circumstances. In light of these developments, CNA has taken an impairment charge of $56 million pretax for the fourth quarter of 2004, net of the participation by Loews, with respect to amounts loaned under the facility. Any draws under the credit facility beyond $106 million or further changes in the national contractor’s business plan or projections may necessitate further impairment charges.
As a result of the impairment taken in the fourth quarter of 2004, CNAF plans to recognize income using the effective interest rate method starting in the first quarter of 2005. Under this method, interest income recognized will be accrued on the net carrying amount of the loan at the effective interest rate used to discount the impaired loan’s estimated future cash flows. The excess of the cash received over the interest income recognized will reduce the carrying amount of the loan. The change in present value, if any, of the loan that is attributable to changes in the amount or timing of future cash flows will be recorded similar to the impairment charges previously recorded.
CNA Surety has advised that it intends to continue to provide surety bonds on behalf of the contractor during this extended restructuring period, subject to the contractor’s initial and ongoing compliance with CNA Surety’s underwriting standards and ongoing management of CNA Surety’s exposure to the contractor. All bonds written for the national contractor are issued by CCC and its affiliates, other than CNA Surety, and are subject to underlying reinsurance treaties pursuant to which all bonds on behalf of CNA Surety are 100% reinsured to one of CNA Surety’s insurance subsidiaries. This arrangement underlies the more limited reinsurance coverages discussed below.
Through facultative reinsurance contracts with CCC, CNA Surety’s exposure on bonds written from October 1, 2002 through October 31, 2003 has been limited to $20 million per bond, with CCC to incur 100% of losses above that level. For bonds written subsequent to November 1, 2003, CNA Surety’s exposure is limited to $14.5 million per bond, subject to a per principal retention of $60 million and an aggregate limit of $150 million, under all facultative insurance coverage and two excess of loss treaties between CNA Surety and CCC. The first excess of loss contract, $40 million excess of $60 million, provides CNA Surety coverage exclusively for the national contractor, while the second excess of loss contract, $50 million excess of $100 million, provides CNA Surety with coverage for the national contractor as well as other CNA Surety risks. For bonds written prior to September 30, 2002 there is no facultative reinsurance and CCC retains 100% of the losses above the per principal retention of $60 million.
187
Renewals of both excess of loss contracts were effective January 1, 2005. CCC and CNA Surety are presently discussing a possible restructuring of the reinsurance arrangements discussed in the paragraph above, under which all bonds written for the national contractor would be reinsured by CCC under an excess of $60 million treaty and other CNA Surety accounts would be covered by a separate $50 million excess of $100 million treaty.
CCC and CNA Surety continue to engage in periodic discussions with insurance regulatory authorities regarding the level of bonds provided for this principal and will continue to apprise those authorities regarding their ongoing exposure to this account.
Indemnification and subrogation rights, including rights to contract proceeds on construction projects in the event of default, exist that reduce CNA Surety’s and ultimately the Company’s exposure to loss. While CNAF believes that the contractor’s continuing restructuring efforts may be successful and provide sufficient cash flow for its operations, the contractor’s failure to ultimately achieve its extended restructuring plan or perform its contractual obligations under the credit facility or under the Company’s surety bonds could have a material adverse effect on the Company’s results of operations and/or equity. If such failures occur, the Company estimates the surety loss, net of indemnification and subrogation recoveries, but before the effects of minority interest, to be approximately $200 million pretax. In addition, such failures could cause the remaining unimpaired amount due under the credit facility to be uncollectible.
agreements.
2006.
F. Capital Transactions with Subsidiaries
2006.
G. Dividends from Subsidiaries and Affiliates
In 2004, 2003 and 2002, CNAF received approximately $307 million, $93 million and $118 million in dividends from subsidiaries.
CNAF’s ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from its subsidiaries. The payment of dividends to CNAF by its insurance subsidiaries without prior approval of the insurance department of each subsidiary’s domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments.
Dividends from CCC are subjectlonger provides additional liquidity to the insurance holding company lawscontractor and has not recognized interest income related to the loans since June 30, 2005.
188
paying ordinary dividends in the second quarter of 2005 as a result of a $500 million dividend received from its subsidiary, CAC, on February 11, 2005.
In addition, by agreement with the New Hampshire Insurance Department, the CIC Group may not pay dividends to CCC until after January 1, 2006.
CNAF’s domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based capital is a method developed by the NAIC to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of risk-based capital specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual capital is evaluated by a comparison to the risk-based capital results, as determined by the formula. Companies below minimum risk-based capital requirements are classified within certain levels, each of which requires specified corrective action. As of December 31, 20042005, these guarantees and 2003, all of CNAF’s domestic insurance subsidiaries exceeded the minimum risk-based capital requirements.
H. Preferred Stock
The capital plan established in November of 2003 consisted of the sale of $750collateral obligations aggregated $9 million of a new series of CNA convertible preferred stock to Loews. The preferred stock converted into 32,327,015 shares of CNAF common stock on April 20, 2004. The number of shares was determined utilizing a conversion price per share of common stock that was based on average market prices of CNAF common stock from November 17, 2003 through November 21, 2003. The terms of the Series I Issue were approved by a special committee of independent members of CNAF’s Board of Directors.
During 2002, CNAF sold $750 million of a then new issue of preferred stock, designated Series H Cumulative Preferred Issue (Series H Issue), to Loews. The terms of the Series H Issue were approved by a special committee of independent members of CNAF’s Board of Directors. The proceeds from the Series H Issue were applied by CNAF to increase the statutory surplus of CNAF’s principal insurance subsidiary, CCC.
The Series H Issue accrues cumulative dividends at an initial rate of 8% per year, compounded annually. It will be adjusted quarterly to a rate equal to 400 basis points above the ten-year U.S. Treasury rate beginning with the quarterly dividend after the first triggering event to occur of either (i) an increase by two intermediate rating levels of the financial strength rating of CCC from its rating at the time of issuance by any of A.M. Best Company, Standard & Poor’s or Moody’s Investor Services or (ii) one year following an increase by one intermediate ratings level of the financial strength rating of CCC by any one of those rating agencies. Accrued but unpaid cumulative dividends cannot be paid on the Series H Issue unless and until one of the two triggering events described above has occurred. Beginning with the quarter following an increase of one intermediate rating level in CCC’s financial strength rating, however, current (but not accrued cumulative) quarterly dividends can be paid. As of December 31, 2004, the Company has $127 million of undeclared (and therefore unrecorded) but accumulated dividends.
The Series H Issue is senior to CNAF’s common stock as to the payment of dividends and amounts payable upon any liquidation, dissolution or winding up. No dividends may be declared on CNAF’s common stock until all cumulative dividends on the Series H Issue have been paid. CNAF may not issue any equity securities ranking senior to or on par with the Series H Issue without the consent of a majority of its stockholders. The Series H Issue is non-voting and is not convertible into any other securities of CNAF. It may be redeemed only upon the mutual agreement of CNAF and a majority of the stockholders of the preferred stock.
189150
| Gross Insurance Reserves | Insurance | Amortiz- | Gross Insurance Reserves | Insurance | Amortiz- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Claims and | ation | Claim | Claims and | ation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred | Claim | Future | Policy- | Net | Policy- | of Deferred | Other | Net | Deferred | And Claim | Future | Policy- | Net | Policy- | of Deferred | Other | Net | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition | And Claim | Policy | Unearned | holders | Net Earned | Investment | holders’ | Acquisition | Operating | Written Pre- | Acquisition | Adjustment | Policy | Unearned | holders’ | Net Earned | Investment | holders’ | Acquisition | Operating | Written Pre- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Costs | Expense | Benefits | Premium | Funds | Premiums | Income (a) | Benefits | Costs | Expenses | miums (b) | Costs | Expense | Benefits | Premium | Funds | Premiums | Income (a) | Benefits | Cost | Expenses | miums (b) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Standard Lines | $ | 407 | $ | 14,934 | $ | — | $ | 2,007 | $ | 35 | $ | 4,413 | $ | 991 | $ | 3,111 | $ | 981 | $ | 521 | $ | 4,433 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Lines | 283 | 5,529 | — | 1,599 | — | 2,555 | 403 | 1,550 | 538 | 284 | 2,596 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Life and Group Non-Core | 500 | 3,134 | 6,645 | 173 | 980 | 641 | 698 | 1,195 | 14 | 259 | 633 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other Non-Core | — | 6,039 | — | 5 | — | (1 | ) | 320 | 190 | 1 | 137 | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eliminations | — | — | — | — | — | (5 | ) | — | 1 | — | (56 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Operations | $ | 1,190 | $ | 29,636 | $ | 6,645 | $ | 3,784 | $ | 1,015 | $ | 7,603 | $ | 2,412 | $ | 6,047 | $ | 1,534 | $ | 1,145 | $ | 7,655 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2005 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Standard Lines | $ | 408 | $ | 15,084 | $ | — | $ | 1,952 | $ | 30 | $ | 4,410 | $ | 767 | $ | 3,876 | $ | 986 | $ | 554 | $ | 4,382 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Lines | 274 | 5,205 | — | 1,577 | — | 2,475 | 281 | 1,621 | 532 | 223 | 2,463 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Life and Group Non-Core | 515 | 3,277 | 6,297 | 168 | 1,465 | 704 | 593 | 1,161 | 22 | 318 | 694 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other Non-Core | — | 7,372 | — | 9 | — | (8 | ) | 251 | 343 | 3 | 138 | (19 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eliminations | — | — | — | — | — | (12 | ) | — | (2 | ) | — | (75 | ) | (12 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Operations | $ | 1,197 | $ | 30,938 | $ | 6,297 | $ | 3,706 | $ | 1,495 | $ | 7,569 | $ | 1,892 | $ | 6,999 | $ | 1,543 | $ | 1,158 | $ | 7,508 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2004 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Standard Lines | $ | 444 | $ | 14,302 | $ | – | $ | 1,978 | $ | 43 | $ | 4,917 | $ | 495 | $ | 3,487 | $ | 1,109 | $ | 687 | $ | 4,582 | $ | 4,917 | $ | 496 | $ | 3,489 | $ | 1,109 | $ | 687 | $ | 4,582 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Lines | 285 | 4,860 | – | 1,546 | – | 2,277 | 246 | 1,446 | 506 | 201 | 2,391 | 2,277 | 246 | 1,446 | 506 | 189 | 2,391 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Life and Group Non-Core | 537 | 3,680 | 5,883 | 164 | 1,682 | 921 | 692 | 1,369 | 36 | 367 | 633 | 921 | 692 | 1,369 | 36 | 367 | 633 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other Non-Core | 2 | 8,678 | – | 834 | – | 128 | 241 | 165 | 29 | 151 | 5 | 128 | 246 | 162 | 29 | 151 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eliminations | – | – | – | – | – | (34 | ) | – | (21 | ) | – | (99 | ) | (17 | ) | (34 | ) | — | (21 | ) | — | (99 | ) | (17 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Operations | $ | 1,268 | $ | 31,520 | $ | 5,883 | $ | 4,522 | $ | 1,725 | $ | 8,209 | $ | 1,674 | $ | 6,446 | $ | 1,680 | $ | 1,307 | $ | 7,594 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Standard Lines | $ | 499 | $ | 14,282 | $ | – | $ | 2,267 | $ | 79 | $ | 4,530 | $ | 407 | $ | 4,542 | $ | 1,195 | $ | 938 | $ | 4,561 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Lines | 257 | 4,200 | – | 1,480 | 3 | 1,840 | 201 | 1,651 | 408 | 201 | 2,038 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Life and Group Non-Core | 1,745 | 3,576 | 8,161 | 153 | 522 | 2,376 | 821 | 2,394 | 224 | 596 | 538 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other Non-Core | 32 | 9,672 | – | 1,100 | (3 | ) | 582 | 218 | 1,815 | 138 | 199 | 496 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eliminations | – | – | – | – | – | (114 | ) | – | (115 | ) | – | (118 | ) | (16 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Operations | $ | 2,533 | $ | 31,730 | $ | 8,161 | $ | 5,000 | $ | 601 | $ | 9,214 | $ | 1,647 | $ | 10,287 | $ | 1,965 | $ | 1,816 | $ | 7,617 | $ | 8,209 | $ | 1,680 | $ | 6,445 | $ | 1,680 | $ | 1,295 | $ | 7,594 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2002 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Standard Lines | $ | 519 | $ | 12,779 | $ | – | $ | 2,163 | $ | 47 | $ | 4,678 | $ | 475 | $ | 3,491 | $ | 1,125 | $ | 654 | $ | 4,755 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Lines | 216 | 3,628 | – | 1,261 | 3 | 1,451 | 172 | 1,069 | 349 | 170 | 1,574 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Life and Group Non-Core | 1,764 | 3,457 | 7,409 | 156 | 533 | 3,408 | 821 | 3,220 | 162 | 732 | 1,682 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other Non-Core | 52 | 7,506 | – | 1,253 | (3 | ) | 714 | 262 | 681 | 155 | 321 | 680 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eliminations | – | – | – | (13 | ) | – | (38 | ) | – | (41 | ) | – | (143 | ) | (38 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Operations | $ | 2,551 | $ | 27,370 | $ | 7,409 | $ | 4,820 | $ | 580 | $ | 10,213 | $ | 1,730 | $ | 8,420 | $ | 1,791 | $ | 1,734 | $ | 8,653 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (a) | Investment income is allocated based on each segment’s net carried insurance reserves as adjusted. | |
| (b) | Net written premiums relate to business in property and casualty companies only. |
(a) Investment income is allocated based on each segment’s net carried insurance reserves as adjusted.
(b) Net written premiums relate to business in property and casualty companies only.
190151
SCHEDULE V. VALUATION AND QUALIFYING ACCOUNTS
| Balance at | Charged to | Charged to | Balance at | Charged to | Charged to | |||||||||||||||||||||||||||||||||||
| Beginning | Costs and | Other | Balance at | Beginning | Costs and | Other | Balance at | |||||||||||||||||||||||||||||||||
| of Period | Expenses | Accounts (a) | Deductions | End of Period | of Period | Expenses | Accounts (a) | Deductions | End of Period | |||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||
| Deducted from assets: | ||||||||||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts: | ||||||||||||||||||||||||||||||||||||||||
| Insurance and reinsurance receivables | $ | 964 | $ | 48 | $ | 3 | $ | 178 | $ | 837 | ||||||||||||||||||||||||||||||
| Valuation allowance: | ||||||||||||||||||||||||||||||||||||||||
| Deferred income taxes | $ | 30 | $ | — | $ | — | $ | 30 | $ | — | ||||||||||||||||||||||||||||||
| Year ended December 31, 2005 | ||||||||||||||||||||||||||||||||||||||||
| Deducted from assets: | ||||||||||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts: | ||||||||||||||||||||||||||||||||||||||||
| Insurance and reinsurance receivables | $ | 1,048 | $ | 111 | $ | 3 | $ | 198 | $ | 964 | ||||||||||||||||||||||||||||||
| Valuation allowance: | ||||||||||||||||||||||||||||||||||||||||
| Deferred income taxes | $ | 33 | $ | (3 | ) | $ | — | $ | — | $ | 30 | |||||||||||||||||||||||||||||
| Year ended December 31, 2004 | ||||||||||||||||||||||||||||||||||||||||
| Deducted from assets: | ||||||||||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts: | ||||||||||||||||||||||||||||||||||||||||
| Insurance and reinsurance receivables | $ | 948 | $ | 87 | $ | 14 | $ | 1 | $ | 1,048 | $ | 948 | $ | 312 | $ | 5 | $ | 217 | $ | 1,048 | ||||||||||||||||||||
| Year ended December 31, 2003 | ||||||||||||||||||||||||||||||||||||||||
| Deducted from assets: | ||||||||||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts: | ||||||||||||||||||||||||||||||||||||||||
| Insurance and reinsurance receivables | $ | 352 | $ | 602 | $ | 3 | $ | 9 | $ | 948 | ||||||||||||||||||||||||||||||
| Valuation allowance: | ||||||||||||||||||||||||||||||||||||||||
| Deferred income taxes | $ | — | $ | 33 | $ | — | $ | — | $ | 33 | ||||||||||||||||||||||||||||||
(a) Amount includes effects of foreign currency translation.
| (a) | Amount includes effects of foreign currency translation. |
| Consolidated Property and Casualty Operations | Consolidated Property and Casualty Operations | |||||||||||||||||||||||
| As of and for the years ended December 31 | 2004 | 2003 | 2002 | 2006 | 2005 | 2004 | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
| Deferred acquisition costs | $ | 1,267 | $ | 1,321 | $ | 1,257 | $ | 1,190 | $ | 1,197 | ||||||||||||||
| Reserves for unpaid claim and claim adjustment expenses | 31,201 | 31,282 | 25,648 | 29,459 | 30,694 | |||||||||||||||||||
| Discount deducted from claim and claim adjustment expense reserves above (based on interest rates ranging from 3.5% to 7.5%) | 1,827 | 2,280 | 2,440 | 1,648 | 1,739 | |||||||||||||||||||
| Unearned premiums | 4,522 | 5,000 | 4,813 | 3,784 | 3,706 | |||||||||||||||||||
| Net written premiums | 7,594 | 7,617 | 8,653 | 7,655 | 7,509 | $ | 7,594 | |||||||||||||||||
| Net earned premiums | 7,925 | 7,469 | 8,438 | 7,595 | 7,558 | 7,925 | ||||||||||||||||||
| Net investment income | 1,260 | 1,532 | 1,422 | 2,035 | 1,595 | 1,266 | ||||||||||||||||||
| Incurred claim and claim adjustment expenses related to current year | 5,118 | 4,747 | 6,722 | 4,837 | 5,054 | 5,118 | ||||||||||||||||||
| Incurred claim and claim adjustment expenses related to prior years | 235 | 2,431 | 52 | 332 | 1,107 | 234 | ||||||||||||||||||
| Amortization of deferred acquisition costs | 1,641 | 1,827 | 1,660 | 1,534 | 1,541 | 1,641 | ||||||||||||||||||
| Paid claim and claim adjustment expenses | 5,359 | 5,075 | 8,218 | 4,165 | 3,541 | 5,401 | ||||||||||||||||||
191152
| CNA Financial Corporation | ||||||
| Dated: February | By | /s/ Stephen W. Lilienthal | ||||
| Stephen W. Lilienthal | ||||||
| Chief Executive Officer | ||||||
| (Principal Executive Officer) | ||||||
| By | /s/ D. Craig Mense | |||||
| D. Craig Mense | ||||||
| Executive Vice President and | ||||||
| Chief Financial Officer | ||||||
| Dated: February | By | /s/ Brenda J. Gaines | ||||
| (Brenda J. Gaines, Director) | ||||||
| Dated: February | By | /s/ | ||||
| ( | ||||||
| Dated: February | By | /s/ Paul J. Liska | ||||
| (Paul J. Liska, Director) | ||||||
| Dated: February 22, 2007 | By | /s/ Jose Montemayor | ||||
| (Jose Montemayor, Director) | ||||||
| Dated: February 22, 2007 | By | /s/ Don M. Randel | ||||
| (Don M. Randel, Director) |
193153
| Dated: February | By | /s/ Joseph Rosenberg | ||||
| (Joseph Rosenberg, Director) | ||||||
| Dated: February | By | /s/ | ||||
| ( | ||||||
| Dated: February | By | /s/ | ||||
| ( | ||||||
| Dated: February | By | /s/ Marvin Zonis | ||||
| (Marvin Zonis, Director) |
195154