CNA FINANCIAL CORP
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[
Ö
] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-5823
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 36-6169860 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 333 S. Wabash | ||
| Chicago, Illinois | 60604 | |
| (Address of principal executive offices) | (Zip Code) |
(312) 822-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock | New York Stock Exchange | |
| with a par value | Chicago Stock Exchange | |
| of $2.50 per share |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes... No
Ö
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15 (d) of the Act. Yes... No
Ö
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
Ö
No...
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes... No....
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [
Ö
]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer.... Accelerated filer
Ö
Non-accelerated filer (Do not check if a
smaller reporting company).... Smaller reporting company....
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes... No
Ö
As of
February 19, 2010, 269,074,707 shares of common stock were outstanding. The aggregate market
value of the common stock held by non-affiliates of the registrant as of June 30, 2009 was
approximately $412 million based on the closing price of $15.47 per share of the common stock on
the New York Stock Exchange on June 30, 2009.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the CNA Financial Corporation Proxy Statement prepared for the 2010 annual meeting
of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this
Report.
| Item | Page | |||
| Number | Number | |||
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| 1. | 3 | |||
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| 1A. | 8 | |||
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| 1B. | 16 | |||
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| 2. | 16 | |||
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| 3. | 16 | |||
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| 4. | 16 | |||
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| 5. | 17 | |||
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| 6. | 19 | |||
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| 7. | 20 | |||
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| 7A. | 56 | |||
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| 8. | 61 | |||
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| 9. | 144 | |||
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| 9A. | 144 | |||
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| 9B. | 144 | |||
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| 10. | 145 | |||
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| 11. | 146 | |||
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| 12. | 146 | |||
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| 13. | 146 | |||
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| 14. | 146 | |||
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| 15. | 147 |
2
Table of Contents
CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company.
Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. References to
“CNA,” “the Company,” “we,” “our,” “us” or like terms refer to the business of CNAF and its
subsidiaries. Our property and casualty insurance operations are conducted by Continental Casualty
Company (CCC), incorporated in 1897, and The Continental Insurance Company (CIC), organized in
1853, and affiliates. Loews Corporation (Loews) owned approximately 90% of our outstanding common
stock as of December 31, 2009.
Our ongoing core businesses serve a wide variety of customers, including small, medium and large
businesses, associations, professionals, and groups with a broad range of insurance and risk
management products and services.
Our insurance products primarily include commercial property and casualty coverages. Our services
include risk management, information services, warranty and claims administration. Our products
and services are marketed through independent agents, brokers and managing general agents.
Our core business, commercial property and casualty insurance operations, is reported in two
business segments: CNA Specialty and CNA Commercial. Our non-core operations are managed in two
business segments: Life & Group Non-Core and Corporate & Other Non-Core. Each segment is managed
separately due to 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 Management’s Discussion and Analysis (MD&A) included under Item 7
and in Note N of the Consolidated Financial Statements included under Item 8.
Competition
The property and casualty insurance industry is highly competitive both as to rate and service. We
compete with stock and mutual insurance companies, reinsurance companies and other entities for
both producers and customers. We must continuously allocate resources to refine and improve our
insurance products and services.
Rates among insurers vary according to the types of insurers and methods of operation. We compete
for business not only on the basis of rate, but also on the basis of availability of coverage
desired by customers, ratings and quality of service, including claim adjustment services.
There are approximately 2,400 individual companies that sell property and casualty insurance in the
United States. Based on 2008 statutory net written premiums, we are the seventh largest commercial
insurance writer and the thirteenth largest property and casualty insurance organization in the
United States.
Regulation
The insurance industry is subject to comprehensive and detailed regulation and supervision
throughout the United States. Each state has established supervisory agencies with broad
administrative powers relative to licensing insurers and agents, approving policy forms,
establishing reserve requirements, prescribing the form and content of statutory financial reports,
and regulating capital adequacy and the type, quality and amount of investments permitted. Such
regulatory powers also extend to premium rate regulations, which require that rates not be
excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by
insurance subsidiaries, intercompany transfers of assets may be subject to prior notice or approval
by the state insurance regulators, depending on the size of such transfers and payments in relation
to the financial position of the insurance affiliates making the transfer or payment.
Insurers are also required by the states to provide coverage to insureds who would not otherwise be
considered eligible by the insurers. Each state dictates the types of insurance and the level of
coverage that must be provided to such involuntary risks. Our share of these involuntary risks is
mandatory and generally a function of our respective share of the voluntary market by line of
insurance in each state.
Further, insurance companies are subject to state guaranty fund and other insurance-related
assessments. Guaranty fund assessments are levied by the state departments of insurance to cover
claims of insolvent insurers. Other insurance-related assessments are generally levied by state
agencies to fund various
3
Table of Contents
organizations including disaster relief funds, rating bureaus, insurance departments, and workers’
compensation second injury funds, or by industry organizations that assist in the statistical
analysis and ratemaking process.
Reform of the U.S. tort liability system is another issue facing the insurance industry. Over the
last decade, many states have passed some type of tort reform. Even though there has been some
tort reform success, new causes of action and theories of damages continue to be proposed in state
court actions or by federal or state legislatures that continue to expand liability for insurers
and their policyholders. For example, some state legislatures are considering legislation
addressing direct actions against insurers related to bad faith claims. As a result of this
unpredictability in the law, insurance underwriting and rating are expected to continue to be
difficult in commercial lines, professional liability and some specialty coverages.
Although the federal government and its regulatory agencies do not directly regulate the business
of insurance, federal legislative and regulatory initiatives can impact the insurance industry in a
variety of ways. These initiatives and legislation include tort reform proposals; proposals
addressing natural catastrophe exposures; terrorism risk mechanisms; federal financial services
reforms; federal regulation of insurance; various tax proposals affecting insurance companies; and
possible regulatory limitations, impositions and restrictions arising from the Emergency Economic
Stabilization Act of 2008.
Employee Relations
As of December 31, 2009, we had approximately 8,900 employees and have experienced satisfactory
labor relations. We have never had work stoppages due to labor disputes.
We have comprehensive benefit plans for substantially all of our employees, including retirement
plans, savings plans, disability programs, group life programs and group healthcare programs. See
Note J of the Consolidated Financial Statements included under Item 8 for further discussion of our
benefit plans.
4
Table of Contents
The following table displays the distribution of our direct written premiums by geographic
concentration.
Direct Written Premiums
| Percent of Total | ||||||||||||
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
|
California
|
9.1 | % | 9.2 | % | 9.5 | % | ||||||
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New York
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6.8 | 6.9 | 7.0 | |||||||||
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Texas
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6.6 | 6.2 | 6.1 | |||||||||
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Florida
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6.2 | 6.5 | 7.5 | |||||||||
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Illinois
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3.8 | 3.8 | 3.8 | |||||||||
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New Jersey
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3.7 | 3.8 | 3.7 | |||||||||
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Missouri
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3.6 | 3.1 | 2.9 | |||||||||
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Pennsylvania
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3.2 | 3.3 | 3.4 | |||||||||
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All other states, countries or political subdivisions (a)
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57.0 | 57.2 | 56.1 | |||||||||
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Total
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100.0 | % | 100.0 | % | 100.0 | % | ||||||
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| (a) |
No other individual state, country or political subdivision accounts for more than 3.0% of
direct written premiums.
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Approximately 7.0%, 7.4% and 6.9% of our direct written premiums were derived from outside of
the United States for the years ended December 31, 2009, 2008 and 2007. Premiums from any
individual foreign country were not significant.
Property and Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over time of reserves
established for property and casualty claim and claim adjustment expenses at the end of the
preceding ten calendar years for our property and casualty insurance companies. The table excludes
our life subsidiaries, and as such, the carried reserves will not agree to the Consolidated
Financial Statements included under Item 8. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down, shows the cumulative
amounts paid as of the end of successive years with respect to the originally reported reserve
liability. The third section, reading down, shows re-estimates of the originally recorded reserves
as of the end of each successive year, which is the result of our property and casualty insurance
subsidiaries’ expanded awareness of additional facts and circumstances that pertain to the
unsettled claims. The last section compares the latest re-estimated reserves to the reserves
originally established, and indicates whether the original reserves were adequate or inadequate to
cover the estimated costs of unsettled claims.
The loss reserve development table is cumulative and, therefore, ending balances should not be
added since the amount at the end of each calendar year includes activity for both the current and
prior years. The development amounts in the table below include the impact of commutations, but
exclude the impact of the provision for uncollectible reinsurance.
5
Table of Contents
Schedule of Loss Reserve Development
| Calendar Year Ended | 1999 (a) | 2000 | 2001 (b) | 2002 (c) | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||
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Originally reported gross
reserves for unpaid claim
and claim adjustment
expenses
|
$ | 26,850 | $ | 26,510 | $ | 29,649 | $ | 25,719 | $ | 31,284 | $ | 31,204 | $ | 30,694 | $ | 29,459 | $ | 28,415 | $ | 27,475 | $ | 26,712 | ||||||||||||||||||||||
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Originally reported ceded
recoverable
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6,091 | 7,333 | 11,703 | 10,490 | 13,847 | 13,682 | 10,438 | 8,078 | 6,945 | 6,213 | 5,524 | |||||||||||||||||||||||||||||||||
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Originally reported net
reserves for unpaid claim
and claim adjustment
expenses
|
$ | 20,759 | $ | 19,177 | $ | 17,946 | $ | 15,229 | $ | 17,437 | $ | 17,522 | $ | 20,256 | $ | 21,381 | $ | 21,470 | $ | 21,262 | $ | 21,188 | ||||||||||||||||||||||
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Cumulative net paid as of:
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One year later
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$ | 6,547 | $ | 7,686 | $ | 5,981 | $ | 5,373 | $ | 4,382 | $ | 2,651 | $ | 3,442 | $ | 4,436 | $ | 4,308 | $ | 3,930 | $ | - | ||||||||||||||||||||||
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Two years later
|
11,937 | 11,992 | 10,355 | 8,768 | 6,104 | 4,963 | 7,022 | 7,676 | 7,127 | - | - | |||||||||||||||||||||||||||||||||
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Three years later
|
15,256 | 15,291 | 12,954 | 9,747 | 7,780 | 7,825 | 9,620 | 9,822 | - | - | - | |||||||||||||||||||||||||||||||||
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Four years later
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18,151 | 17,333 | 13,244 | 10,870 | 10,085 | 9,914 | 11,289 | - | - | - | - | |||||||||||||||||||||||||||||||||
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Five years later
|
19,686 | 17,775 | 13,922 | 12,814 | 11,834 | 11,261 | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Six years later
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20,206 | 18,970 | 15,493 | 14,320 | 12,988 | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Seven years later
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21,231 | 20,297 | 16,769 | 15,291 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Eight years later
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22,373 | 21,382 | 17,668 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Nine years later
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23,276 | 22,187 | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Ten years later
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23,992 | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Net reserves re-estimated
as of:
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End of initial year
|
$ | 20,759 | $ | 19,177 | $ | 17,946 | $ | 15,229 | $ | 17,437 | $ | 17,522 | $ | 20,256 | $ | 21,381 | $ | 21,470 | $ | 21,262 | $ | 21,188 | ||||||||||||||||||||||
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One year later
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21,163 | 21,502 | 17,980 | 17,650 | 17,671 | 18,513 | 20,588 | 21,601 | 21,463 | 21,021 | - | |||||||||||||||||||||||||||||||||
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Two years later
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23,217 | 21,555 | 20,533 | 18,248 | 19,120 | 19,044 | 20,975 | 21,706 | 21,259 | - | - | |||||||||||||||||||||||||||||||||
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Three years later
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23,081 | 24,058 | 21,109 | 19,814 | 19,760 | 19,631 | 21,408 | 21,609 | - | - | - | |||||||||||||||||||||||||||||||||
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Four years later
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25,590 | 24,587 | 22,547 | 20,384 | 20,425 | 20,212 | 21,432 | - | - | - | - | |||||||||||||||||||||||||||||||||
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Five years later
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26,000 | 25,594 | 22,983 | 21,076 | 21,060 | 20,301 | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Six years later
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26,625 | 26,023 | 23,603 | 21,769 | 21,217 | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Seven years later
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27,009 | 26,585 | 24,267 | 21,974 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Eight years later
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27,541 | 27,207 | 24,548 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Nine years later
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28,035 | 27,510 | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Ten years later
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28,352 | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
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Total net (deficiency)
redundancy
|
$ | (7,593 | ) | $ | (8,333 | ) | $ | (6,602 | ) | $ | (6,745 | ) | $ | (3,780 | ) | $ | (2,779 | ) | $ | (1,176 | ) | $ | (228 | ) | $ | 211 | $ | 241 | $ | - | ||||||||||||||
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Reconciliation to gross
re-estimated reserves:
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Net reserves re-estimated
|
$ | 28,352 | $ | 27,510 | $ | 24,548 | $ | 21,974 | $ | 21,217 | $ | 20,301 | $ | 21,432 | $ | 21,609 | $ | 21,259 | $ | 21,021 | $ | - | ||||||||||||||||||||||
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Re-estimated ceded
recoverable
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10,511 | 11,277 | 16,756 | 16,107 | 14,468 | 13,349 | 10,727 | 8,444 | 7,113 | 6,101 | - | |||||||||||||||||||||||||||||||||
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Total gross re-estimated
reserves
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$ | 38,863 | $ | 38,787 | $ | 41,304 | $ | 38,081 | $ | 35,685 | $ | 33,650 | $ | 32,159 | $ | 30,053 | $ | 28,372 | $ | 27,122 | $ | - | ||||||||||||||||||||||
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Total gross (deficiency)
redundancy
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$ | (12,013 | ) | $ | (12,277 | ) | $ | (11,655 | ) | $ | (12,362 | ) | $ | (4,401 | ) | $ | (2,446 | ) | $ | (1,465 | ) | $ | (594 | ) | $ | 43 | $ | 353 | $ | - | ||||||||||||||
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Net (deficiency)
redundancy related to:
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Asbestos claims
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$ | (1,655 | ) | $ | (1,590 | ) | $ | (818 | ) | $ | (827 | ) | $ | (177 | ) | $ | (123 | ) | $ | (113 | ) | $ | (112 | ) | $ | (107 | ) | $ | (79 | ) | $ | - | ||||||||||||
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Environmental claims
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(691 | ) | (635 | ) | (288 | ) | (282 | ) | (209 | ) | (209 | ) | (159 | ) | (159 | ) | (159 | ) | (76 | ) | - | |||||||||||||||||||||||
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Total asbestos and
environmental
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(2,346 | ) | (2,225 | ) | (1,106 | ) | (1,109 | ) | (386 | ) | (332 | ) | (272 | ) | (271 | ) | (266 | ) | (155 | ) | - | |||||||||||||||||||||||
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Other claims
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(5,247 | ) | (6,108 | ) | (5,496 | ) | (5,636 | ) | (3,394 | ) | (2,447 | ) | (904 | ) | 43 | 477 | 396 | - | ||||||||||||||||||||||||||
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Total net (deficiency)
redundancy
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$ | (7,593 | ) | $ | (8,333 | ) | $ | (6,602 | ) | $ | (6,745 | ) | $ | (3,780 | ) | $ | (2,779 | ) | $ | (1,176 | ) | $ | (228 | ) | $ | 211 | $ | 241 | $ | - | ||||||||||||||
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6
Table of Contents
| (a) |
Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of
$784 million as of December 31, 1999.
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| (b) |
Effective January 1, 2001, we established a new life insurance company, CNA Group Life
Assurance Company (CNAGLA). Further, on January 1, 2001 $1,055 million of reserves were
transferred from CCC to CNAGLA.
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| (c) |
Effective October 31, 2002, we sold CNA Reinsurance Company Limited. As a result of the
sale, net reserves were reduced by $1,316 million.
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Additional information regarding our property and casualty claim and claim adjustment expense
reserves and reserve development is set forth in the MD&A included under Item 7 and in
Notes A and F of the Consolidated Financial Statements included under Item 8.
Investments
Information on our investments is set forth in the MD&A included under Item 7 and in
Notes A, B, C and D of the Consolidated Financial Statements included under Item 8.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act).
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers, including CNA, that file electronically with the SEC. The public
can obtain any documents that we file with the SEC at
http://www.sec.gov
.
We also make available free of charge on or through our internet website (http://www.cna.com) our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the SEC. Copies of these reports may also be obtained, free of charge, upon written request
to: CNA Financial Corporation, 333 S. Wabash Avenue, Chicago, IL 60604, Attn. Jonathan D. Kantor,
Executive Vice President, General Counsel and Secretary.
7
Table of Contents
Our business faces many risks. We have described below some of the more significant risks which we
face. There may be additional risks that we do not yet know of or that we do not currently
perceive to be significant that may also impact our business. Each of the risks and uncertainties
described below could lead to events or circumstances that have a material adverse effect on our
results of operations, equity, business and insurer financial strength and debt ratings. You
should carefully consider and evaluate all of the information included in this Report and any
subsequent reports we may file with the SEC or make available to the public before investing in any
securities we issue.
We have incurred and may continue to incur significant realized and unrealized investment losses
and volatility in net investment income arising from the severe disruption in the capital and
credit markets.
Investment returns are an important part of our overall profitability. General economic
conditions, changes in financial markets such as fluctuations in interest rates, long term periods
of low interest rates, credit conditions and currency, commodity and stock prices, including the
short and long-term effects of losses in relation to asset-backed securities, and many other
factors beyond our control can adversely affect the value of our investments and the realization of
investment income. Further, we invest a portion of our assets in equity securities and limited
partnerships which are subject to greater volatility than our fixed income investments. Limited
partnership investments generally present greater volatility, higher illiquidity, and greater risk
than fixed income investments. As a result of all of these factors, we may not realize an adequate
return on our investments, may incur losses on sales of our investments, and may be required to
write down the value of our investments. Therefore, our results of operations, equity, business
and insurer financial strength and debt ratings could be materially adversely impacted.
Our underwriting results may continue to suffer as a result of the unfavorable global economic
conditions.
Overall global economic conditions may continue to be recessionary and highly unfavorable.
Although many lines of our business have both direct and indirect exposure to these economic
conditions, the exposure is especially high for the lines of business that provide management and
professional liability insurance, as well as surety bonds, to businesses engaged in real estate,
financial services and professional services. As a result, we have experienced and may continue to
experience unanticipated underwriting losses with respect to these lines of business.
Additionally, global recessionary conditions have led to decreased insured exposures causing us to
experience declines in premium volume. Consequently, our results of operations, equity, business
and insurer financial strength and debt ratings could be adversely impacted.
Our valuation of investments and impairment of securities requires significant judgment.
Our investment portfolio is exposed to various risks, such as interest rate, credit, and currency
risks, many of which are unpredictable. We exercise significant judgment in analyzing these risks
and in validating fair values provided by third parties for securities in our investment portfolio
that are not regularly traded. We also exercise significant judgment in determining whether the
impairment of particular investments is temporary or other-than-temporary. Securities with
exposure to residential and commercial mortgage and other loan collateral can be particularly
sensitive to fairly small changes in actual collateral performance and assumptions as to future
collateral performance.
During 2008, we incurred significant unrealized losses in our investment portfolio. During 2009,
financial markets were volatile and we experienced improvement in our unrealized position. In
addition, during 2009 and 2008 we recorded significant other-than-temporary impairment (OTTI)
losses primarily in the corporate and other taxable bonds, asset-backed securities and
non-redeemable preferred equity securities sectors.
Due to the inherent uncertainties involved with these types of risks and the resulting judgments,
we may incur further unrealized losses and conclude that further other-than-temporary write downs
of our investments are required. As a result, our results of operations, equity, business and
insurer financial strength and debt ratings could be materially adversely impacted. Additional
information on our investment portfolio is included in the MD&A under Item 7 and Notes B, C, and D
to the Consolidated Financial Statements included under Item 8.
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We are unable to predict the impact on us of governmental efforts and policy changes taken and
proposed to be taken in response to the unfavorable economic conditions.
The federal government has implemented various measures, including the establishment of the
Troubled Assets Relief Program pursuant to the Emergency Economic Stabilization Act of 2008, in an
effort to deal with the ongoing economic conditions. In addition, there are numerous proposals for
further legislative and regulatory actions at both the federal and state levels, particularly with
respect to the financial services industry. Since these new laws and regulations, or other policy
changes, could involve critical matters affecting our operations, they may have an impact on our
business and our overall financial condition. Due to this significant uncertainty, we are unable
to determine whether our actions in response to these governmental efforts will be effective or to
predict with any certainty the overall impact these governmental efforts will have on us. As a
result, our results of operations, equity, business and insurer financial strength and debt ratings
could be materially adversely impacted.
We are subject to extensive federal, state and local governmental regulations that restrict our
ability to do business and generate revenues.
The insurance industry is subject to comprehensive and detailed regulation and supervision
throughout the United States. Most insurance regulations are designed to protect the interests of
our policyholders rather than our investors. Each state in which we do business has established
supervisory agencies that regulate the manner in which we do business. Their regulations relate
to, among other things, the following:
| • |
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 or
unprofitable market areas;
|
|
| • |
the required use of certain methods of accounting and reporting;
|
|
| • |
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 private or quasi-governmental insurers;
|
|
| • |
licensing of insurers and agents;
|
|
| • |
approval of policy forms;
|
|
| • |
limitations on the ability of our insurance subsidiaries to pay dividends to us; and
|
|
| • |
limitations on the ability to non-renew, cancel or change terms and conditions in policies.
|
Regulatory powers also extend to premium rate regulations which require that rates not be
excessive, inadequate or unfairly discriminatory. The states in which we do business also require
us to provide coverage to persons whom we would not otherwise consider eligible. Each state
dictates the types of insurance and the level of coverage that must be provided to such involuntary
risks. Our share of these involuntary risks is mandatory and generally a function of our
respective share of the voluntary market by line of insurance in each state.
Any of these regulations could materially adversely affect our results of operations, equity,
business and insurer financial strength and debt ratings.
We are subject to capital adequacy requirements and, if we are unable to maintain or raise
sufficient capital to meet these requirements, regulatory agencies may restrict or prohibit us from
operating our business.
Insurance companies such as us are subject to risk-based capital standards set by state regulators
to help identify companies that merit further regulatory attention. These standards apply
specified risk factors to various asset, premium and reserve components of our statutory capital
and surplus reported in our statutory basis of accounting financial statements. Current rules
require companies to maintain statutory capital and surplus at a specified minimum level determined
using the risk-based capital formula. If we do not meet these minimum requirements, state
regulators may restrict or prohibit us from operating our business. If we are required to record a
material charge against earnings in connection with a change in estimates or circumstances or if we
9
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incur significant unrealized losses related to our investment portfolio, we may violate these
minimum capital adequacy requirements unless we are able to raise sufficient additional capital.
Examples of events leading us to record a material charge against earnings include impairment of
our investments or unexpectedly poor claims experience.
Loews has provided us with substantial amounts of capital in prior years. Loews may be restricted
in its ability or willingness to provide additional capital support to us. As a result, if we are
in need of additional capital, we may be required to secure this funding from sources other than
Loews. We may be limited in our ability to raise significant amounts of capital on favorable terms
or at all.
Rating agencies may downgrade their ratings of us and thereby adversely affect our ability to write
insurance at competitive rates or at all.
Ratings are an important factor in establishing the competitive position of insurance companies.
Our insurance company subsidiaries, as well as our public debt, are rated by rating agencies,
namely, A.M. Best Company (A.M. Best), Moody’s Investors Service, Inc. (Moody’s) and Standard &
Poor’s. Ratings reflect the rating agency’s opinions of an insurance company’s or insurance
holding company’s financial strength, capital adequacy, operating performance, strategic position
and ability to meet its obligations to policyholders and debt holders.
Due to the intense competitive environment in which we operate, the disruption in the capital and
credit markets, the uncertainty in determining reserves and the potential for us to take material
unfavorable development in the future, and possible changes in the methodology or criteria applied
by the rating agencies, the rating agencies may take action to lower our ratings in the future. If
our property and casualty insurance financial strength ratings are downgraded below current levels,
our business and results of operations could be materially adversely affected. The severity of the
impact on our 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 our insurance products to certain markets, and
the required collateralization of certain future payment obligations or reserves.
In addition, it is possible that a lowering of the debt ratings of Loews by certain of the rating
agencies could result in an adverse impact on our ratings, independent of any change in our
circumstances. We have entered into several settlement agreements and assumed reinsurance
contracts that require collateralization of future payment obligations and assumed reserves if our
ratings or other specific criteria fall below certain thresholds. The ratings triggers are
generally more than one level below our current ratings. Additional information on our ratings and
ratings triggers is included in the MD&A under Item 7.
Our insurance subsidiaries, upon whom we depend for dividends in order to fund our working capital
needs, are limited by state regulators in their ability to pay dividends.
We are a holding company and are dependent upon dividends, loans and other sources of cash from our
subsidiaries in order to meet our obligations. Ordinary dividend payments, or dividends that do
not require prior approval by the subsidiaries’ domiciliary state departments of insurance are
generally limited to amounts determined by formula which varies by state. The formula for the
majority of the states is the greater of 10% of the prior year statutory surplus or the prior year
statutory net income, less the aggregate of all dividends paid during the twelve months prior to
the date of payment. Some states, however, have an additional stipulation that dividends cannot
exceed the prior year’s earned surplus. If we are restricted, by regulatory rule or otherwise,
from paying or receiving inter-company dividends, we may not be able to fund our working capital
needs and debt service requirements from available cash. As a result, we would need to look to
other sources of capital which may be more expensive or may not be available at all.
If we determine that our recorded loss reserves are insufficient to cover our estimated ultimate
unpaid liability for claims, we may need to increase our loss reserves.
We maintain loss reserves to cover our estimated ultimate unpaid liability for claims and claim
adjustment expenses for reported and unreported claims and for future policy benefits. Reserves
represent our best estimate at a given point in time. Insurance reserves are not an exact
calculation of liability but instead are complex estimates derived by us, generally utilizing a
variety of reserve estimation techniques from numerous assumptions and expectations about future
events, many of which are highly uncertain, such as estimates of
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claims severity, frequency of claims, mortality, morbidity, expected interest rates, inflation,
claims handling, 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 of its ultimate settlement. Many of these uncertainties are not precisely
quantifiable and require significant judgment on our part. As trends in underlying claims develop,
particularly in so-called “long tail” or long duration coverages, we are sometimes required to add
to our reserves. This is called unfavorable net prior year development and results in a charge to
our earnings in the amount of the added reserves, recorded in the period the change in estimate is
made. These charges can be substantial. Additional information on our reserves is included in the
MD&A under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.
We are 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 our business by either
extending coverage beyond the original underwriting intent or by increasing the number or size of
claims, resulting in further increases in our reserves which can have a material adverse effect on
our results of operations and equity. The effects of these and other unforeseen emerging claim and
coverage issues are extremely hard to predict. Examples of emerging or potential claim and
coverage issues include:
| • |
increases in the number and size of claims relating to injuries from various medical
products including pharmaceuticals;
|
|
| • |
the effects of recessionary economic conditions and financial reporting scandals, which
have resulted in an increase in the number and size of claims, due to corporate failures;
these claims include both directors and officers (D&O) and errors and omissions (E&O)
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 welding rods, benzene, lead,
noise induced hearing loss and various other chemical and radiation exposure claims.
|
In light of the many uncertainties associated with establishing the estimates and making the
assumptions necessary to establish reserve levels, we review and change our reserve estimates in a
regular and ongoing process as experience develops and further claims are reported and settled. In
addition, we periodically undergo state regulatory financial examinations, including review and
analysis of our reserves. If estimated reserves are insufficient for any reason, the required
increase in reserves would be recorded as a charge against our earnings for the period in which
reserves are determined to be insufficient. These charges could be substantial and could
materially adversely affect our results of operations, equity, business and insurer financial
strength and debt ratings.
Loss reserves for asbestos and environmental pollution are especially difficult to estimate and may
result in more frequent and larger additions to these reserves.
Our experience has been that establishing reserves for casualty coverages relating to asbestos and
environmental pollution (which we refer to as A&E) claim and claim adjustment expenses are subject
to uncertainties that are greater than those presented by other claims. Estimating the ultimate
cost of both reported and unreported claims are subject to a higher degree of variability due to a
number of additional factors including, among others, the following:
| • |
coverage issues including whether certain costs are covered under the policies and whether
policy limits apply;
|
|
| • |
inconsistent court decisions and developing legal theories;
|
|
| • |
continuing aggressive tactics of plaintiffs’ lawyers;
|
|
| • |
the risks and lack of predictability inherent in major litigation;
|
11
Table of Contents
| • |
changes in the frequency of asbestos and environmental pollution claims;
|
|
| • |
changes in the severity of claims including bodily injury claims for malignancies arising
out of exposure to asbestos;
|
|
| • |
the impact of the exhaustion of primary limits and the resulting increase in claims on any
umbrella or excess policies we have issued;
|
|
| • |
our ability to recover reinsurance for these claims; and
|
|
| • |
changes in the legal and legislative environment in which we operate.
|
As a result of this higher degree of variability, we have necessarily supplemented traditional
actuarial methods and techniques with additional estimating techniques and methodologies, many of
which involve significant judgment on our part. Consequently, we may periodically need to record
changes in our claim and claim adjustment expense reserves in the future in these areas in amounts
that could materially adversely affect our results of operations, equity, business and insurer
financial strength and debt ratings. Additional information on A&E claims is included in the MD&A
under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.
Asbestos claims.
The estimation of reserves for asbestos claims is particularly
difficult in light of the factors noted above. In addition, our ability to estimate the ultimate
cost of asbestos claims is further complicated by the following:
| • |
inconsistency of court decisions and jury attitudes, as well as future court decisions;
|
|
| • |
interpretation of 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 frequency of claims and severity of 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;
|
|
| • |
the mix of asbestos-related diseases presented; and
|
|
| • |
the ability to recover reinsurance.
|
In addition, a number of our insureds have asserted that their claims for insurance are not subject
to aggregate limits on coverage. If these insureds are successful in this regard, our potential
liability for their claims would be unlimited. Some of these insureds contend that their asbestos
claims fall within the so-called “non-products” liability coverage within their policies, rather
than the products liability coverage, and that this “non-products” liability coverage is not
subject to any aggregate limit. It is difficult to predict the extent to which these claims will
succeed and, as a result, the ultimate size of these claims.
Environmental pollution claims.
The estimation of reserves for environmental
pollution claims is complicated by liability and coverage issues arising from these claims. We and
others in the insurance industry
12
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are disputing coverage for many such claims. In addition to the coverage issues noted in the
asbestos claims section above, key coverage issues in environmental pollution claims include the
following:
| • |
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.
|
To date, courts have been inconsistent in their rulings on these issues, thus adding to the
uncertainty of the outcome of many of these claims.
Further, the scope of federal and state statutes and regulations determining liability and
insurance coverage for environmental pollution liabilities have been the subject of extensive
litigation. In many cases, courts have expanded the scope of coverage and liability for cleanup
costs beyond the original intent of our insurance policies. Additionally, the standards for
cleanup in environmental pollution matters are unclear, the number of sites potentially subject to
cleanup under applicable laws is unknown, and the impact of various proposals to reform existing
statutes and regulations is difficult to predict.
We may suffer losses from non-routine litigation and arbitration matters which may exceed the
reserves we have established.
We face substantial risks of litigation and arbitration beyond ordinary course claims and A&E
matters, which may contain assertions in excess of amounts covered by reserves that we have
established. These matters may be difficult to assess or quantify and may seek recovery of very
large or indeterminate amounts that include punitive or treble damages. Accordingly, unfavorable
results in these proceedings could have a material adverse impact on our results of operations,
equity, business and insurer financial strength and debt ratings.
Additional information on litigation is included in Notes F and G to the Consolidated Financial
Statements included under Item 8.
Catastrophe losses are unpredictable.
Catastrophe losses are an inevitable part of our business. Various events can cause catastrophe
losses, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather, and
fires, and their frequency and severity are inherently unpredictable. In addition, longer-term
natural catastrophe trends may be changing and new types of catastrophe losses may be developing
due to climate change, a phenomenon that has been associated with extreme weather events linked to
rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land
and air temperatures, sea levels, rain, and snow. The extent of our losses from catastrophes is a
function of both the total amount of our insured exposures in the affected areas and the severity
of the events themselves. In addition, as in the case of catastrophe losses generally, it can take
a long time for the ultimate cost to us to be finally determined. As our claim experience develops
on a particular catastrophe, we may be required to adjust our reserves, or take unfavorable
development, to reflect our revised estimates of the total cost of claims. We believe we could
incur significant catastrophe losses in the future. Therefore, our results of operations, equity,
business and insurer financial strength and debt ratings could be materially adversely impacted.
Additional information on catastrophe losses is included in the MD&A under Item 7 and Note F to the
Consolidated Financial Statements included under Item 8.
Our key assumptions used to determine reserves and deferred acquisition costs for our long term
care product offerings could vary significantly from actual experience.
Our reserves and deferred acquisition costs for our long term care product offerings are based on
certain key assumptions including morbidity, which is the frequency and severity of illness,
sickness and diseases contracted, policy persistency, which is the percentage of policies remaining
in force, interest rates and future health care cost trends. If actual experience differs from
these assumptions, the deferred acquisition asset may not be fully realized and the reserves may
not be adequate, requiring us to add to reserves, or take unfavorable
13
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development. Therefore, our results of operations, equity, business and insurer financial strength
and debt ratings could be materially adversely impacted.
We are unable to predict the impact on us of federal health care reform legislation.
The federal government may be implementing landmark health care reform legislation that could
involve critical matters affecting our operations, particularly our workers’ compensation and long
term care products. Until the legislation is enacted, we are unable to predict with any certainty
the overall impact it will have on us. As a result, our results of operations, equity, business
and insurer financial strength and debt ratings could be materially adversely impacted.
We continue to face exposure to losses arising from terrorist acts, despite the passage of the
Terrorism Risk Insurance Program Reauthorization Act of 2007.
The Terrorism Risk Insurance Program Reauthorization Act of 2007 extended, until December 31, 2014,
the program established within the U.S. Department of Treasury by the Terrorism Risk Insurance Act
of 2002. This program requires insurers to offer terrorism coverage and the federal government to
share in insured losses arising from acts of terrorism. Given the unpredictability of the nature,
targets, severity and frequency of potential terrorist acts, this program does not provide complete
protection for future losses derived from acts of terrorism. Further, the laws of certain states
restrict our ability to mitigate this residual exposure. For example, some states mandate property
insurance coverage of damage from fire following a loss, thereby prohibiting us from excluding
terrorism exposure. In addition, some states generally prohibit us from excluding terrorism
exposure from our primary workers’ compensation policies. Consequently, there is substantial
uncertainty as to our ability to contain our terrorism exposure effectively since we continue to
issue forms of coverage, in particular, workers’ compensation, that are exposed to risk of loss
from a terrorism act. As a result, our results of operations, equity, business and insurer
financial strength and debt ratings could be materially adversely impacted by terrorist act losses.
Our premium writings and profitability are affected by the availability and cost of reinsurance.
We purchase reinsurance to help manage our exposure to risk. Under our reinsurance arrangements,
another insurer assumes a specified portion of our claim and claim adjustment expenses in exchange
for a specified portion of policy premiums. Market conditions determine the availability and cost
of the reinsurance protection we purchase, which affects the level of our business and
profitability, as well as the level and types of risk we retain. If we are unable to obtain
sufficient reinsurance at a cost we deem acceptable, we may be unwilling to bear the increased risk
and would reduce the level of our underwriting commitments. Therefore, our financial results of
operations could be materially adversely impacted. Additional information on reinsurance is
included in Note H to the Consolidated Financial Statements included under Item 8.
We may not be able to collect amounts owed to us by reinsurers.
We have significant amounts recoverable from reinsurers which are reported as receivables in our
balance sheets and are estimated in a manner consistent with claim and claim adjustment expense
reserves or future policy benefits reserves. The ceding of insurance does not, however, discharge
our primary liability for claims. As a result, we are subject to credit risk relating to our
ability to recover amounts due from reinsurers. Certain of our reinsurance carriers have
experienced deteriorating financial conditions or have been downgraded by rating agencies. A
continuation or worsening of the current unfavorable global economic conditions could similarly
impact all of our reinsurers. In addition, reinsurers could dispute amounts which we believe are
due to us. If we are not able to collect the amounts due to us from reinsurers, our claims
expenses will be higher which could materially adversely affect our results of operations, equity,
business and insurer financial strength and debt ratings. Additional information on reinsurance is
included in Note H to the Consolidated Financial Statements included under Item 8.
We face intense competition in our industry and may be adversely affected by the cyclical nature of
the property and casualty business.
All aspects of the insurance industry are highly competitive and we must continuously allocate
resources to refine and improve our insurance products and services. We compete with a large
number of stock and mutual insurance companies and other entities for both distributors and
customers. Insurers compete on the basis of factors including products, price, services, ratings
and financial strength. We may lose business to competitors offering competitive insurance
products at lower prices. The property and casualty market is cyclical and has
14
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experienced periods characterized by relatively high levels of price competition, less restrictive
underwriting standards and relatively low premium rates, followed by periods of relatively lower
levels of competition, more selective underwriting standards and relatively high premium rates. As
a result, our premium levels, expense ratio, results of operations, equity, business and insurer
financial strength and debt ratings could be materially adversely impacted.
We are dependent on a small number of key executives and other key personnel to operate our
business successfully.
Our success substantially depends upon our ability to attract and retain high quality key
executives and other employees. We believe there are only a limited number of available qualified
executives in the business lines in which we compete. We rely substantially upon the services of
our executive officers to implement our business strategy. The loss of the services of any members
of our management team or the inability to attract and retain other talented personnel could impede
the implementation of our business strategies. We do not maintain key man life insurance policies
with respect to any of our employees.
15
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None.
The 333 S. Wabash Avenue building, located in Chicago, Illinois and owned by CCC, a wholly-owned
subsidiary of CNAF, serves as our home office. Our subsidiaries own or lease office space in
various cities throughout the United States and in other countries. The following table sets forth
certain information with respect to our principal office locations.
| Amount (Square Feet) of Building | ||||||
| Owned and Occupied or Leased | ||||||
| Location | and Occupied by CNA | Principal Usage | ||||
|
333 S. Wabash Avenue, Chicago, Illinois
|
803,728 | Principal executive offices of CNAF | ||||
|
401 Penn Street, Reading, Pennsylvania
|
171,318 | Property and casualty insurance offices | ||||
|
2405 Lucien Way, Maitland, Florida
|
121,959 | Property and casualty insurance offices | ||||
|
40 Wall Street, New York, New York
|
107,927 | Property and casualty insurance offices | ||||
|
1100 Ward Avenue, Honolulu, Hawaii
|
104,478 | Property and casualty insurance offices | ||||
|
101 S. Phillips Avenue, Sioux Falls, South Dakota
|
83,616 | Property and casualty insurance offices | ||||
|
600 N. Pearl Street, Dallas, Texas
|
70,790 | Property and casualty insurance offices | ||||
|
675 Placentia Avenue, Brea, California
|
63,538 | Property and casualty insurance offices | ||||
|
1249 S. River Road, Cranbury, New Jersey
|
56,100 | Property and casualty insurance offices | ||||
|
4267 Meridian Parkway, Aurora, Illinois
|
46,903 | Data center | ||||
We lease the office space described above except for the Chicago, Illinois building, the
Reading, Pennsylvania building and the Aurora, Illinois building, which are owned. We consider
that our properties are generally in good condition, are well maintained and are suitable and
adequate to carry on our business.
Information on our legal proceedings is set forth in Notes F and G of the Consolidated Financial
Statements included under Item 8.
None.
16
Table of Contents
Our common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange under the
symbol CNA.
As of
February 19, 2010, we had 269,074,707 shares of common stock outstanding. Approximately 90%
of our outstanding common stock is owned by Loews. We had 1,793 stockholders of record as of
February 19, 2010 according to the records maintained by our transfer agent.
In the fourth quarter of 2008, we issued and Loews purchased $1.25 billion of CNAF non-voting
cumulative senior preferred stock, designated the 2008 Senior Preferred Stock (2008 Senior
Preferred). No dividends may be declared on our common stock or any future preferred stock while
the 2008 Senior Preferred is outstanding. In the fourth quarter of 2009, we redeemed $250 million
of the 2008 Senior Preferred. See Note L of the Consolidated Financial Statements included under
Item 8 for further details on the 2008 Senior Preferred.
Our Board of Directors has approved an authorization to purchase, in the open market or through
privately negotiated transactions, our outstanding common stock, as our management deems
appropriate. Under the terms of the 2008 Senior Preferred discussed above, common stock repurchases
are prohibited while the 2008 Senior Preferred is outstanding.
The table below shows the high and low sales prices for our common stock based on the New York
Stock Exchange Composite Transactions.
Common Stock Information
| 2009 | 2008 | |||||||||||||||||||||||
| Dividends | Dividends | |||||||||||||||||||||||
| High | Low | Declared | High | Low | Declared | |||||||||||||||||||
|
Quarter:
|
||||||||||||||||||||||||
|
First
|
$ | 17.43 | $ | 6.41 | - | $ | 35.04 | $ | 23.01 | $ | 0.15 | |||||||||||||
|
Second
|
17.59 | 8.83 | - | 32.15 | 24.34 | 0.15 | ||||||||||||||||||
|
Third
|
26.51 | 13.63 | - | 30.61 | 21.88 | 0.15 | ||||||||||||||||||
|
Fourth
|
25.01 | 20.48 | - | 26.70 | 8.50 | - | ||||||||||||||||||
17
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The following graph compares the total return of our common stock, the Standard & Poor’s (S&P)
500 Index and the S&P 500 Property & Casualty Insurance Index for the five year period from
December 31, 2004 through December 31, 2009. The graph assumes that the value of the investment in
our common stock and for each index was $100 on December 31, 2004 and that dividends were
reinvested.
Stock Price Performance Graph
| Company / Index | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
CNA Financial Corporation
|
100.00 | 122.36 | 150.73 | 127.14 | 62.98 | 91.94 | ||||||||||||||||||
|
S&P 500 Index
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
|
S&P 500 Property & Casualty Insurance Index
|
100.00 | 115.11 | 129.93 | 111.79 | 78.91 | 88.65 |
18
Table of Contents
The following table presents selected financial data. 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.
Selected Financial Data
| As of and for the Years Ended | ||||||||||||||||||||
| December 31 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Results of Operations:
|
||||||||||||||||||||
|
Revenues
|
$ | 8,472 | $ | 7,799 | $ | 9,885 | $ | 10,376 | $ | 9,862 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing
operations, net of tax
|
$ | 483 | $ | (251 | ) | $ | 905 | $ | 1,181 | $ | 267 | |||||||||
|
Income (loss) from discontinued
operations, net of tax
|
(2 | ) | 9 | (6 | ) | (29 | ) | 21 | ||||||||||||
|
Net income attributable to
noncontrolling interests, net of tax
|
(62 | ) | (57 | ) | (48 | ) | (44 | ) | (24 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Net income (loss) attributable to CNA
|
$ | 419 | $ | (299 | ) | $ | 851 | $ | 1,108 | $ | 264 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic Earnings (Loss) Per Share
Attributable to CNA Common
Stockholders:
|
||||||||||||||||||||
|
Income (loss) from continuing
operations attributable to CNA
common stockholders
|
$ | 1.11 | $ | (1.21 | ) | $ | 3.15 | $ | 4.17 | $ | 0.68 | |||||||||
|
Income (loss) from discontinued
operations attributable to CNA
common stockholders
|
(0.01 | ) | 0.03 | (0.02 | ) | (0.11 | ) | 0.08 | ||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic earnings (loss) per share
attributable to CNA common
stockholders
|
$ | 1.10 | $ | (1.18 | ) | $ | 3.13 | $ | 4.06 | $ | 0.76 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Diluted Earnings (Loss) Per Share
Attributable to CNA Common
Stockholders:
|
||||||||||||||||||||
|
Income (loss) from continuing
operations attributable to CNA
common stockholders
|
$ | 1.11 | $ | (1.21 | ) | $ | 3.15 | $ | 4.16 | $ | 0.68 | |||||||||
|
Income (loss) from discontinued
operations attributable to CNA
common stockholders
|
(0.01 | ) | 0.03 | (0.02 | ) | (0.11 | ) | 0.08 | ||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Diluted earnings (loss) per share
attributable to CNA common
stockholders
|
$ | 1.10 | $ | (1.18 | ) | $ | 3.13 | $ | 4.05 | $ | 0.76 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Dividends declared per common share
|
$ | - | $ | 0.45 | $ | 0.35 | $ | - | $ | - | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Financial Condition:
|
||||||||||||||||||||
|
Total investments
|
$ | 41,996 | $ | 35,003 | $ | 41,789 | $ | 44,096 | $ | 39,695 | ||||||||||
|
Total assets
|
55,298 | 51,688 | 56,759 | 60,283 | 59,016 | |||||||||||||||
|
Insurance reserves
|
38,263 | 38,771 | 40,222 | 41,080 | 42,436 | |||||||||||||||
|
Long and short term debt
|
2,303 | 2,058 | 2,157 | 2,156 | 1,690 | |||||||||||||||
|
Total CNA stockholders’ equity
|
10,660 | 6,877 | 10,150 | 9,768 | 8,950 | |||||||||||||||
|
|
||||||||||||||||||||
|
Book value per common share
|
$ | 35.91 | $ | 20.92 | $ | 37.36 | $ | 36.03 | $ | 31.26 | ||||||||||
|
|
||||||||||||||||||||
|
Statutory Surplus:
|
||||||||||||||||||||
|
Combined Continental Casualty
Companies (a)
|
$ | 9,338 | (b) | $ | 7,819 | $ | 8,348 | $ | 8,056 | $ | 6,733 | |||||||||
|
Life company
|
448 | (b) | 487 | 471 | 687 | 627 | ||||||||||||||
| (a) |
Represents the combined statutory surplus of CCC and its subsidiaries, including the Life
company, as determined in accordance with statutory accounting practices as further discussed
in Note L of the Consolidated Financial Statements included under Item 8.
|
|
| (b) |
Preliminary results.
|
19
Table of Contents
Overview
The following discussion should be read in conjunction with Item 1A Risk Factors, Item 6 Selected
Financial Data and Item 8 Financial Statements and Supplementary Data of this Form 10-K. References
to net operating income (loss), net realized investment gains (losses) and net income (loss) used
in this MD&A reflect amounts attributable to CNA, unless otherwise noted.
Index to this MD&A
Management’s discussion and analysis of financial condition and results of operations is comprised
of the following sections:
| Page No. | ||||
|
Consolidated Operations
|
21 | |||
|
Critical Accounting Estimates
|
23 | |||
|
Reserves – Estimates and Uncertainties
|
25 | |||
|
|
||||
|
Segment Results
|
31 | |||
|
CNA Specialty
|
32 | |||
|
CNA Commercial
|
35 | |||
|
Life & Group Non-Core
|
38 | |||
|
Corporate & Other Non-Core
|
40 | |||
|
Asbestos and Environmental Pollution (A&E) Reserves
|
42 | |||
|
Investments
|
44 | |||
|
Net Investment Income
|
44 | |||
|
Net Realized Investment Gains (Losses)
|
45 | |||
|
Duration
|
47 | |||
|
Asset-Backed Exposure
|
48 | |||
|
Short Term Investments
|
48 | |||
|
Separate Accounts
|
49 | |||
|
Liquidity and Capital Resources
|
50 | |||
|
Cash Flows
|
50 | |||
|
Liquidity
|
51 | |||
|
Commitments, Contingencies and Guarantees
|
52 | |||
|
Ratings
|
52 | |||
|
Accounting Standards Update
|
53 | |||
|
Forward-Looking Statements
|
54 | |||
20
Table of Contents
CONSOLIDATED OPERATIONS
Results of Operations
The following table includes the consolidated results of our operations. For more detailed
components of our business operations and the net operating income financial measure, see the
segment discussions within this MD&A.
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions, except per share data) | ||||||||||||
|
|
||||||||||||
|
Revenues
|
||||||||||||
|
Net earned premiums
|
$ | 6,721 | $ | 7,151 | $ | 7,484 | ||||||
|
Net investment income
|
2,320 | 1,619 | 2,433 | |||||||||
|
Other revenues
|
288 | 326 | 279 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total operating revenues
|
9,329 | 9,096 | 10,196 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Claims, Benefits and Expenses
|
||||||||||||
|
Net incurred claims and benefits
|
5,267 | 5,703 | 5,995 | |||||||||
|
Policyholders’ dividends
|
23 | 20 | 14 | |||||||||
|
Amortization of deferred acquisition costs
|
1,417 | 1,467 | 1,520 | |||||||||
|
Other insurance related expenses
|
781 | 694 | 733 | |||||||||
|
Other expenses
|
444 | 477 | 401 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total claims, benefits and expenses
|
7,932 | 8,361 | 8,663 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating income from continuing operations before income tax
|
1,397 | 735 | 1,533 | |||||||||
|
Income tax expense on operating income
|
(353 | ) | (145 | ) | (425 | ) | ||||||
|
Net operating income, after-tax, attributable to noncontrolling interests
|
(62 | ) | (57 | ) | (48 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net operating income from continuing operations attributable to CNA
|
982 | 533 | 1,060 | |||||||||
|
|
||||||||||||
|
Net realized investment losses, net of participating policyholders’ interests
|
(857 | ) | (1,297 | ) | (311 | ) | ||||||
|
Income tax benefit on net realized investment losses
|
296 | 456 | 108 | |||||||||
|
Net realized investment (gains) losses, after-tax, attributable to
noncontrolling interests
|
- | - | - | |||||||||
|
|
||||||||||||
|
Net realized investment losses attributable to CNA
|
(561 | ) | (841 | ) | (203 | ) | ||||||
|
|
||||||||||||
|
Income (loss) from continuing operations attributable to CNA
|
421 | (308 | ) | 857 | ||||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations attributable to CNA, net of
income tax (expense) benefit of $0, $9 and $0
|
(2 | ) | 9 | (6 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss) attributable to CNA
|
$ | 419 | $ | (299 | ) | $ | 851 | |||||
|
|
||||||||||||
2009 Compared with 2008
Net results improved $718 million in 2009 as compared with 2008. This improvement was due to
increased net operating income and decreased net realized investment losses.
Net realized investment losses decreased $280 million in 2009 as compared with 2008. See the
Investments section of this MD&A for further discussion of net realized investment results and net
investment income.
Net operating income improved $449 million in 2009 as compared with 2008. Net operating income
increased $394 million for CNA Specialty and CNA Commercial and net operating loss decreased $55
million for our non-core operations. This improvement was primarily due to higher net investment
income and lower catastrophe losses. Net investment income in 2008 included indexed group annuity
trading portfolio losses of $146 million. This trading portfolio supported the indexed group
annuity portion of our pension deposit business which was exited during 2008, and these losses were
substantially offset by a corresponding decrease in the policyholders’ funds reserves supported by
the trading portfolio. Excluding the trading portfolio losses in 2008, net investment income
increased $555 million primarily driven by limited partnership income. Catastrophe losses were $58
million after-tax in 2009, as compared to catastrophe impacts of $239 million after-tax in 2008.
Partially offsetting these favorable items was an unfavorable change in current accident year
underwriting results excluding catastrophes.
21
Table of Contents
Results for the year ended December 31, 2009 included expense of $45 million related to our pension
and postretirement plans, compared with a benefit of $14 million for the year ended December 31,
2008. Based on our current assumptions and investment performance in 2009, our estimated 2010
expense for the CNA Retirement Plan and the CNA Retiree Health and Group Benefits plan is expected
to moderate.
In 2008, the amount due from policyholders related to losses under deductible policies within CNA
Commercial Lines was reduced by $90 million for insolvent insureds. The reduction of this amount,
which was reflected as unfavorable net prior year reserve development in 2008, had no effect on
2008 results of operations as the Company had previously recognized provisions in prior years.
These impacts were reported in Insurance claims and policyholders’ benefits in the 2008
Consolidated Statement of Operations.
Favorable net prior year development of $208 million and $80 million was recorded in 2009 and 2008
related to our CNA Specialty, CNA Commercial and Corporate & Other Non-Core segments. Excluding
the impact of the $90 million of unfavorable net prior year reserve development discussed above,
which had no net impact on the results of operations, favorable net prior year development was $170
million in 2008. Further information on net prior year development for 2009 and 2008 is included
in Note F of the Consolidated Financial Statements included under Item 8.
Net earned premiums decreased $430 million in 2009 as compared with 2008, including a $58 million
decrease related to CNA Specialty and a $355 million decrease related to CNA Commercial. See the
Segment Results section of this MD&A for further discussion.
Results from discontinued operations decreased $11 million in 2009 as compared to 2008. The 2008
results were primarily driven by the recognition in 2008 of a change in estimate of the tax benefit
related to the 2007 sale of our United Kingdom discontinued operations subsidiary.
2008 Compared with 2007
Net results decreased $1,150 million in 2008 as compared with 2007. This decrease was due to
higher net realized investment losses and decreased net operating income.
Net realized investment losses increased $638 million in 2008 as compared to 2007. The increase
was primarily driven by higher impairment losses. See the Investments section of this MD&A for
further discussion of net realized investment results and net investment income.
Net operating income decreased $527 million in 2008 as compared with 2007. The decrease was
primarily due to lower net investment income, driven by limited partnership results, and higher
catastrophe impacts. Net investment income included a decline in trading portfolio results of $159
million, which was substantially offset by a corresponding decrease in the policyholders’ funds
reserves supported by the indexed group annuity trading portfolio. The catastrophe impacts were
$239 million after-tax in 2008, as compared to catastrophe losses of $51 million after-tax in 2007.
Net operating income in 2007 included an after-tax loss of $108 million in connection with the
settlement of the IGI contingency, as discussed in the Life & Group Non-Core segment discussion in
this MD&A.
Favorable net prior year development of $80 million and $73 million was recorded in 2008 and 2007
related to our CNA Specialty, CNA Commercial and Corporate & Other Non-core segments. Further
information on net prior year development for 2008 and 2007 is included in Note F of the
Consolidated Financial Statements included under Item 8.
Net earned premiums decreased $333 million in 2008 as compared with 2007, including a $4 million
decrease related to CNA Specialty and a $317 million decrease related to CNA Commercial. See the
Segment Results section of this MD&A for further discussion.
Results from discontinued operations improved $15 million in 2008 as compared to 2007. The 2008
results were primarily driven by the recognition in 2008 of a change in estimate of the tax benefit
related to the 2007 sale of our United Kingdom discontinued operations subsidiary. The loss in
2007 was primarily driven by unfavorable net prior year development.
22
Table of Contents
Critical Accounting Estimates
The preparation of the Consolidated Financial Statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires us 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
amounts of revenues and expenses reported during the period. Actual results may differ from those
estimates.
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with
GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates
used to prepare the Consolidated Financial Statements. In general, our estimates are based on
historical experience, evaluation of current trends, information from third party professionals and
various other assumptions that are believed to be reasonable under the known facts and
circumstances.
The accounting estimates discussed below are considered by us to be critical to an understanding of
our Consolidated Financial Statements as their application places the most significant demands on
our judgment. Note A of the Consolidated Financial Statements included under Item 8 should be read
in conjunction with this section to assist with obtaining an understanding of the underlying
accounting policies related to these estimates. Due to the inherent uncertainties involved with
these types of judgments, actual results could differ significantly from estimates and may have a
material adverse impact on our results of operations and/or equity.
Insurance Reserves
Insurance reserves are established for both short and long-duration insurance contracts.
Short-duration contracts are primarily related to property and casualty insurance policies where
the reserving process is based on actuarial estimates of the amount of loss, including amounts for
known and unknown claims. Long-duration contracts typically include traditional life insurance,
payout annuities and long term care products and are estimated using actuarial estimates about
mortality, morbidity and persistency as well as assumptions about expected investment returns. The
reserve for unearned premiums on property and casualty and accident and health contracts represents
the portion of premiums written related to the unexpired terms of coverage. The inherent risks
associated with the reserving process are discussed in the Reserves
– Estimates and Uncertainties
section below.
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim
adjustment expense reserves or future policy benefits reserves and are reported as receivables in
the Consolidated Balance Sheets. The ceding of insurance does not discharge us of our primary
liability under insurance contracts written by us. An exposure exists with respect to property and
casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet its
obligations or disputes the liabilities assumed under reinsurance agreements. An estimated
allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due
from reinsurers, reinsurer solvency, our past experience and current economic conditions. Further
information on our reinsurance program is included in Note H of the Consolidated Financial
Statements included under Item 8.
Valuation of Investments and Impairment of Securities
The Company classifies its fixed maturity securities and equity securities as either
available-for-sale or trading which are both carried at fair value. The determination of fair
value requires management to make a significant number of assumptions, particularly with respect to
asset-backed securities. Due to the level of uncertainty related to changes in the fair value of
these assets, it is possible that changes in the near term could have an adverse material impact on
our results of operations and/or equity.
Our investment portfolio is subject to market declines below amortized cost that may be
other-than-temporary. A significant judgment in the valuation of investments is the determination
of whether a credit loss exists on impaired securities, which results in the recognition of
impairment losses in earnings. We have an Impairment Committee which reviews the investment
portfolio on at least a quarterly basis, with ongoing analysis as new information becomes
available. Further information on our process for evaluating impairments is included in Note B of
the Consolidated Financial Statements included under Item 8.
23
Table of Contents
Long Term Care Products
Reserves and deferred acquisition costs for our long term care products are based on certain
assumptions including morbidity, policy persistency and interest rates. The recoverability of
deferred acquisition costs and the adequacy of the reserves are contingent on actual experience
related to these key assumptions and other factors such as future health care cost trends. If
actual experience differs from these assumptions, the deferred acquisition costs may not be fully
realized and the reserves may not be adequate, requiring us to add to reserves, or take unfavorable
development. Therefore, our results of operations and/or equity could be adversely impacted.
Payout Annuity Contracts
Reserves for our payout annuity products are based on certain assumptions including mortality and
interest rates. The adequacy of the reserves is contingent on actual experience related to these
key assumptions. If actual experience differs from these assumptions, reserves may not be
adequate, requiring us to add to reserves, or take unfavorable development. Therefore, our results
of operations and/or equity could be adversely impacted.
Pension and Postretirement Benefit Obligations
We make a significant number of assumptions in estimating the liabilities and costs related to our
pension and postretirement benefit obligations to employees under our benefit plans. The
assumptions that most impact these costs are the discount rate, the expected return on plan assets
and the rate of compensation increases. These assumptions are evaluated relative to current market
factors such as inflation, interest rates and fiscal and monetary policies. Changes in these
assumptions can have a material impact on pension obligations and pension expense.
To determine the discount rate assumption as of the year-end measurement date for our CNA
Retirement Plan and CNA Retiree Health and Group Benefits Plan, we considered the estimated timing
of plan benefit payments and available yields on high quality fixed income debt securities. For
this purpose, high quality is considered a rating of Aa or better by Moody’s Investors Service,
Inc. (Moody’s) or a rating of AA or better from Standard & Poor’s (S&P). We reviewed several yield
curves constructed using the cash flow characteristics of the plans as well as bond indices as of
the measurement date. The year-over-year change of those data points was also considered. Based
on this review, management determined that 5.70% and 5.50% were the appropriate discount rates as
of December 31, 2009 to calculate our accrued pension and postretirement liabilities. Accordingly,
the 5.70% and 5.50% rates will also be used to determine our 2010 pension and postretirement
expense. At December 31, 2008, the discount rates used to calculate our accrued pension and
postretirement liabilities were 6.30% and 6.30%.
Further information on our pension and postretirement benefit obligations is included in Note J of
the Consolidated Financial Statements included under Item 8.
Legal Proceedings
We are involved in various legal proceedings that have arisen during the ordinary course of
business. We evaluate the facts and circumstances of each situation, and when we determine it is
necessary, a liability is estimated and recorded. Further information on our legal proceedings and
related contingent liabilities is provided in Notes F and G of the Consolidated Financial
Statements included under Item 8.
Income Taxes
We account for taxes under the asset and liability method. Under this method, deferred income
taxes are recognized for temporary differences between the financial statement and tax return basis
of assets and liabilities. Any resulting future tax benefits are recognized to the extent that
realization of such benefits is more likely than not, and a valuation allowance is established for
any portion of a deferred tax asset that management believes will not be realized. The assessment
of the need for a valuation allowance requires management to make estimates and assumptions about
future earnings, reversal of existing temporary differences and available tax planning strategies.
If actual experience differs from these estimates and assumptions, the recorded deferred tax asset
may not be fully realized resulting in an increase to income tax expense in our results of
operations. In addition, the ability to record deferred tax assets in the future could be limited
resulting in a higher effective tax rate in that future period.
24
Table of Contents
Reserves
– Estimates and Uncertainties
We maintain reserves to cover our estimated ultimate unpaid liability for claim and claim
adjustment expenses, including the estimated cost of the claims adjudication process, for claims
that have been reported but not yet settled (case reserves) and claims that have been incurred but
not reported (IBNR). Claim and claim adjustment expense reserves are reflected as liabilities and
are included on the Consolidated Balance Sheets under the heading “Insurance Reserves.”
Adjustments to prior year reserve estimates, if necessary, are reflected in results of operations
in the period that the need for such adjustments is determined. The carried case and IBNR reserves
as of each balance sheet date are provided in the Segment Results section of this MD&A and in Note
F of the Consolidated Financial Statements included under Item 8.
The level of reserves we maintain represents our best estimate, as of a particular point in time,
of what the ultimate settlement and administration of claims will cost based on our assessment of
facts and circumstances known at that time. Reserves are not an exact calculation of liability but
instead are complex estimates that we derive, generally utilizing a variety of actuarial reserve
estimation techniques, from numerous assumptions and expectations about future events, both
internal and external, many of which are highly uncertain.
We are 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 our business by either
extending coverage beyond the original underwriting intent or by increasing the number or size of
claims. Examples of emerging or potential claims and coverage issues include:
| • |
increases in the number and size of claims relating to injuries from various medical
products including pharmaceuticals;
|
||
| • |
the effects of recessionary economic conditions and financial reporting scandals, which
have resulted in an increase in the number and size of claims, due to corporate failures;
these claims include both directors and officers (D&O) and errors and omissions (E&O)
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 welding rods, benzene,
lead, noise induced hearing loss and various other chemical and radiation exposure claims.
|
Our experience has been that establishing reserves for casualty coverages relating to asbestos and
environmental pollution (A&E) claims and claim adjustment expenses are subject to uncertainties
that are greater than those presented by other claims. Estimating the ultimate cost of both
reported and unreported A&E claims are 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;
|
||
| • |
continuing aggressive tactics of plaintiffs’ lawyers;
|
||
| • |
the risks and lack of predictability inherent in major litigation;
|
||
| • |
changes in the frequency of A&E claims;
|
||
| • |
changes in the severity of claims, including bodily injury claims for malignancies
arising out of exposure to asbestos;
|
||
| • |
the impact of the exhaustion of primary limits and the resulting increase in claims on
any umbrella or excess policies we have issued;
|
||
| • |
our ability to recover reinsurance for A&E claims; and
|
25
Table of Contents
| • |
changes in the legal and legislative environment in which we operate.
|
It is also difficult to forecast changes in the legal and legislative environment and the impact on
the future development of A&E claims. This development will be affected by future court decisions
and interpretations, as well as changes in applicable legislation. It is difficult to predict the
ultimate outcome of large coverage disputes until settlement negotiations near completion and
significant legal questions are resolved or, failing settlement, until the dispute is adjudicated.
This is particularly the case with policyholders in bankruptcy where negotiations often involve a
large number of claimants and other parties and require court approval to be effective.
Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for
more traditional property and casualty exposures are less precise in estimating claim and claim
adjustment reserves for A&E, particularly in an environment of emerging or potential claims and
coverage issues that arise from industry practices and legal, judicial and social conditions.
Therefore, these traditional actuarial methods and techniques are necessarily supplemented with
additional estimation techniques and methodologies, many of which involve significant judgments
that are required of management. For A&E, we regularly monitor our exposures, including reviews of
loss activity, regulatory developments and court rulings. In addition, we perform a ground up
analysis on our exposures. Our actuaries, in conjunction with our specialized claim unit, use
various modeling techniques to estimate our overall exposure to known accounts. We use this
information and additional modeling techniques to develop loss distributions and claim reporting
patterns to determine reserves for accounts that will report A&E exposure in the future.
Estimating the average claim size requires analysis of the impact of large losses and claim cost
trend based on changes in the cost of repairing or replacing property, changes in the cost of legal
fees, judicial decisions, legislative changes, and other factors. Due to the inherent
uncertainties in estimating reserves for A&E claim and claim adjustment expenses and the degree of
variability due to, among other things, the factors described above, we may be required to record
material changes in our claim and claim adjustment expense reserves in the future, should new
information become available or other developments emerge. See the A&E Reserves section of this
MD&A and Note F of the Consolidated Financial Statements included under Item 8 for additional
information relating to A&E claims and reserves.
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 our claim and claim
adjustment expense reserves and could lead to future reserve additions. See the Segment Results
sections of this MD&A and Note F of the Consolidated Financial Statements included under Item 8 for
a discussion of changes in reserve estimates and the impact on our results of operations.
Establishing Reserve Estimates
In developing claim and claim adjustment expense (“loss” or “losses”) reserve estimates, our
actuaries perform detailed reserve analyses that are staggered throughout the year. The data is
organized at a “product” level. A product can be a line of business covering a subset of insureds
such as commercial automobile liability for small and middle market customers, it can encompass
several lines of business provided to a specific set of customers such as dentists, or it can be a
particular type of claim such as construction defect. Every product is analyzed at least once
during the year, and many products are analyzed multiple times. The analyses generally review
losses gross of ceded reinsurance and apply the ceded reinsurance terms to the gross estimates to
establish estimates net of reinsurance. In addition to the detailed analyses, we review actual
loss emergence for all products each quarter.
The detailed analyses use a variety of generally accepted actuarial methods and techniques to
produce a number of estimates of ultimate loss. Our actuaries determine a point estimate of
ultimate loss by reviewing the various estimates and assigning weight to each estimate given the
characteristics of the product being reviewed. The reserve estimate is the difference between the
estimated ultimate loss and the losses paid to date. The difference between the estimated ultimate
loss and the case incurred loss (paid loss plus case reserve) is IBNR. IBNR calculated as such
includes a provision for development on known cases (supplemental development) as well as a
provision for claims that have occurred but have not yet been reported (pure IBNR).
Most of our business can be characterized as long-tail. For long-tail business, it will generally
be several years between the time the business is written and the time when all claims are
settled. Our long-tail exposures include commercial automobile liability, workers’ compensation,
general liability, medical malpractice, other
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professional liability coverages, assumed reinsurance run-off and products liability. Short-tail
exposures include property, commercial automobile physical damage, marine and warranty. CNA
Specialty and CNA Commercial contain both long-tail and short-tail exposures. Corporate & Other
Non-Core contains long-tail exposures.
Various methods are used to project ultimate loss for both long-tail and short-tail exposures
including, but not limited to, the following:
| • |
Paid Development,
|
||
| • |
Incurred Development,
|
||
| • |
Loss Ratio,
|
||
| • |
Bornhuetter-Ferguson Using Premiums and Paid Loss,
|
||
| • |
Bornhuetter-Ferguson Using Premiums and Incurred Loss,
|
||
| • |
Frequency times Severity, and
|
||
| • |
Stochastic modeling.
|
The paid development method estimates ultimate losses by reviewing paid loss patterns and applying
them to accident years with further expected changes in paid loss. Selection of the paid loss
pattern requires analysis of several factors including the impact of inflation on claims costs, the
rate at which claims professionals make claim payments and close claims, the impact of judicial
decisions, the impact of underwriting changes, the impact of large claim payments and other
factors. Claim cost inflation itself requires evaluation of changes in the cost of repairing or
replacing property, changes in the cost of medical care, changes in the cost of wage replacement,
judicial decisions, legislative changes and other factors. Because this method assumes that losses
are paid at a consistent rate, changes in any of these factors can impact the results. Since the
method does not rely on case reserves, it is not directly influenced by changes in the adequacy of
case reserves.
For many products, paid loss data for recent periods may be too immature or erratic for accurate
predictions. This situation often exists for long-tail exposures. In addition, changes in the
factors described above may result in inconsistent payment patterns. Finally, estimating the paid
loss pattern subsequent to the most mature point available in the data analyzed often involves
considerable uncertainty for long-tail products such as workers’ compensation.
The incurred development method is similar to the paid development method, but it uses case
incurred losses instead of paid losses. Since the method uses more data (case reserves in addition
to paid losses) than the paid development method, the incurred development patterns may be less
variable than paid patterns. However, selection of the incurred loss pattern requires analysis of
all of the factors above. In addition, the inclusion of case reserves can lead to distortions if
changes in case reserving practices have taken place, and the use of case incurred losses may not
eliminate the issues associated with estimating the incurred loss pattern subsequent to the most
mature point available.
The loss ratio method multiplies premiums by an expected loss ratio to produce ultimate loss
estimates for each accident year. This method may be useful for immature accident periods or if
loss development patterns are inconsistent, losses emerge very slowly, or there is relatively
little loss history from which to estimate future losses. The selection of the expected loss ratio
requires analysis of loss ratios from earlier accident years or pricing studies and analysis of
inflationary trends, frequency trends, rate changes, underwriting changes, and other applicable
factors.
The Bornhuetter-Ferguson using premiums and paid loss method is a combination of the paid
development approach and the loss ratio approach. This method normally determines expected loss
ratios similar to the approach used to estimate the expected loss ratio for the loss ratio method
and requires analysis of the same factors described above. This method assumes that only future
losses will develop at the expected loss ratio level. The percent of paid loss to ultimate loss
implied from the paid development method is used to determine what percentage of ultimate loss is
yet to be paid. The use of the pattern from the paid development method requires consideration of
all factors listed in the description of the paid development method. The estimate of losses yet
to be paid is added to current paid losses to estimate the ultimate loss for each year. This
method will
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react very slowly if actual ultimate loss ratios are different from expectations due to changes not
accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson using premiums and incurred loss method is similar to the
Bornhuetter-Ferguson using premiums and paid loss method except that it uses case incurred losses.
The use of case incurred losses instead of paid losses can result in development patterns that are
less variable than paid patterns. However, the inclusion of case reserves can lead to distortions
if changes in case reserving have taken place, and the method requires analysis of all the factors
that need to be reviewed for the loss ratio and incurred development methods.
The Frequency times Severity method multiplies a projected number of ultimate claims by an
estimated ultimate average loss for each accident year to produce ultimate loss estimates. Since
projections of the ultimate number of claims are often less variable than projections of ultimate
loss, this method can provide more reliable results for products where loss development patterns
are inconsistent or too variable to be relied on exclusively. In addition, this method can more
directly account for changes in coverage that impact the number and size of claims. However, this
method can be difficult to apply to situations where very large claims or a substantial number of
unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims
requires analysis of several factors including the rate at which policyholders report claims to us,
the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating
the ultimate average loss requires analysis of the impact of large losses and claim cost trend
based on changes in the cost of repairing or replacing property, changes in the cost of medical
care, changes in the cost of wage replacement, judicial decisions, legislative changes and other
factors.
Stochastic modeling produces a range of possible outcomes based on varying assumptions related to
the particular product being modeled. For some products, we use models which rely on historical
development patterns at an aggregate level, while other products are modeled using individual claim
variability assumptions supplied by the claims department. In either case, multiple simulations
are run and the results are analyzed to produce a range of potential outcomes. The results will
typically include a mean and percentiles of the possible reserve distribution which aid in the
selection of a point estimate.
For many exposures, especially those that can be considered long-tail, a particular accident year
may not have a sufficient volume of paid losses to produce a statistically reliable estimate of
ultimate losses. In such a case, our actuaries typically assign more weight to the incurred
development method than to the paid development method. As claims continue to settle and the
volume of paid loss increases, the actuaries may assign additional weight to the paid development
method. For most of our products, even the incurred losses for accident years that are early in
the claim settlement process will not be of sufficient volume to produce a reliable estimate of
ultimate losses. In these cases, we will not assign any weight to the paid and incurred
development methods. We will use loss ratio, Bornhuetter-Ferguson and average loss methods. For
short-tail exposures, the paid and incurred development methods can often be relied on sooner
primarily because our history includes a sufficient number of years to cover the entire period over
which paid and incurred losses are expected to change. However, we may also use loss ratio,
Bornhuetter-Ferguson and average loss methods for short-tail exposures.
For other more complex products where the above methods may not produce reliable indications, we
use additional methods tailored to the characteristics of the specific situation. Such products
include construction defect losses and A&E.
For construction defect losses, our actuaries organize losses by report year. Report year groups
claims by the year in which they were reported. To estimate losses from claims that have not been
reported, various extrapolation techniques are applied to the pattern of claims that have been
reported to estimate the number of claims yet to be reported. This process requires analysis of
several factors including the rate at which policyholders report claims to us, the impact of
judicial decisions, the impact of underwriting changes and other factors. An average claim size is
determined from past experience and applied to the number of unreported claims to estimate reserves
for these claims.
Periodic Reserve Reviews
The reserve analyses performed by our actuaries result in point estimates. Each quarter, the
results of the detailed reserve reviews are summarized and discussed with our senior management to
determine the best estimate of reserves. This group considers many factors in making this
decision. The factors include, but are not limited to, the historical pattern and volatility of
the actuarial indications, the sensitivity of the actuarial indications to changes in paid and
incurred loss patterns, the consistency of claims handling processes, the
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consistency of case reserving practices, changes in our pricing and underwriting, pricing and
underwriting trends in the insurance market, and legal, judicial, social and economic trends.
Our recorded reserves reflect our best estimate as of a particular point in time based upon known
facts, consideration of the factors cited above, and our judgment. The carried reserve may differ
from the actuarial point estimate as the result of our consideration of the factors noted above as
well as the potential volatility of the projections associated with the specific product being
analyzed and other factors impacting claims costs that may not be quantifiable through traditional
actuarial analysis. This process results in management’s best estimate which is then recorded as
the loss reserve.
Currently, our recorded reserves are modestly higher than the actuarial point estimate. For both
CNA Commercial and CNA Specialty, the difference between our reserves and the actuarial point
estimate is primarily driven by uncertainty with respect to immature accident years, claim cost
inflation, changes in claims handling, tort reform roll-backs which may adversely impact claim
costs, and the effects of the recessionary economy. For Corporate & Other Non-Core, the carried
reserve is relatively consistent with the actuarial point estimate.
The key assumptions fundamental to the reserving process are often different for various products
and accident years. Some of these assumptions are explicit assumptions that are required of a
particular method, but most of the assumptions are implicit and cannot be precisely quantified. An
example of an explicit assumption is the pattern employed in the paid development method. However,
the assumed pattern is itself based on several implicit assumptions such as the impact of inflation
on medical costs and the rate at which claim professionals close claims. As a result, the effect
on reserve estimates of a particular change in assumptions usually cannot be specifically
quantified, and changes in these assumptions cannot be tracked over time.
Our recorded reserves are management’s best estimate. In order to provide an indication of the
variability associated with our net reserves, the following discussion provides a sensitivity
analysis that shows the approximate estimated impact of variations in the most significant factor
affecting our reserve estimates for particular types of business. These significant factors are
the ones that could most likely materially impact the reserves. This discussion covers the major
types of business for which we believe a material deviation to our reserves is reasonably possible.
There can be no assurance that actual experience will be consistent with the current assumptions
or with the variation indicated by the discussion. In addition, there can be no assurance that
other factors and assumptions will not have a material impact on our reserves.
Within CNA Specialty, we believe a material deviation to our net reserves is reasonably possible
for professional liability and related business. This business includes professional
liability coverages provided to various professional firms, including architects, realtors, small
and mid-sized accounting firms, law firms and technology firms. This business also includes D&O,
employment practices, fiduciary and fidelity coverages as well as insurance products serving the
healthcare delivery system. The most significant factor affecting reserve estimates for this
business is claim severity. Claim severity is driven by the cost of medical care, the cost of wage
replacement, legal fees, judicial decisions, legislation and other factors. Underwriting and claim
handling decisions such as the classes of business written and individual claim settlement
decisions can also impact claim severity. If the estimated claim severity increases by 9%, we
estimate that the net reserves would increase by approximately $450 million. If the estimated
claim severity decreases by 3%, we estimate that net reserves would decrease by approximately $150
million. Our net reserves for this business were approximately $4.9 billion at December 31, 2009.
Within CNA Commercial, the two types of business for which we believe a material deviation to our
net reserves is reasonably possible are workers’ compensation and general liability.
For CNA Commercial workers’ compensation, since many years will pass from the time the business is
written until all claim payments have been made, claim cost inflation on claim payments is the most
significant factor affecting workers’ compensation reserve estimates. Workers’ compensation claim
cost inflation is driven by the cost of medical care, the cost of wage replacement, expected
claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated
workers’ compensation claim cost inflation increases by 100 basis points for the entire period over
which claim payments will be made, we estimate that our net reserves would increase by
approximately $450 million. If estimated workers’ compensation claim cost inflation decreases by
100 basis points for the entire period over which claim payments will be made, we estimate that
29
Table of Contents
our net reserves would decrease by approximately $400 million. Our net reserves for CNA Commercial
workers’ compensation were approximately $4.8 billion at December 31, 2009.
For CNA Commercial general liability, the most significant factor affecting reserve estimates is
severity. Claim severity is driven by changes in the cost to repair or replace property, the cost
of medical care, the cost of wage replacement, judicial decisions, legislation and other factors.
If the estimated claim severity for general liability increases by 6%, we estimate that our net
reserves would increase by approximately $200 million. If the estimated claim severity for general
liability decreases by 3%, we estimate that our net reserves would decrease by approximately $100
million. Our net reserves for CNA Commercial general liability were approximately $3.3 billion at
December 31, 2009.
Within Corporate & Other Non-Core, the two types of business for which we believe a material
deviation to our net reserves is reasonably possible are CNA Re and A&E.
For CNA Re, the predominant method used for estimating reserves is the incurred development method.
Changes in the cost to repair or replace property, the cost of medical care, the cost of wage
replacement, the rate at which ceding companies report claims, judicial decisions, legislation and
other factors all impact the incurred development pattern for CNA Re. The pattern selected results
in the incurred development factor that estimates future changes in case incurred loss. If the
estimated incurred development factor for CNA Re increases by 40%, we estimate that our net
reserves for CNA Re would increase by approximately $100 million. If the estimated incurred
development factor for CNA Re decreases by 30%, we estimate that our net reserves would decrease by
approximately $75 million. Our net reserves for CNA Re were approximately $0.7 billion at December
31, 2009.
For A&E, the most significant factor affecting reserve estimates is overall account severity.
Overall account severity for A&E reflects the combined impact of economic trends (inflation),
changes in the types of defendants involved, the expected mix of asbestos disease types, judicial
decisions, legislation and other factors. If the estimated overall account severity for A&E
increases approximately 20%, we estimate that our A&E net reserves would increase by approximately
$300 million. If the estimated overall account severity for A&E decreases by approximately 10%, we
estimate that our A&E net reserves would decrease by approximately $150 million. Our net reserves
for A&E were approximately $1.4 billion at December 31, 2009.
Given the factors described above, it is not possible to quantify precisely the ultimate exposure
represented by claims and related litigation. As a result, we regularly review the adequacy of our
reserves and reassess our reserve estimates as historical loss experience develops, additional
claims are reported and settled and additional information becomes available in subsequent periods.
In light of the many uncertainties associated with establishing the estimates and making the
assumptions necessary to establish reserve levels, we review our reserve estimates on a regular
basis and make adjustments in the period that the need for such adjustments is determined. These
reviews have resulted in our identification of information and trends that have caused us to change
our reserves in prior periods and could lead to the identification of a need for additional
material increases or decreases in claim and claim adjustment expense reserves, which could
materially affect our results of operations, equity, business and insurer financial strength and
debt ratings positively or negatively. See the Ratings section of this MD&A for further
information regarding our financial strength and debt ratings.
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Segment Results
The following discusses the results of continuing operations for our operating segments.
As a result of our realignment of management responsibilities, we revised our property and casualty
segments in the fourth quarter of 2009. There was no change in our Life & Group Non-Core and
Corporate & Other Non-Core segments. Prior period segment disclosures have been conformed to the
current year presentation. The new segment structure reflects the way management currently reviews
results and makes business decisions.
Our core property and casualty commercial insurance operations are reported in two business
segments: CNA Specialty and CNA Commercial. CNA Specialty provides a broad array of professional,
financial and specialty property and casualty products and services, primarily through insurance
brokers and managing general underwriters. CNA Commercial includes property and casualty coverages
sold to small businesses and middle market entities and organizations primarily through an
independent agency distribution system. CNA Commercial also includes commercial insurance and risk
management products sold to large corporations primarily through insurance brokers. Previously, our
international operations were treated as a separate business unit within CNA Specialty. The
products sold through our international operations are now reflected within CNA Specialty and CNA
Commercial in a manner that aligns with the products within each segment. Additionally, our excess
and surplus lines, which were previously included in CNA Specialty, are now included in CNA
Commercial, as part of CNA Select Risk.
Our non-core operations are managed in two segments: Life & Group Non-Core and Corporate & Other
Non-Core. Life & Group Non-Core primarily includes the results of the life and group lines of
business that have been placed in run-off. Corporate & Other Non-Core primarily includes certain
corporate expenses, including interest on corporate debt, and the results of certain property and
casualty business primarily in run-off, including CNA Re. This segment also includes the results
related to the centralized adjusting and settlement of A&E.
Our property and casualty field structure consists of 41 branch locations across the country
organized into 6 zones. The centralized processing operation for small and middle-market
customers, located in Maitland, Florida, handles policy processing, billing and collection
activities, and also acts as a call center to optimize customer service. The claims structure
consists of a centralized claim center designed to efficiently handle the high volume of low
severity claims including property damage, liability, and workers’ compensation medical only
claims, and 14 principal claim office locations around the country handling the more complex
claims.
We utilize the net operating income financial measure to monitor our operations. Net operating
income is calculated by excluding from net income (loss) attributable to CNA the after-tax effects
of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and
3) any cumulative effects of changes in accounting guidance. See further discussion regarding how
we manage our business in Note N of the Consolidated Financial Statements included under Item 8.
In evaluating the results of our CNA Specialty and CNA Commercial segments, we utilize the loss
ratio, the expense ratio, the dividend ratio, and the combined ratio. These ratios are calculated
using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim
adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance
underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to
net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net
earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals,
net of reinsurance, for prior years are defined as net prior year development within this MD&A.
These changes can be favorable or unfavorable. Net prior year development does not include the
impact of related acquisition expenses. Further information on our reserves is provided in Note F
of the Consolidated Financial Statements included under Item 8.
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CNA SPECIALTY
Business Overview
CNA Specialty provides professional liability and other coverages through property and casualty
products and services, both domestically and abroad, through a network of brokers, managing general
underwriters and independent agencies. CNA Specialty provides solutions for managing the risks of
its clients, including architects, lawyers, accountants, healthcare professionals, financial
intermediaries and public and private companies. Product offerings also include surety and
fidelity bonds and vehicle warranty services.
CNA Specialty includes the following business groups:
Professional & Management Liability
provides management and professional liability insurance and
risk management services and other specialized property and casualty coverages in the United
States. This group provides professional liability coverages to various professional firms,
including architects, realtors, small and mid-sized accounting firms, law firms and technology
firms. Professional & Management Liability also provides D&O, employment practices, fiduciary and
fidelity coverages. Specific areas of focus include small and mid-size firms as well as privately
held firms and not-for-profit organizations, where tailored products for this client segment are
offered. Products within Professional & Management Liability are distributed through brokers,
agents and managing general underwriters.
Professional & Management Liability, through CNA HealthPro, also offers insurance products to serve
the healthcare delivery system. Products include professional liability and associated standard
property and casualty coverages, and are distributed on a national basis through brokers, agents
and managing general underwriters. Key customer segments include long term care facilities, allied
healthcare providers, life sciences, dental professionals and mid-size and large healthcare
facilities.
International
provides similar management and professional liability insurance and other
specialized property and casualty coverages in Canada and Europe.
Surety
consists primarily of CNA Surety Corporation (CNA Surety) and its insurance subsidiaries and
offers small, medium and large contract and commercial surety bonds. CNA Surety provides surety
and fidelity bonds in all 50 states through a combined network of independent agencies. We own
approximately 62% of CNA Surety.
Warranty and Alternative Risks
provides extended service contracts and related products that
protect individuals from the financial burden associated with mechanical breakdown and other
related losses, primarily for vehicles and portable electronic communication devices. These
products are distributed through and administered by a wholly owned subsidiary, CNA National
Warranty Corporation, or through a third party administrator.
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The following table details results of operations for CNA Specialty.
Results of Operations
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Net written premiums
|
$ | 2,684 | $ | 2,719 | $ | 2,766 | ||||||
|
Net earned premiums
|
2,697 | 2,755 | 2,759 | |||||||||
|
Net investment income
|
526 | 354 | 493 | |||||||||
|
Net operating income
|
591 | 414 | 524 | |||||||||
|
Net realized investment losses, after-tax
|
(123 | ) | (167 | ) | (45 | ) | ||||||
|
Net income
|
468 | 247 | 479 | |||||||||
|
|
||||||||||||
|
Ratios
|
||||||||||||
|
Loss and loss adjustment expense
|
56.9 | % | 61.7 | % | 62.5 | % | ||||||
|
Expense
|
29.3 | 27.3 | 25.8 | |||||||||
|
Dividend
|
0.3 | 0.5 | 0.2 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Combined
|
86.5 | % | 89.5 | % | 88.5 | % | ||||||
|
|
||||||||||||
2009 Compared with 2008
Net written premiums for CNA Specialty decreased $35 million in 2009 as compared with 2008. The
decrease in net written premiums was driven by our architects & engineers and surety bond lines of
business, as current economic conditions have led to decreased insured exposures. This, along with
the competitive market conditions, may continue to put ongoing pressure on premium and income
levels and the expense ratio. Net written premiums were also unfavorably impacted by foreign
exchange. Net earned premiums decreased $58 million as compared with the same period in 2008,
consistent with the trend of lower net written premiums.
CNA Specialty’s average rate decreased 2% for 2009 as compared to a decrease of 4% for 2008 for
policies that renewed in each period. Retention rates of 85% were achieved for those policies that
were available for renewal in each period.
Net income improved $221 million in 2009 as compared with 2008. This increase was due to improved
net operating income and lower net realized investment losses. See the Investments section of this
MD&A for further discussion of net investment income and net realized investment results.
Net operating income improved $177 million in 2009 as compared with 2008, primarily due to higher
net investment income and increased favorable net prior year development.
The combined ratio improved 3.0 points in 2009 as compared with 2008. The loss ratio improved 4.8
points primarily due to increased favorable net prior year development. The expense ratio increased
2.0 points in 2009 as compared with 2008, primarily due to higher underwriting expenses and the
lower net earned premium base. Underwriting expenses increased primarily due to higher
employee-related costs.
Favorable net prior year development of $224 million was recorded in 2009, compared to $106 million
in 2008. Further information on CNA Specialty net prior year development for 2009 and 2008 is
included in Note F of the Consolidated Financial Statements included under Item 8.
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The following table summarizes the gross and net carried reserves as of December 31, 2009 and 2008
for CNA Specialty.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
Claim and Claim Adjustment Expense Reserves
| December 31 | 2009 | 2008 | ||||||
| (In millions) | ||||||||
|
|
||||||||
|
Gross Case Reserves
|
$ | 2,208 | $ | 2,105 | ||||
|
Gross IBNR Reserves
|
4,714 | 4,616 | ||||||
|
|
||||||||
|
|
||||||||
|
Total Gross Carried Claim and Claim Adjustment Expense Reserves
|
$ | 6,922 | $ | 6,721 | ||||
|
|
||||||||
|
|
||||||||
|
Net Case Reserves
|
$ | 1,781 | $ | 1,639 | ||||
|
Net IBNR Reserves
|
4,085 | 3,896 | ||||||
|
|
||||||||
|
|
||||||||
|
Total Net Carried Claim and Claim Adjustment Expense Reserves
|
$ | 5,866 | $ | 5,535 | ||||
|
|
||||||||
2008 Compared with 2007
Net written premiums for CNA Specialty decreased $47 million in 2008 as compared with 2007.
Premiums written in 2008 were unfavorably impacted by competitive market conditions resulting in
decreased production, as compared with 2007, primarily in professional management and liability
lines. The unfavorable impact in premiums written was partially offset by decreased ceded premiums
primarily due to decreased use of reinsurance. Net earned premiums decreased $4 million as
compared with the same period in 2007, consistent with the decrease in net written premiums.
CNA Specialty’s average rate decreased 4% for 2008, as compared to a decrease of 5% for 2007 for
policies that renewed in each period. Retention rates of 85% and 83% were achieved for those
policies that were up for renewal in each period.
Net income decreased $232 million in 2008 as compared with 2007. This decrease was primarily
attributable to higher net realized investment losses and lower net operating income. See the
Investments section of this MD&A for further discussion of net investment income and net realized
investment results.
Net operating income decreased $110 million in 2008 as compared with 2007. This decrease was
primarily driven by significantly lower net investment income and decreased current accident year
underwriting results. These unfavorable results were partially offset by the impact of favorable
net prior year development in 2008 as compared to unfavorable net prior year development in 2007.
The combined ratio increased 1.0 point in 2008 as compared with 2007. The loss ratio improved 0.8
point, primarily due to the impact of development. This was partially offset by higher current
accident year loss ratios recorded primarily in our E&O and D&O coverages for financial
institutions due to the financial markets credit crisis in 2008.
The expense ratio increased 1.5 points in 2008 as compared with 2007. The increase primarily
related to increased underwriting expenses and reduced ceding commissions.
Favorable net prior year development of $106 million was recorded in 2008, compared to unfavorable
net prior year development of $24 million in 2007. Further information on CNA Specialty net prior
year development for 2008 and 2007 is included in Note F of the Consolidated Financial Statements
included under Item 8.
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CNA COMMERCIAL
Business Overview
CNA Commercial works with an independent agency distribution system and a network of brokers to
market a broad range of property and casualty insurance products and services to small,
middle-market and large businesses and organizations. Property products include standard and
excess property coverages, as well as marine coverage, and boiler and machinery. Casualty products
include standard casualty insurance products such as workers’ compensation, general and product
liability, commercial auto and umbrella coverages. Most insurance programs are provided on a
guaranteed cost basis; however, we also offer specialized loss-sensitive insurance programs to
those customers viewed as higher risk and less predictable in exposure.
These property and casualty products are offered as part of our
Commercial, Business
and
International
insurance groups. Our Business insurance group serves our smaller commercial
accounts and the Commercial insurance group serves our middle markets and larger risks. In
addition, CNA Commercial provides total risk management services relating to claim and information
services to the large commercial insurance marketplace, through a wholly-owned subsidiary, CNA
ClaimPlus, Inc., a third party administrator. The International insurance group primarily consists
of the commercial product lines of our operations in Europe, Canada, Latin America and Hawaii.
Also included in CNA Commercial is
CNA Select Risk (Select Risk)
, which includes our excess and
surplus lines coverages. Select Risk provides specialized insurance for selected commercial risks
on both an individual customer and program basis. Customers insured by Select Risk are generally
viewed as higher risk and less predictable in exposure than those covered by standard insurance
markets. Select Risk’s products are distributed throughout the United States through specialist
producers, program agents and brokers.
The following table details results of operations for CNA Commercial.
Results of Operations
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Net written premiums
|
$ | 3,448 | $ | 3,770 | $ | 4,007 | ||||||
|
Net earned premiums
|
3,432 | 3,787 | 4,104 | |||||||||
|
Net investment income
|
922 | 603 | 1,006 | |||||||||
|
Net operating income
|
506 | 289 | 697 | |||||||||
|
Net realized investment losses, after-tax
|
(232 | ) | (335 | ) | (105 | ) | ||||||
|
Net income (loss)
|
274 | (46 | ) | 592 | ||||||||
|
|
||||||||||||
|
Ratios
|
||||||||||||
|
Loss and loss adjustment expense
|
69.6 | % | 73.0 | % | 66.8 | % | ||||||
|
Expense
|
35.2 | 31.2 | 32.1 | |||||||||
|
Dividend
|
0.3 | - | 0.2 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Combined
|
105.1 | % | 104.2 | % | 99.1 | % | ||||||
|
|
||||||||||||
2009 Compared with 2008
Net written premiums for CNA Commercial decreased $322 million in 2009 as compared with 2008.
Written premiums declined in most lines primarily due to general economic conditions. Current
economic conditions have led to decreased insured exposures, such as in small businesses and in the
construction industry due to smaller payrolls and reduced project volume. This, along with
competitive market conditions, may continue to put ongoing pressure on premium and income levels
and the expense ratio. Net earned premiums decreased $355 million in 2009 as compared with 2008,
consistent with the trend of lower net written premiums. Premiums were also impacted by
unfavorable premium development recorded in 2009 and unfavorable foreign exchange.
CNA Commercial’s average rate was flat, as compared to a decrease of 4% for 2008 for policies that
renewed in each period. Retention rates of 81% were achieved for those policies that were
available for renewal in both periods.
35
Table of Contents
Net results improved $320 million in 2009 as compared with 2008. This improvement was due to
increased net operating income and decreased net realized investment losses. See the Investments
section of this MD&A for further discussion of net realized investment results and net investment
income.
Net operating income improved $217 million in 2009 compared with 2008. This improvement was
primarily driven by higher net investment income and lower catastrophe losses. Partially
offsetting these favorable items was an unfavorable change in current accident year underwriting
results excluding catastrophes.
The combined ratio increased 0.9 point in 2009 as compared with 2008. The loss ratio improved 3.4
points primarily due to decreased catastrophe losses, partially offset by the impact of higher
current accident year non-catastrophe loss ratios. Catastrophe losses were $82 million, or 2.4
points of the loss ratio, for 2009 as compared to $343 million, or 9.0 points of the loss ratio,
for 2008. The current accident year loss ratio, excluding catastrophe losses, was unfavorably
impacted by loss experience in several lines of business, including workers’ compensation and
renewable energy, as well as several significant property losses.
The expense ratio increased 4.0 points in 2009 as compared with 2008, primarily related to higher
underwriting expenses, unfavorable changes in estimates for insurance-related assessments and the
lower net earned premium base. Underwriting expenses increased primarily due to higher
employee-related costs.
In 2008, the amount due from policyholders related to losses under deductible policies within CNA
Commercial Lines was reduced by $90 million for insolvent insureds. The reduction of this amount,
which was reflected as unfavorable net prior year reserve development in 2008, had no effect on
2008 results of operations as the Company had previously recognized provisions in prior years.
These impacts were reported in Insurance claims and policyholders’ benefits in the 2008
Consolidated Statement of Operations.
Favorable net prior year development of $168 million was recorded in 2009, compared to favorable
net prior year development of $96 million in 2008. Excluding the impact of the $90 million of
unfavorable net prior year reserve development discussed above, which had no net impact on the 2008
results of operations, favorable net prior year development was $186 million. Further information
on CNA Commercial net prior year development for 2009 and 2008 is included in Note F of the
Consolidated Financial Statements included under Item 8.
The following table summarizes the gross and net carried reserves as of December 31, 2009 and 2008
for CNA Commercial.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
Claim and Claim Adjustment Expense Reserves
| December 31 | 2009 | 2008 | ||||||
| (In millions) | ||||||||
|
|
||||||||
|
Gross Case Reserves
|
$ | 6,510 | $ | 6,772 | ||||
|
Gross IBNR Reserves
|
6,495 | 6,837 | ||||||
|
|
||||||||
|
|
||||||||
|
Total Gross Carried Claim and Claim Adjustment Expense Reserves
|
$ | 13,005 | $ | 13,609 | ||||
|
|
||||||||
|
|
||||||||
|
Net Case Reserves
|
$ | 5,269 | $ | 5,505 | ||||
|
Net IBNR Reserves
|
5,580 | 5,673 | ||||||
|
|
||||||||
|
|
||||||||
|
Total Net Carried Claim and Claim Adjustment Expense Reserves
|
$ | 10,849 | $ | 11,178 | ||||
|
|
||||||||
2008 Compared with 2007
Net written premiums for CNA Commercial decreased $237 million in 2008 as compared with 2007.
Premiums written in 2008 were unfavorably impacted by competitive market conditions resulting in
decreased production, as compared with 2007, across most lines of business. This unfavorable
impact was partially offset by decreased ceded premiums. Net earned premiums decreased $317
million in 2008 as compared with 2007, consistent with the decreased net written premiums.
CNA Commercial’s average rate decreased 4% for 2008, as compared to a decrease of 3% for 2007 for
policies that renewed in each period. Retention rates of 81% and 79% were achieved for those
policies that were available for renewal in each period.
36
Table of Contents
Net results decreased $638 million in 2008 as compared with 2007. This decrease was attributable
to decreased net operating income and higher net realized investment losses. See the Investments
section of this MD&A for further discussion of the net realized investment results and net
investment income.
Net operating income decreased $408 million in 2008 as compared with 2007. This decrease was
primarily driven by significantly lower net investment income and higher catastrophe impacts. The
catastrophe impacts were $230 million after-tax in 2008, which included a $7 million after-tax
catastrophe-related insurance assessment, as compared to catastrophe losses of $49 million
after-tax in 2007.
The combined ratio increased 5.1 points in 2008 as compared with 2007. The loss ratio increased
6.2 points primarily due to increased catastrophe losses. Catastrophes losses related to 2008
events had an adverse impact of 9.0 points on the loss ratio in 2008 compared with an adverse
impact of 1.8 points in 2007.
The expense ratio decreased 0.9 point in 2008 as compared with 2007 primarily related to changes in
the assessment rates imposed by certain states for insurance-related assessments. The dividend
ratio decreased 0.2 point in 2008 as compared with 2007 due to increased favorable dividend
development in the workers’ compensation line of business.
Favorable net prior year development of $96 million was recorded in 2008. Excluding the impact of
the $90 million of unfavorable net prior year reserve development discussed above, which had no net
impact on the 2008 results of operations, favorable net prior year development was $186 million.
Favorable net prior year development of $183 million was recorded in 2007. Further information on
CNA Commercial net prior year development for 2008 and 2007 is included in Note F of the
Consolidated Financial Statements included under Item 8.
37
Table of Contents
LIFE & GROUP NON-CORE
Business Overview
The Life & Group Non-Core segment primarily includes the results of the life and group lines of
business that are in run-off. We continue to service our existing individual long term care
commitments, our payout annuity business and our pension deposit business. We also retain a block
of group reinsurance and life settlement contracts. These businesses are being managed as a
run-off operation. Our group long term care business, while considered non-core, continues to be
actively marketed. During 2008, we exited the indexed group annuity portion of our pension deposit
business.
The following table summarizes the results of operations for Life & Group Non-Core.
Results of Operations
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Net earned premiums
|
$ | 595 | $ | 612 | $ | 618 | ||||||
|
Net investment income
|
664 | 484 | 622 | |||||||||
|
Net operating loss
|
(16 | ) | (108 | ) | (159 | ) | ||||||
|
Net realized investment losses, after-tax
|
(153 | ) | (236 | ) | (36 | ) | ||||||
|
Net loss
|
(169 | ) | (344 | ) | (195 | ) | ||||||
2009 Compared with 2008
Net earned premiums for Life & Group Non-Core decreased $17 million in 2009 as compared with 2008.
Net earned premiums relate primarily to the individual and group long term care businesses.
Net loss decreased $175 million in 2009 as compared with 2008. The decrease in net loss was
primarily due to improved net realized investment results, favorable performance on our remaining
pension deposit business as further discussed below, and a settlement reached with Willis Limited
that resolved litigation related to the placement of personal accident reinsurance. Under the
settlement agreement, Willis Limited agreed to pay us a total of $130 million, which resulted in an
after-tax gain of $61 million, net of reinsurance. This litigation was brought by us in response to
our settlement of the IGI contingency in 2007, as discussed below.
Certain of the separate account investment contracts related to our pension deposit business
guarantee principal and an annual minimum rate of interest, for which we recorded an additional
pretax liability in Policyholders’ funds in 2008. Based on the increase in value of the
investments supporting this business, we decreased this pretax liability by $42 million during
2009. During 2008 we increased this liability by $68 million.
These favorable impacts were partially offset by unfavorable results in our long term care business
and a $28 million after-tax legal accrual recorded in the second quarter of 2009 related to a
previously held limited partnership investment. The limited partnership investment supported the
indexed group annuity portion of our pension deposit business.
Net investment income for the year ended December 31, 2008 included trading portfolio losses of
$146 million, which were substantially offset by a corresponding decrease in the policyholders’
funds reserves supported by the trading portfolio. This trading portfolio supported the indexed
group annuity portion of our pension deposit business. During 2008, we settled these liabilities
with policyholders with no material impact to results of operations. That business had a net loss
of $22 million for the year ended December 31, 2008.
2008 Compared with 2007
Net earned premiums for Life & Group Non-Core decreased $6 million in 2008 as compared with 2007.
Net loss increased $149 million in 2008 as compared with 2007. The increase in net loss was
primarily due to increased net realized investment losses and adverse investment performance on a
portion of our pension deposit business. As discussed above, during 2008, the Company recorded a
pretax liability of $68 million in Policyholders’ funds due to the performance of the related
assets supporting the pension deposit business in 2008. There was no liability recorded in 2007
related to this business.
38
Table of Contents
The net loss in 2007 included an after-tax loss of $108 million related to the settlement of the
IGI contingency. The IGI contingency related to reinsurance arrangements with respect to personal
accident insurance coverages provided between 1997 and 1999 which were the subject of arbitration
proceedings.
The decreased net investment income included a decline of trading portfolio results, which was
substantially offset by a corresponding decrease in the policyholders’ fund reserves supported by
the indexed group annuity trading portfolio. The trading portfolio supported the indexed group
annuity portion of our pension deposit business. See the Investments section of this MD&A for
further discussion of net investment income and net realized investment results.
39
Table of Contents
CORPORATE & OTHER NON-CORE
Overview
Corporate & Other Non-Core primarily includes certain corporate expenses, including interest on
corporate debt, and the results of certain property and casualty business primarily in run-off,
including CNA Re. This segment also includes the results related to the centralized adjusting and
settlement of A&E claims.
The following table summarizes the results of operations for the Corporate & Other Non-Core
segment, including A&E and intrasegment eliminations.
Results of Operations
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Net investment income
|
$ | 208 | $ | 178 | $ | 312 | ||||||
|
Net operating loss
|
(99 | ) | (62 | ) | (2 | ) | ||||||
|
Net realized investment losses, after-tax
|
(53 | ) | (103 | ) | (17 | ) | ||||||
|
Net loss
|
(152 | ) | (165 | ) | (19 | ) | ||||||
2009 Compared with 2008
Net loss decreased $13 million in 2009 as compared with 2008, primarily due to improved net
realized investment results and higher net investment income. Partially offsetting these favorable
items was increased unfavorable net prior year development primarily related to A&E.
Unfavorable net prior year development of $184 million was recorded in 2009, including $79 million
for asbestos exposures and $76 million for environmental pollution exposures. In our most recent
actuarial ground up review we noted adverse development in various asbestos accounts due to
increases in average claim severity and defense expense arising from increased trial activity.
Additionally, we have not seen a decline in the overall emergence of new accounts during the last
few years. We noted adverse development in various pollution accounts due to changes in the
liabilities attributed to our policyholders and adverse changes in case law impacting insurers’
coverage obligations. These changes in turn increased our account estimates on certain accounts.
In addition, the frequency of environmental pollution claims did not decline at the rate previously
anticipated. Unfavorable net prior year development of $122 million was recorded in 2008. Further
information on Corporate & Other Non-Core net prior year development for 2009 and 2008 is included
in Note F of the Consolidated Financial Statements included under Item 8.
The following table summarizes the gross and net carried reserves as of December 31, 2009 and 2008
for Corporate & Other Non-Core.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
Claim and Claim Adjustment Expense Reserves
| December 31 | 2009 | 2008 | ||||||
| (In millions) | ||||||||
|
|
||||||||
|
Gross Case Reserves
|
$ | 1,548 | $ | 1,823 | ||||
|
Gross IBNR Reserves
|
2,458 | 2,578 | ||||||
|
|
||||||||
|
|
||||||||
|
Total Gross Carried Claim and Claim Adjustment Expense Reserves
|
$ | 4,006 | $ | 4,401 | ||||
|
|
||||||||
|
|
||||||||
|
Net Case Reserves
|
$ | 972 | $ | 1,126 | ||||
|
Net IBNR Reserves
|
1,515 | 1,561 | ||||||
|
|
||||||||
|
|
||||||||
|
Total Net Carried Claim and Claim Adjustment Expense Reserves
|
$ | 2,487 | $ | 2,687 | ||||
|
|
||||||||
2008 Compared with 2007
Net loss increased $146 million in 2008 as compared with 2007. This increase was primarily due to
lower net investment income, higher net realized investment losses and expenses associated with a
legal contingency. These unfavorable impacts were partially offset by a $27 million release from
the allowance for uncollectible
40
Table of Contents
reinsurance receivables arising from a change in estimate. In addition, the 2007 results included
current accident year losses related to certain mass torts.
Unfavorable net prior year development of $122 million was recorded in 2008. Unfavorable net prior
year development of $86 million was recorded in 2007. Further information on Corporate & Other
Non-Core net prior year development for 2008 and 2007 is included in Note F of the Consolidated
Financial Statements included under Item 8.
41
Table of Contents
A&E Reserves
Our property and casualty insurance subsidiaries have actual and potential exposures related to
asbestos and environmental pollution (A&E) claims. Establishing reserves for A&E claim and claim
adjustment expenses is subject to a higher degree of variability due to a number of factors, as
further discussed in the Reserve Estimates & Uncertainties section of this MD&A. Due to the
inherent uncertainties in estimating claim and claim adjustment expense reserves for A&E and due to
the significant uncertainties described related to A&E claims, our 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 our business, results of operations, equity, and insurer
financial strength and debt ratings.
Asbestos
In the past several years, we 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. In recent years, the rate of new
filings has decreased. Various challenges to mass screening claimants have been successful.
Historically, the majority of asbestos bodily injury claims have been filed by persons exhibiting
few, if any, disease symptoms. Studies have concluded that the percentage of unimpaired claimants
to total claimants ranges between 66% and up to 90%. Some courts and 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.
Despite the decrease in new claim filings in recent years, there are several factors, in our view,
negatively impacting asbestos claim trends. Plaintiff attorneys who previously sued entities that
are now bankrupt continue to seek other viable targets. As plaintiff attorneys named additional
defendants to new and existing asbestos bodily injury lawsuits, we experienced an increase in the
total number of policyholders with current asbestos claims. Companies with few or no previous
asbestos claims are becoming targets in asbestos litigation and, although they may have little or
no liability, nevertheless must be defended. Additionally, plaintiff attorneys and trustees for
future claimants are demanding that policy limits be paid lump-sum into the bankruptcy asbestos
trusts prior to presentation of valid claims and medical proof of these claims. Various challenges
to these practices have succeeded in litigation, and are continuing to be litigated. Plaintiff
attorneys and trustees for future claimants are also attempting to devise claims payment procedures
for bankruptcy trusts that would allow asbestos claims to be paid under lax standards for injury,
exposure and causation. This also presents the potential for exhausting policy limits in an
accelerated fashion. Challenges to these practices are being mounted, though the ultimate impact
or success of these tactics remains uncertain.
We are involved in significant asbestos-related claim litigation, which is described in Note F of
the Consolidated Financial Statements included under Item 8.
Environmental Pollution
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
has been 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.
42
Table of Contents
Many policyholders have made claims against us 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 our adoption of the Simplified Commercial General Liability
coverage form, which includes what is referred to in the industry as absolute pollution exclusion.
We 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.
Further information on A&E claim and claim adjustment expense reserves and net prior year
development is included in Note F of the Consolidated Financial Statements included under Item 8.
43
Table of Contents
INVESTMENTS
We maintain a large portfolio of fixed maturity and equity securities, including large amounts of
corporate and government issued debt securities, residential and commercial mortgage-backed
securities, and other asset-backed securities and investments in limited partnerships which pursue
a variety of long and short investment strategies across a broad array of asset classes. Our
investment portfolio supports our obligation to pay future insurance claims and provides investment
returns which are an important part of our overall profitability.
For more than a year, capital and credit markets have experienced severe levels of volatility,
illiquidity, uncertainty and overall disruption. This broader market disruption significantly
subsided in 2009 in most asset sectors. The U.S. Government has initiated programs intended to
stabilize and improve markets and the economy. While the ultimate impact of these programs remains
uncertain and economic conditions in the U.S. remain challenging, financial markets have shown
improvement in 2009. Risk free interest rates continued near multi-year lows and credit spreads
narrowed resulting in improvement in the Company’s unrealized position. However, fair values in
the asset-backed sector continue to be depressed primarily due to continued concerns with
underlying residential and commercial collateral. During the year, the Company took advantage of
favorable market conditions to reposition the portfolio to better match the needs of the business.
The substantial improvement in the unrealized position of the portfolio not only reflects the
broader market recovery, but also these actions which centered around reducing non-investment grade
corporate and non-agency residential and commercial mortgage-backed securities through net sales
and principal repayments of $1,482 million and $2,459 million on an amortized cost basis. In
addition, we had net purchases of $7,441 million in investment grade corporate bonds and $2,041
million in agency residential mortgage-backed securities.
Net Investment Income
The significant components of net investment income are presented in the following table.
Net Investment Income
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Fixed maturity securities
|
$ | 1,941 | $ | 1,984 | $ | 2,047 | ||||||
|
Short term investments
|
36 | 115 | 186 | |||||||||
|
Limited partnerships
|
315 | (379 | ) | 183 | ||||||||
|
Equity securities
|
49 | 80 | 25 | |||||||||
|
Trading
portfolio – indexed group annuity
|
- | (146 | ) | 10 | ||||||||
|
Trading
portfolio – other
|
23 | (3 | ) | - | ||||||||
|
Other
|
6 | 19 | 35 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Gross investment income
|
2,370 | 1,670 | 2,486 | |||||||||
|
Investment expenses
|
(50 | ) | (51 | ) | (53 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net investment income
|
$ | 2,320 | $ | 1,619 | $ | 2,433 | ||||||
|
|
||||||||||||
Net investment income increased $701 million in 2009 as compared with 2008. Excluding indexed
group annuity trading portfolio losses of $146 million in 2008, net investment income increased
$555 million primarily driven by improved results from limited partnership investments. This
increase was partially offset by the impact of lower risk free and short term interest rates.
Limited partnership investments generally present greater volatility, higher illiquidity, and
greater risk than fixed income investments. Limited partnership income in 2009 was driven by
improved performance across many limited partnerships and included individual partnership
performance that ranged from a positive $120 million to a negative $59 million. The limited
partnership investments are managed as an overall portfolio in an effort to mitigate the greater
levels of volatility, illiquidity and risk that are present in the individual investments. The
indexed group annuity trading portfolio losses in 2008 were substantially offset by a corresponding
decrease in the policyholders’ funds reserves supported by the trading portfolio, which was
included in Insurance claims and policyholders’ benefits on the Consolidated Statements of
Operations. We exited the indexed group annuity business in 2008.
44
Table of Contents
Net investment income decreased $814 million in 2008 as compared with 2007. The decrease was
primarily driven by significant losses from limited partnerships and the indexed group annuity
trading portfolio in 2008, and a decline in short term interest rates.
The fixed maturity investment portfolio and short term investments provided a pretax effective
income yield of 5.1%, 5.6% and 5.8% for the years ended December 31, 2009, 2008, and 2007.
Net Realized Investment Gains (Losses)
The components of net realized investment results are presented in the following table.
Net Realized Investment Gains (Losses)
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Fixed maturity securities:
|
||||||||||||
|
U.S. Treasury securities and obligations of government agencies
|
$ | (53 | ) | $ | 235 | $ | 86 | |||||
|
Corporate and other taxable bonds
|
(306 | ) | (643 | ) | (183 | ) | ||||||
|
States,
municipalities and political subdivisions – tax-exempt securities
|
(21 | ) | 53 | 3 | ||||||||
|
Asset-backed securities
|
(778 | ) | (476 | ) | (343 | ) | ||||||
|
Redeemable preferred stock
|
(9 | ) | - | (41 | ) | |||||||
|
|
||||||||||||
|
Total fixed maturity securities
|
(1,167 | ) | (831 | ) | (478 | ) | ||||||
|
|
||||||||||||
|
Equity securities
|
243 | (490 | ) | 117 | ||||||||
|
Derivative securities
|
51 | (19 | ) | 32 | ||||||||
|
Short term investments and other
|
16 | 43 | 18 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Realized investment losses, net of participating policyholders’ interests
|
(857 | ) | (1,297 | ) | (311 | ) | ||||||
|
Income tax benefit
|
296 | 456 | 108 | |||||||||
|
Realized investment (gains) losses, after-tax, attributable to noncontrolling interests
|
- | - | - | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net realized investment gains (losses) attributable to CNA
|
$ | (561 | ) | $ | (841 | ) | $ | (203 | ) | |||
|
|
||||||||||||
Net realized investment losses decreased $280 million for 2009 as compared with 2008, driven
by a realized investment gain related to a common stock holding as discussed below and decreased
OTTI losses recognized in earnings. Further information on our realized gains and losses,
including our OTTI losses and impairment decision process, is set forth in Note B of the
Consolidated Financial Statements included under Item 8. During the second quarter of 2009, the
Company adopted updated accounting guidance, which amended the OTTI loss model for fixed maturity
securities, as discussed in Note A of the Consolidated Financial Statements included under Item 8.
Included in the 2009 net realized gains for equity securities was $370 million related to the sale
of our holdings of Verisk Analytics Inc., which began trading on October 7, 2009 after an initial
public offering. Since our cost basis in this position was zero, the entire amount was recognized
as a pretax realized investment gain in the fourth quarter of 2009.
Net realized investment losses increased $638 million for 2008 as compared with 2007. The increase
was primarily driven by an increase in OTTI losses recognized in earnings.
Our fixed maturity portfolio consists primarily of high quality bonds, 90% and 91% of which were
rated as investment grade (rated BBB- or higher) at December 31, 2009 and 2008. The classification
between investment grade and non-investment grade is based on a ratings methodology that takes into
account ratings from the three major providers, S&P, Moody’s and Fitch Ratings (Fitch) in that
order of preference. If a security is not rated by any of the three, we formulate an internal
rating. For securities with credit support from third party guarantees, the rating reflects the
greater of the underlying rating of the issuer or the insured rating.
45
Table of Contents
The following table summarizes the ratings of our fixed maturity portfolio at carrying value.
Fixed Maturity Ratings
| December 31 | 2009 | % | 2008 | % | ||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
U.S. Government and Agencies
|
$ | 3,705 | 10 | % | $ | 4,611 | 16 | % | ||||||||
|
AAA rated
|
5,855 | 17 | 8,494 | 29 | ||||||||||||
|
AA and A rated
|
12,464 | 35 | 8,166 | 29 | ||||||||||||
|
BBB rated
|
10,122 | 28 | 5,029 | 17 | ||||||||||||
|
Non-investment grade
|
3,466 | 10 | 2,587 | 9 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 35,612 | 100 | % | $ | 28,887 | 100 | % | ||||||||
|
|
||||||||||||||||
Non-investment grade fixed maturity securities, as presented in the table below, include
high-yield securities rated below BBB- by bond rating agencies and other unrated securities that,
according to our analysis, are below investment grade. Non-investment grade securities generally
involve a greater degree of risk than investment grade securities. Although we have focused
efforts to reduce our exposure to non-investment grade securities through net dispositions,
non-investment grade securities increased primarily due to price appreciation and downgrades of
$1,126 million of asset-backed securities and $333 million of other fixed maturity securities on an
amortized cost basis that were previously investment grade. The amortized cost of our
non-investment grade fixed maturity bond portfolio was $3,637 million and $3,709 million at
December 31, 2009 and 2008. The following table summarizes the ratings of this portfolio at
carrying value.
Non-investment Grade
| December 31 | 2009 | % | 2008 | % | ||||||||||||
| (In millions) | ||||||||||||||||
|
BB
|
$ | 1,352 | 39 | % | $ | 1,585 | 61 | % | ||||||||
|
B
|
1,255 | 36 | 754 | 29 | ||||||||||||
|
CCC - C
|
761 | 22 | 232 | 9 | ||||||||||||
|
D
|
98 | 3 | 16 | 1 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 3,466 | 100 | % | $ | 2,587 | 100 | % | ||||||||
|
|
||||||||||||||||
Included within the fixed maturity portfolio are securities that contain credit support from
third party guarantees from mono-line insurers. At December 31, 2009, $487 million of the carrying
value of the fixed maturity portfolio had a third party guarantee that increased the underlying
average rating of those securities from AA- to AAA. Of this amount, over 99% was within the
tax-exempt bond segment. This third party credit support on tax-exempt bonds is provided by five
mono-line insurers, the largest exposure based on fair value being Assured Guaranty Ltd. at 94%.
At December 31, 2009 and 2008, approximately 99% and 97% of the fixed maturity portfolio was issued
by U.S. Government and agencies or was rated by S&P or Moody’s. The remaining bonds were rated by
other rating agencies or internally.
The carrying value of fixed maturity and equity securities that are either subject to trading
restrictions or trade in illiquid private placement markets at December 31, 2009 was $154 million,
which represents less than 0.4% of our total investment portfolio. These securities were in a net
unrealized gain position of $5 million at December 31, 2009.
46
Table of Contents
The following table provides the composition of available-for-sale fixed maturity securities in a
gross unrealized loss position at December 31, 2009 by maturity profile. Securities not due at a
single date are allocated based on weighted average life.
Maturity Profile
| Percent of | Percent of | |||||||
| Fair Value | Unrealized Loss | |||||||
|
Due in one year or less
|
3 | % | 4 | % | ||||
|
Due after one year through five years
|
20 | 12 | ||||||
|
Due after five years through ten years
|
36 | 36 | ||||||
|
Due after ten years
|
41 | 48 | ||||||
|
|
||||||||
|
Total
|
100 | % | 100 | % | ||||
|
|
||||||||
Duration
A primary objective in the management of the fixed maturity and equity portfolios is to optimize
return relative to underlying liabilities and respective liquidity needs. Our 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 enter into an investment decision. We also continually monitor exposure to
issuers of securities held and broader industry sector exposures and may from time to time adjust
such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the
underlying liabilities and the ability to align the duration of the portfolio to those liabilities
to meet future liquidity needs, minimize interest rate risk and maintain a level of income
sufficient to support the underlying insurance liabilities. For portfolios where future liability
cash flows are determinable and typically long term in nature, we segregate investments for
asset/liability management purposes. The segregated investments support liabilities primarily in
the Life & Group Non-Core segment including annuities, structured benefit settlements and long term
care products.
The effective durations of fixed maturity securities, short term investments, non-redeemable
preferred stocks and interest rate derivatives are presented in the table below. Short term
investments are net of securities lending collateral and accounts payable and receivable amounts
for securities purchased and sold, but not yet settled.
Effective Durations
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Effective Duration | Effective Duration | |||||||||||||||
| Fair Value | (In years) | Fair Value | (In years) | |||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
Segregated investments
|
$ | 10,376 | 11.2 | $ | 8,168 | 9.9 | ||||||||||
|
|
||||||||||||||||
|
Other interest sensitive investments
|
29,665 | 4.0 | 25,194 | 4.5 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 40,041 | 5.8 | $ | 33,362 | 5.8 | ||||||||||
|
|
||||||||||||||||
The investment portfolio is periodically analyzed for changes in duration and related price
change risk. Additionally, we periodically review the sensitivity of the portfolio to the level of
foreign exchange rates and other factors that contribute to market price changes. A summary of
these risks and specific analysis on changes is included in Item 7A Quantitative and Qualitative
Disclosures About Market Risk included herein.
47
Table of Contents
Asset-Backed Exposure
Asset-Backed Distribution
| Security Type | ||||||||||||||||
| December 31, 2009 | RMBS (a) | CMBS (b) | Other ABS (c) | Total | ||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
U.S. Government Agencies
|
$ | 3,405 | $ | - | $ | - | $ | 3,405 | ||||||||
|
AAA
|
1,644 | 345 | 626 | 2,615 | ||||||||||||
|
AA
|
307 | 92 | 69 | 468 | ||||||||||||
|
A
|
250 | 81 | 35 | 366 | ||||||||||||
|
BBB
|
226 | 44 | 102 | 372 | ||||||||||||
|
Non-investment grade and equity tranches
|
1,105 | 22 | - | 1,127 | ||||||||||||
|
|
||||||||||||||||
|
Total Fair Value
|
$ | 6,937 | $ | 584 | $ | 832 | $ | 8,353 | ||||||||
|
|
||||||||||||||||
|
Total Amortized Cost
|
$ | 7,469 | $ | 709 | $ | 858 | $ | 9,036 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Sub-prime (included above)
|
||||||||||||||||
|
Fair Value
|
$ | 602 | $ | - | $ | - | $ | 602 | ||||||||
|
Amortized Cost
|
$ | 709 | $ | - | $ | - | $ | 709 | ||||||||
|
|
||||||||||||||||
|
Alt-A (included above)
|
||||||||||||||||
|
Fair Value
|
$ | 650 | $ | - | $ | - | $ | 650 | ||||||||
|
Amortized Cost
|
$ | 775 | $ | - | $ | - | $ | 775 | ||||||||
| (a) |
Residential mortgage-backed securities (RMBS)
|
|
| (b) |
Commercial mortgage-backed securities (CMBS)
|
|
| (c) |
Other asset-backed securities (Other ABS)
|
The exposure to sub-prime residential mortgage (sub-prime) collateral and Alternative A
residential mortgages that have lower than normal standards of loan documentation (Alt-A)
collateral is measured by the original deal structure. Of the securities with sub-prime exposure,
approximately 66% were rated investment grade, while 78% of the Alt-A securities were rated
investment grade. At December 31, 2009, $7 million of the carrying value of the sub-prime and
Alt-A securities carried a third-party guarantee.
Pretax OTTI losses of $435 million for securities with sub-prime and Alt-A exposure were included
in the $685 million of pretax OTTI losses related to asset-backed securities recognized in earnings
on the Consolidated Statement of Operations for the year ended December 31, 2009. Continued
deterioration in the underlying collateral beyond our current expectations may cause us to
reconsider and recognize additional OTTI losses in earnings. See Note B of the Consolidated
Financial Statements included under Item 8 for additional information related to unrealized losses
on asset-backed securities.
Short Term Investments
The carrying value of the components of the short term investment portfolio is presented in the
following table.
Short Term Investments
| December 31, | December 31, | |||||||
| 2009 | 2008 | |||||||
| (In millions) | ||||||||
|
|
||||||||
|
Short term investments available-for-sale:
|
||||||||
|
Commercial paper
|
$ | 185 | $ | 563 | ||||
|
U.S. Treasury securities
|
3,025 | 2,258 | ||||||
|
Money market funds
|
179 | 329 | ||||||
|
Other
|
560 | 384 | ||||||
|
|
||||||||
|
|
||||||||
|
Total short term investments
|
$ | 3,949 | $ | 3,534 | ||||
|
|
||||||||
There was no cash collateral held related to securities lending at December 31, 2009 or 2008.
48
Table of Contents
Separate Accounts
The following table summarizes the bond ratings of the investments supporting separate account
products which guarantee principal and a minimum rate of interest, for which additional amounts may
be recorded in Policyholders’ funds should the aggregate contract value exceed the fair value of
the related assets supporting the business at any point in time.
Separate Account Bond Ratings
| December 31 | 2009 | % | 2008 | % | ||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
U.S. Government Agencies
|
$ | 67 | 18 | % | $ | 67 | 20 | % | ||||||||
|
AAA rated
|
17 | 5 | 53 | 15 | ||||||||||||
|
AA and A rated
|
176 | 46 | 148 | 43 | ||||||||||||
|
BBB rated
|
93 | 24 | 74 | 22 | ||||||||||||
|
Non-investment grade
|
27 | 7 | 1 | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 380 | 100 | % | $ | 343 | 100 | % | ||||||||
|
|
||||||||||||||||
At December 31, 2009 and 2008, approximately 97% of the separate account portfolio was issued
by U.S. Government and affiliated agencies or was rated by S&P or Moody’s. The remaining bonds
were rated by other rating agencies or internally.
49
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our principal operating cash flow sources are premiums and investment income from our insurance
subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and
operating expenses.
For 2009, net cash provided by operating activities was $1,258 million, as compared to $1,558
million for 2008. Cash provided by operating activities in 2008 was favorably impacted by
increased net sales of trading securities to fund policyholders’ withdrawals of investment contract
products issued by us, which are reflected as financing cash flows. The primary source of these
cash flows was the indexed group annuity portion of our pension deposit business which we exited in
2008. Additionally, during the second quarter of 2009 we resumed the use of a trading portfolio
for income enhancement purposes. Because cash receipts and cash payments resulting from purchases
and sales of trading securities are reported as cash flows related to operating activities,
operating cash flows were reduced by $164 million related to net cash outflows which increased the
size of the trading portfolio held at December 31, 2009. Cash provided by operating activities in
2009 was favorably impacted by decreased loss payments as compared to 2008, and tax recoveries in
2009 compared with tax payments in 2008.
For 2008, net cash provided by operating activities was $1,558 million as compared to
$1,239 million in 2007. Cash provided by operating activities was favorably impacted by increased
net sales of trading securities to fund policyholders’ withdrawals of investment contract products
issued by us, decreased tax payments and decreased loss payments. Policyholders’ fund withdrawals
are reflected as financing cash flows. Cash provided by operating activities was unfavorably
impacted by decreased premium collections and decreased investment income receipts.
Cash flows from investing activities include the purchase and sale of available-for-sale financial
instruments. Additionally, cash flows from investing activities may include the purchase and sale
of businesses, land, buildings, equipment and other assets not generally held for resale.
Net cash used by investing activities was $1,093 million, $1,908 million and $1,082 million for
2009, 2008, and 2007. Cash flows used by investing activities related principally to purchases of
fixed maturity securities and short term investments. The cash flow from investing activities is
impacted by various factors such as the anticipated payment of claims, financing activity,
asset/liability management and individual security buy and sell decisions made in the normal course
of portfolio management.
Cash flows from financing activities include proceeds from the issuance of debt and equity
securities, outflows for dividends or repayment of debt, outlays to reacquire equity instruments,
and deposits and withdrawals related to investment contract products issued by us.
Net cash flows used by financing activities was $120 million in 2009. Net cash flows provided by
financing activities was $347 million in 2008. Net cash flows used by financing activities was $185
million in 2007. Net cash used by financing activities in 2009 was primarily related to the
payment of dividends on the 2008 Senior Preferred stock to Loews Corporation.
2008 Senior Preferred
In the fourth quarter of 2008, we issued, and Loews purchased, 12,500 shares of CNAF non-voting
cumulative senior preferred stock (2008 Senior Preferred) for $1.25 billion. In the fourth quarter
of 2009, we redeemed $250 million of the 2008 Senior Preferred at the issue price plus accrued
dividends, using a portion of the proceeds from the issuance of $350 million of 7.350% ten-year
senior notes, leaving $1.0 billion of the 2008 Senior Preferred outstanding as of December 31,
2009. Dividends of $122 million and $19 million on the 2008 Senior Preferred were declared and paid
for the years ended December 31, 2009 and 2008.
50
Table of Contents
Liquidity
We believe that our present cash flows from operations, investing activities and financing
activities are sufficient to fund our working capital and debt obligation needs and we do not
expect this to change in the near term due to the following factors:
| • |
We do not anticipate changes in our core property and casualty commercial insurance
operations which would significantly impact liquidity and we continue to maintain reinsurance
contracts which limit the impact of potential catastrophic events.
|
|
| • |
We have entered into several settlement agreements and assumed reinsurance contracts that
require collateralization of future payment obligations and assumed reserves if our ratings or
other specific criteria fall below certain thresholds. The ratings triggers are generally
more than one level below our current ratings. A downgrade below our current ratings levels
would also result in additional collateral requirements for derivative contracts for which we
are in a liability position at any given point in time. The maximum potential
collateralization requirements are approximately $70 million.
|
|
| • |
As of December 31, 2009, our holding company held short term investments of $395 million.
Additionally, we have $100 million available through a revolving credit facility as of
December 31, 2009. Our holding company’s ability to meet its debt service and other
obligations is significantly dependent on receipt of dividends from our subsidiaries. The
payment of dividends to us by our insurance subsidiaries without prior approval of the
insurance department of each subsidiary’s domiciliary jurisdiction is limited by formula.
Notwithstanding this limitation, we believe that our holding company has sufficient liquidity
to fund our preferred stock dividend and debt service payments through 2010.
|
We have an effective shelf registration statement under which we may issue $1,650 million of debt
or equity securities.
51
Table of Contents
Commitments, Contingencies, and Guarantees
We have various commitments, contingencies and guarantees which we become involved with during the
ordinary course of business. The impact of these commitments, contingencies and guarantees should
be considered when evaluating our liquidity and capital resources.
A summary of our commitments as of December 31, 2009 is presented in the following table.
Contractual Commitments
| December 31, 2009 | More than 5 | |||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | years | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Debt (a)
|
$ | 3,338 | $ | 144 | $ | 884 | $ | 771 | $ | 1,539 | ||||||||||
|
Lease obligations
|
173 | 39 | 66 | 42 | 26 | |||||||||||||||
|
Claim and claim expense reserves (b)
|
28,310 | 6,042 | 7,347 | 4,061 | 10,860 | |||||||||||||||
|
Future policy benefits reserves (c)
|
12,505 | 177 | 337 | 326 | 11,665 | |||||||||||||||
|
Policyholder funds reserves (c)
|
155 | 19 | 9 | 7 | 120 | |||||||||||||||
|
Guaranteed payment contracts (d)
|
8 | 5 | 3 | - | - | |||||||||||||||
|
Preferred stock dividends (e)
|
500 | 100 | 200 | 200 | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total (f)
|
$ | 44,989 | $ | 6,526 | $ | 8,846 | $ | 5,407 | $ | 24,210 | ||||||||||
|
|
||||||||||||||||||||
| (a) |
Includes estimated future interest payments.
|
|
| (b) |
Claim and claim adjustment expense reserves are not discounted and represent our estimate of
the amount and timing of the ultimate settlement and administration of gross claims based on
our assessment of facts and circumstances known as of December 31, 2009. See the Reserves –
Estimates and Uncertainties section of this MD&A for further information. Claim and claim
adjustment expense reserves of $19 million related to business which has been 100% ceded to
unaffiliated parties in connection with the sale of our individual life business in 2004 are
not included.
|
|
| (c) |
Future policy benefits and policyholder funds reserves are not discounted and represent our
estimate of the ultimate amount and timing of the settlement of benefits based on our
assessment of facts and circumstances known as of December 31, 2009. Future policy benefit
reserves of $777 million and policyholder fund reserves of $39 million related to business
which has been 100% ceded to unaffiliated parties in connection with the sale of our
individual life business in 2004 are not included. Additional information on future policy
benefits and policyholder funds reserves is included in Note A of the Consolidated Financial
Statements under Item 8.
|
|
| (d) |
Primarily relating to telecommunications and software services.
|
|
| (e) |
Our preferred stock has a minimum dividend rate of 10% due quarterly, if declared. We have
reflected the dividend payment in the table above for a period of 5 years, which may be more
or less than the actual period the preferred stock remains outstanding. As long as the amount
of preferred stock outstanding is $1.0 billion, the minimum dividend payment, if declared, is
$100 million a year.
|
|
| (f) |
Does not include expected estimated contribution of $73 million to the Company’s pension and
postretirement plans in 2010.
|
Further information on our commitments, contingencies and guarantees is provided in Notes B,
C, F, G, I and K of the Consolidated Financial Statements included under Item 8.
Ratings
Ratings are an important factor in establishing the competitive position of insurance companies.
Our insurance company subsidiaries are rated by major rating agencies, and these ratings reflect
the rating agency’s opinion of the insurance company’s financial strength, operating performance,
strategic position and ability to meet our obligations to policyholders. Agency ratings are not a
recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by
the issuing organization. Each agency’s rating should be evaluated independently of any other
agency’s rating. One or more of these agencies could take action in the future to change the
ratings of our insurance subsidiaries.
52
Table of Contents
The table below reflects the various group ratings issued by A.M. Best Company (A.M. Best), Moody’s
and S&P for the property and casualty and life companies. The table also includes the ratings for
CNAF senior debt and The Continental Corporation (Continental) senior debt.
| Insurance Financial Strength Ratings | Debt Ratings | |||||||
| Property & Casualty | Life | CNAF | Continental | |||||
| CCC Group | CAC | Senior Debt | Senior Debt | |||||
|
A.M. Best
|
A | A- | bbb | Not rated | ||||
|
Moody’s
|
A3 | Not rated | Baa3 | Baa3 | ||||
|
S&P
|
A- | Not rated | BBB- | BBB- | ||||
A.M. Best, Moody’s and S&P currently maintain a stable outlook on the Company.
If our property and casualty insurance financial strength ratings were downgraded below current
levels, our business and results of operations could be materially adversely affected. The
severity of the impact on our 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 our insurance products to certain
markets and the required collateralization of certain future payment obligations or reserves.
As discussed in the Liquidity section above, additional collateralization may be required for
certain settlement agreements and assumed reinsurance contracts, as well as derivative contracts,
if our ratings or other specific criteria fall below certain thresholds.
In addition, it is possible that a lowering of the debt ratings of Loews by certain of these
agencies could result in an adverse impact on our ratings, independent of any change in our
circumstances. None of the major rating agencies which rates Loews currently maintains a negative
outlook or has Loews on negative Credit Watch.
Accounting Standards Update
For a discussion of accounting standards updates that have been adopted or will be adopted in the
future, see Note A of the Consolidated Financial Statements included under Item 8.
53
Table of Contents
FORWARD-LOOKING STATEMENTS
This report contains a number of forward-looking statements which relate to anticipated future
events rather than actual present conditions or historical events. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and
generally include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates,” and
similar expressions. Forward-looking statements in this report include any and all statements
regarding expected developments in our insurance business, including losses and loss reserves for
asbestos and environmental pollution and other mass tort claims which are more uncertain, and
therefore more difficult to estimate than loss reserves respecting traditional property and
casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our
expectations concerning our revenues, earnings, expenses and investment activities; expected cost
savings and other results from our expense reduction activities; and our proposed actions in
response to trends in our business. Forward-looking statements, by their nature, are subject to a
variety of inherent risks and uncertainties that could cause actual results to differ materially
from the results projected in the forward-looking statement. We cannot control many of these risks
and uncertainties. Some examples of these risks and uncertainties are:
| • |
conditions in the capital and credit markets including severe levels of
volatility, illiquidity, uncertainty and overall disruption, as well as sharply reduced
economic activity, that may impact the returns, types, liquidity and valuation of our
investments;
|
|
| • |
general economic and business conditions, including recessionary conditions that
may decrease the size and number of our insurance customers and create additional losses to
our lines of business, especially those that provide management and professional liability
insurance, as well as surety bonds, to businesses engaged in real estate, financial services
and professional services, and inflationary pressures on medical care costs, construction
costs and other economic sectors that increase the severity of claims;
|
|
| • |
the effects of the mergers and failures of a number of prominent financial
institutions and government sponsored entities, as well as the effects of accounting and
financial reporting scandals and other major failures in internal controls and governance, on
capital and credit markets, as well as on the markets for directors and officers and errors
and omissions coverages;
|
|
| • |
changes in foreign or domestic political, social and economic conditions;
|
|
| • |
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 us,
and rulings and changes in tax laws and regulations;
|
|
| • |
regulatory limitations, impositions and restrictions upon us, including the
effects of assessments and other surcharges for guaranty funds and second-injury funds, other
mandatory pooling arrangements and future assessments levied on insurance companies and other
financial industry participants under the Emergency Economic Stabilization Act of 2008
recoupment provisions;
|
|
| • |
the impact of competitive products, policies and pricing and the competitive
environment in which we operate, including changes in our book of business;
|
|
| • |
product and policy availability and demand and market responses, including the
level of ability to obtain rate increases and decline or non-renew under priced accounts, to
achieve premium targets and profitability and to realize growth and retention estimates;
|
|
| • |
development of claims and the impact on loss reserves, including changes in claim
settlement policies;
|
|
| • |
the assertion of “public nuisance” theories of liability, pursuant to which
plaintiffs seek to recover monies spent to administer public health care programs and/or to
abate hazards to public health and safety;
|
|
| • |
the effectiveness of current initiatives by claims management to reduce loss and
expense ratios through more efficacious claims handling techniques;
|
|
| • |
the performance of reinsurance companies under reinsurance contracts with us;
|
|
| • |
conditions in the capital and credit markets that may limit our ability to raise
significant amounts of capital on favorable terms, as well as restrictions on the ability or
willingness of Loews to provide additional capital support to us;
|
54
Table of Contents
| • |
weather and other natural physical events, including the severity and frequency of
storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and
earthquakes, as well as climate change, including effects on weather patterns, greenhouse
gases, sea, land and air temperatures, sea levels, rain and snow;
|
|
| • |
regulatory requirements imposed by coastal state regulators in the wake of
hurricanes or other natural disasters, including limitations on the ability to exit markets or
to non-renew, cancel or change terms and conditions in policies, as well as mandatory
assessments to fund any shortfalls arising from the inability of quasi-governmental insurers
to pay claims;
|
|
| • |
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 unpredictability of the nature, targets, severity or frequency of potential
terrorist events, as well as the uncertainty as to our ability to contain our terrorism
exposure effectively, notwithstanding the extension through December 31, 2014 of the Terrorism
Risk Insurance Act of 2002;
|
|
| • |
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, construction defect claims and exposure to liabilities due to
claims made by insureds and others relating to lead-based paint and other mass torts;
|
|
| • |
the risks and uncertainties associated with our loss reserves, as outlined in the
Critical Accounting Estimates and the Reserves – Estimates and Uncertainties sections of this
MD&A, including the sufficiency of the reserves and the possibility for future increases;
|
|
| • |
regulatory limitations and restrictions, including limitations upon our ability to
receive dividends from our insurance subsidiaries imposed by state regulatory agencies and
minimum risk-based capital standards established by the National Association of Insurance
Commissioners;
|
|
| • |
the possibility of changes in our ratings by ratings agencies, including the
inability to access certain markets or distribution channels and the required
collateralization of future payment obligations as a result of such changes, and changes in
rating agency policies and practices; and
|
|
| • |
the actual closing of contemplated transactions and agreements.
|
Our forward-looking statements speak only as of the date on which they are made and we do not
undertake any obligation to update or revise any forward-looking statement to reflect events or
circumstances after the date of the statement, even if our expectations or any related events or
circumstances change.
55
Table of Contents
Our financial instruments are exposed to various risks, such as interest rate, credit and currency
risk. Due to the level of risk associated with certain invested assets and the level of
uncertainty related to changes in the value of these assets, it is possible that changes in these
risks in the near term, including increases in interest rates and further credit spread widening,
could have an adverse material impact on our results of operations and/or equity.
Discussions herein regarding market risk focus on only one element of market risk, which is price
risk. Price risk relates to changes in the level of prices due to changes in interest rates,
equity prices, foreign exchange rates or other factors that relate to market volatility of the
rate, index or price underlying the financial instrument. Our primary market risk exposures are
due to changes in interest rates, although we have certain exposures to changes in equity prices
and foreign currency exchange rates. The fair value of the financial instruments is generally
adversely affected when interest rates rise, equity markets decline and the dollar strengthens
against foreign currency.
Active management of market risk is integral to our operations. We may use the following tools to
manage our exposure to market risk within defined tolerance ranges: (1) change the character of
future investments purchased or sold, (2) use derivatives to offset the market behavior of existing
assets and liabilities or assets expected to be purchased and liabilities to be incurred, or (3)
rebalance our existing asset and liability portfolios.
Sensitivity Analysis
We monitor our sensitivity to interest rate changes (inclusive of credit spread) by revaluing
financial assets and liabilities using a variety of different interest rates. The Company uses
duration and convexity at the security level to estimate the change in fair value that would result
from a change in each security’s yield. Duration measures the price sensitivity of an asset to
changes in the yield rate. Convexity measures how the duration of the asset changes with interest
rates. The duration and convexity analysis takes into account the unique characteristics (e.g.,
call and put options and prepayment expectations) of each security in determining the hypothetical
change in fair value. The analysis is performed at the security level and aggregated up to the
asset category levels for reporting in the tables below.
The evaluation is performed by applying an instantaneous change in yield rates of varying
magnitudes on a static balance sheet to determine the effect such a change in rates would have on
our fair value at risk and the resulting effect on stockholders’ equity. The analysis presents the
sensitivity of the fair value of our financial instruments to selected changes in market rates and
prices. The range of change chosen reflects our view of changes that are reasonably possible over
a one-year period. The selection of the range of values chosen to represent changes in interest
rates should not be construed as our prediction of future market events, but rather an illustration
of the impact of such events.
The sensitivity analysis estimates the decline in the fair value of our interest sensitive assets
and liabilities that were held on December 31, 2009 and 2008 due to an instantaneous change in the
yield of the security at the end of the period of 100 and 150 basis points.
The sensitivity analysis also assumes an instantaneous 10% and 20% decline in the foreign currency
exchange rates versus the United States dollar from their levels at December 31, 2009 and 2008,
with all other variables held constant.
Equity price risk was measured assuming an instantaneous 10% and 25% decline in the Standard &
Poor’s 500 Index (S&P 500) from its level at December 31, 2009 and 2008, with all other variables
held constant. Our equity holdings were assumed to be highly and positively correlated with the
S&P 500.
The value of limited partnerships can be affected by changes in equity markets as well as changes
in interest rates. A model was developed to analyze the observed changes in the value of limited
partnerships held by the Company over a multiple year period along with the corresponding changes
in various equity indices and interest rates. The result of the model allowed us to estimate the
change in value of limited partnerships when equity markets decline by 10% and 25% and interest
rates increase by 100 and 150 basis points.
Our sensitivity analysis has also been applied to the assets supporting our separate account
business because certain of our separate account products guarantee principal and a minimum rate of
interest. All or a portion of these decreases related to the separate account assets may be
offset by decreases in related separate account
56
Table of Contents
liabilities to customers, but that is dependent on the position of the separate account in relation
to the specific guarantees at the time of the interest rate or price decline. Similarly, increases
in the fair value of the separate account investments would also be offset by increases in the same
related separate account liabilities by the same approximate amounts.
The following tables present the estimated effects on the fair value of our financial instruments
at December 31, 2009 and 2008, due to an increase in yield rates of 100 basis points, a 10% decline
in foreign currency exchange rates and a 10% decline in the S&P 500.
| Market Risk Scenario 1 | ||||||||||||||||
| Increase (Decrease) | ||||||||||||||||
| Market | Interest | Currency | Equity | |||||||||||||
| December 31, 2009 | Value | Rate Risk | Risk | Risk | ||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
General account:
|
||||||||||||||||
|
Fixed maturity securities available-for-sale:
|
||||||||||||||||
|
U.S. Treasury securities and obligations of government agencies
|
$ | 199 | $ | (5 | ) | $ | - | $ | - | |||||||
|
Asset-backed securities
|
8,353 | (232 | ) | (2 | ) | - | ||||||||||
|
States, municipalities and political subdivisions – tax-exempt
securities
|
6,993 | (687 | ) | - | - | |||||||||||
|
Corporate and other taxable bonds
|
19,839 | (1,155 | ) | (131 | ) | - | ||||||||||
|
Redeemable preferred stock
|
54 | (3 | ) | - | (2 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total fixed maturity securities available-for-sale
|
35,438 | (2,082 | ) | (133 | ) | (2 | ) | |||||||||
|
|
||||||||||||||||
|
Fixed maturity securities trading
|
174 | (17 | ) | - | - | |||||||||||
|
Equity securities available-for-sale
|
644 | - | - | (65 | ) | |||||||||||
|
Short term investments available-for-sale
|
3,949 | (12 | ) | (32 | ) | - | ||||||||||
|
Limited partnerships
|
1,787 | 1 | - | (59 | ) | |||||||||||
|
Other invested assets
|
4 | 20 | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total general account
|
41,996 | (2,090 | ) | (165 | ) | (126 | ) | |||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Separate accounts:
|
||||||||||||||||
|
Fixed maturity securities
|
380 | (15 | ) | - | - | |||||||||||
|
Equity securities
|
32 | - | - | (3 | ) | |||||||||||
|
Short term investments
|
6 | - | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total separate accounts
|
418 | (15 | ) | - | (3 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Derivative financial instruments, included in Other liabilities
|
(11 | ) | 1 | - | - | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total securities
|
$ | 42,403 | $ | (2,104 | ) | $ | (165 | ) | $ | (129 | ) | |||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Debt (carrying value)
|
$ | 2,303 | $ | (109 | ) | $ | - | $ | - | |||||||
|
|
||||||||||||||||
57
Table of Contents
| Market Risk Scenario 1 | ||||||||||||||||
| Increase (Decrease) | ||||||||||||||||
| Market | Interest | Currency | Equity | |||||||||||||
| December 31, 2008 | Value | Rate Risk | Risk | Risk | ||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
General account:
|
||||||||||||||||
|
Fixed maturity securities available-for-sale:
|
||||||||||||||||
|
U.S. Treasury securities and obligations of government agencies
|
$ | 2,930 | $ | (148 | ) | $ | - | $ | - | |||||||
|
Asset-backed securities
|
7,764 | (542 | ) | (2 | ) | - | ||||||||||
|
States, municipalities and political subdivisions – tax-exempt
securities
|
7,415 | (630 | ) | - | - | |||||||||||
|
Corporate and other taxable bonds
|
10,730 | (597 | ) | (97 | ) | - | ||||||||||
|
Redeemable preferred stock
|
47 | (2 | ) | - | (2 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total fixed maturity securities available-for-sale
|
28,886 | (1,919 | ) | (99 | ) | (2 | ) | |||||||||
|
|
||||||||||||||||
|
Fixed maturity securities trading
|
1 | - | - | - | ||||||||||||
|
Equity securities available-for-sale
|
871 | - | (1 | ) | (87 | ) | ||||||||||
|
Short term investments available-for-sale
|
3,534 | (17 | ) | (13 | ) | - | ||||||||||
|
Limited partnerships
|
1,683 | 1 | - | (38 | ) | |||||||||||
|
Other invested assets
|
28 | - | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total general account
|
35,003 | (1,935 | ) | (113 | ) | (127 | ) | |||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Separate accounts:
|
||||||||||||||||
|
Fixed maturity securities
|
343 | (17 | ) | - | - | |||||||||||
|
Equity securities
|
27 | - | - | (2 | ) | |||||||||||
|
Short term investments
|
7 | - | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total separate accounts
|
377 | (17 | ) | - | (2 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Derivative financial instruments, included in Other liabilities
|
(111 | ) | 90 | - | - | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total securities
|
$ | 35,269 | $ | (1,862 | ) | $ | (113 | ) | $ | (129 | ) | |||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Debt (carrying value)
|
$ | 2,058 | $ | (102 | ) | $ | - | $ | - | |||||||
|
|
||||||||||||||||
58
Table of Contents
The following tables present the estimated effects on the fair value of our financial
instruments at December 31, 2009 and 2008, due to an increase in yield rates of 150 basis points, a
20% decline in foreign currency exchange rates and a 25% decline in the S&P 500.
| Market Risk Scenario 2 | ||||||||||||||||
| Increase (Decrease) | ||||||||||||||||
| Market | Interest | Currency | Equity | |||||||||||||
| December 31, 2009 | Value | Rate Risk | Risk | Risk | ||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
General account:
|
||||||||||||||||
|
Fixed maturity securities available-for-sale:
|
||||||||||||||||
|
U.S. Treasury securities and obligations of government agencies
|
$ | 199 | $ | (7 | ) | $ | - | $ | - | |||||||
|
Asset-backed securities
|
8,353 | (318 | ) | (4 | ) | - | ||||||||||
|
States, municipalities and political subdivisions – tax-exempt
securities
|
6,993 | (994 | ) | - | - | |||||||||||
|
Corporate and other taxable bonds
|
19,839 | (1,677 | ) | (261 | ) | - | ||||||||||
|
Redeemable preferred stock
|
54 | (5 | ) | - | (5 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total fixed maturity securities available-for-sale
|
35,438 | (3,001 | ) | (265 | ) | (5 | ) | |||||||||
|
|
||||||||||||||||
|
Fixed maturity securities trading
|
174 | (19 | ) | - | - | |||||||||||
|
Equity securities available-for-sale
|
644 | - | (1 | ) | (161 | ) | ||||||||||
|
Short term investments available-for-sale
|
3,949 | (19 | ) | (64 | ) | - | ||||||||||
|
Limited partnerships
|
1,787 | 1 | - | (148 | ) | |||||||||||
|
Other invested assets
|
4 | 30 | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total general account
|
41,996 | (3,008 | ) | (330 | ) | (314 | ) | |||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Separate accounts:
|
||||||||||||||||
|
Fixed maturity securities
|
380 | (22 | ) | - | - | |||||||||||
|
Equity securities
|
32 | - | - | (8 | ) | |||||||||||
|
Short term investments
|
6 | - | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total separate accounts
|
418 | (22 | ) | - | (8 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Derivative financial instruments, included in Other liabilities
|
(11 | ) | - | - | - | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total securities
|
$ | 42,403 | $ | (3,030 | ) | $ | (330 | ) | $ | (322 | ) | |||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Debt (carrying value)
|
$ | 2,303 | $ | (160 | ) | $ | - | $ | - | |||||||
|
|
||||||||||||||||
59
Table of Contents
| Market Risk Scenario 2 | ||||||||||||||||
| Increase (Decrease) | ||||||||||||||||
| Market | Interest | Currency | Equity | |||||||||||||
| December 31, 2008 | Value | Rate Risk | Risk | Risk | ||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
General account:
|
||||||||||||||||
|
Fixed maturity securities available-for-sale:
|
||||||||||||||||
|
U.S. Treasury securities and obligations of government
agencies
|
$ | 2,930 | $ | (215 | ) | $ | - | $ | - | |||||||
|
Asset-backed securities
|
7,764 | (845 | ) | (3 | ) | - | ||||||||||
|
States, municipalities and political subdivisions –
tax-exempt securities
|
7,415 | (907 | ) | - | - | |||||||||||
|
Corporate and other taxable bonds
|
10,730 | (865 | ) | (194 | ) | - | ||||||||||
|
Redeemable preferred stock
|
47 | (2 | ) | - | (5 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total fixed maturity securities available-for-sale
|
28,886 | (2,834 | ) | (197 | ) | (5 | ) | |||||||||
|
|
||||||||||||||||
|
Fixed maturity securities trading
|
1 | - | - | - | ||||||||||||
|
Equity securities available-for-sale
|
871 | - | (2 | ) | (218 | ) | ||||||||||
|
Short term investments available-for-sale
|
3,534 | (29 | ) | (26 | ) | - | ||||||||||
|
Limited partnerships
|
1,683 | 1 | - | (94 | ) | |||||||||||
|
Other invested assets
|
28 | - | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total general account
|
35,003 | (2,862 | ) | (225 | ) | (317 | ) | |||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Separate accounts:
|
||||||||||||||||
|
Fixed maturity securities
|
343 | (25 | ) | - | - | |||||||||||
|
Equity securities
|
27 | - | - | (7 | ) | |||||||||||
|
Short term investments
|
7 | - | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total separate accounts
|
377 | (25 | ) | - | (7 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Derivative financial instruments, included in Other liabilities
|
(111 | ) | 131 | - | - | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total securities
|
$ | 35,269 | $ | (2,756 | ) | $ | (225 | ) | $ | (324 | ) | |||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Debt (carrying value)
|
$ | 2,058 | $ | (149 | ) | $ | - | $ | - | |||||||
|
|
||||||||||||||||
60
Table of Contents
CNA Financial Corporation
Consolidated Statements of Operations
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions, except per share data) | ||||||||||||
|
|
||||||||||||
|
Revenues
|
||||||||||||
|
Net earned premiums
|
$ | 6,721 | $ | 7,151 | $ | 7,484 | ||||||
|
Net investment income
|
2,320 | 1,619 | 2,433 | |||||||||
|
Net realized investment losses, net of participating policyholders’ interests:
|
||||||||||||
|
Other-than-temporary impairment losses
|
(1,657 | ) | (1,484 | ) | (741 | ) | ||||||
|
Portion of other-than-temporary impairment losses recognized in Other
comprehensive income
|
305 | - | - | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net impairment losses recognized in earnings
|
(1,352 | ) | (1,484 | ) | (741 | ) | ||||||
|
Other net realized investment gains
|
495 | 187 | 430 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net realized investment losses, net of participating policyholders’ interests
|
(857 | ) | (1,297 | ) | (311 | ) | ||||||
|
|
||||||||||||
|
Other revenues
|
288 | 326 | 279 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total revenues
|
8,472 | 7,799 | 9,885 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Claims, Benefits and Expenses
|
||||||||||||
|
Insurance claims and policyholders’ benefits
|
5,290 | 5,723 | 6,009 | |||||||||
|
Amortization of deferred acquisition costs
|
1,417 | 1,467 | 1,520 | |||||||||
|
Other operating expenses
|
1,097 | 1,037 | 994 | |||||||||
|
Interest
|
128 | 134 | 140 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total claims, benefits and expenses
|
7,932 | 8,361 | 8,663 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations before income tax
|
540 | (562 | ) | 1,222 | ||||||||
|
Income tax (expense) benefit
|
(57 | ) | 311 | (317 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations
|
483 | (251 | ) | 905 | ||||||||
|
Income (loss) from discontinued operations, net of income tax (expense)
benefit of $0, $9 and $0
|
(2 | ) | 9 | (6 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss)
|
481 | (242 | ) | 899 | ||||||||
|
Net income attributable to noncontrolling interests
|
(62 | ) | (57 | ) | (48 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss) attributable to CNA
|
$ | 419 | $ | (299 | ) | $ | 851 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (Loss) Attributable to CNA Common Stockholders
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations attributable to CNA
|
$ | 421 | $ | (308 | ) | $ | 857 | |||||
|
Dividends on 2008 Senior Preferred
|
(122 | ) | (19 | ) | - | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing operations attributable to CNA common
stockholders
|
299 | (327 | ) | 857 | ||||||||
|
Income (loss) from discontinued operations attributable to CNA common
stockholders
|
(2 | ) | 9 | (6 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income (loss) attributable to CNA common stockholders
|
$ | 297 | $ | (318 | ) | $ | 851 | |||||
|
|
||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
61
Table of Contents
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions, except per share data) | ||||||||||||
|
|
||||||||||||
|
Basic and Diluted Earnings (Loss)
Per Share Attributable to CNA
Common Stockholders
|
||||||||||||
|
|
||||||||||||
|
Income (loss) from continuing
operations attributable to CNA
common stockholders
|
$ | 1.11 | $ | (1.21 | ) | $ | 3.15 | |||||
|
Income (loss) from discontinued
operations attributable to CNA
common stockholders
|
(0.01 | ) | 0.03 | (0.02 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic and diluted earnings (loss)
per share attributable to CNA
common stockholders
|
$ | 1.10 | $ | (1.18 | ) | $ | 3.13 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Weighted Average Outstanding Common
Stock and Common Stock Equivalents
|
||||||||||||
|
|
||||||||||||
|
Basic
|
269.0 | 269.4 | 271.5 | |||||||||
|
|
||||||||||||
|
Diluted
|
269.1 | 269.4 | 271.8 | |||||||||
|
|
||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
62
Table of Contents
CNA Financial Corporation
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Comprehensive Income (Loss)
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Years ended December 31 | Tax | After-tax | Tax | After-tax | Tax | After-tax | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Changes in:
|
||||||||||||||||||||||||
|
Net unrealized losses on investments with
other-than-temporary impairments
|
$ | 52 | $ | (95 | ) | $ | - | $ | - | $ | - | $ | - | |||||||||||
|
Net unrealized gains (losses) on other
investments
|
(2,024 | ) | 3,741 | 1,926 | (3,553 | ) | 313 | (579 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net unrealized gains (losses) on investments
|
(1,972 | ) | 3,646 | 1,926 | (3,553 | ) | 313 | (579 | ) | |||||||||||||||
|
Net unrealized gains (losses) on discontinued
operations and other
|
(2 | ) | 9 | 6 | (6 | ) | 2 | 3 | ||||||||||||||||
|
Net foreign currency translation adjustment
|
- | 117 | - | (153 | ) | - | 30 | |||||||||||||||||
|
Net pension and postretirement benefit plans
|
(8 | ) | 15 | 194 | (363 | ) | (52 | ) | 97 | |||||||||||||||
|
Allocation to participating policyholders
|
- | (40 | ) | - | 32 | - | 5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Other comprehensive income (loss)
|
$ | (1,982 | ) | 3,747 | $ | 2,126 | (4,043 | ) | $ | 263 | (444 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
481 | (242 | ) | 899 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive income (loss)
|
4,228 | (4,285 | ) | 455 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Changes in:
|
||||||||||||||||||||||||
|
Net unrealized (gains) losses on investments
attributable to noncontrolling interests
|
(24 | ) | 11 | - | ||||||||||||||||||||
|
Net pension and postretirement benefit plans
attributable to noncontrolling interests
|
(2 | ) | 5 | (2 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Other comprehensive (income) loss attributable to
noncontrolling interests
|
(26 | ) | 16 | (2 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to noncontrolling interests
|
(62 | ) | (57 | ) | (48 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive income attributable to
noncontrolling interests
|
(88 | ) | (41 | ) | (50 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total comprehensive income (loss) attributable
to CNA
|
$ | 4,140 | $ | (4,326 | ) | $ | 405 | |||||||||||||||||
|
|
||||||||||||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
63
Table of Contents
Consolidated Balance Sheets
| December 31 | 2009 | 2008 | ||||||
| (In millions, except share data) | ||||||||
|
|
||||||||
|
Assets
|
||||||||
|
Investments:
|
||||||||
|
Fixed maturity securities at fair value (amortized cost of $35,602 and $34,155)
|
$ | 35,612 | $ | 28,887 | ||||
|
Equity securities at fair value (cost of $633 and $1,016)
|
644 | 871 | ||||||
|
Limited partnership investments
|
1,787 | 1,683 | ||||||
|
Other invested assets
|
4 | 28 | ||||||
|
Short term investments
|
3,949 | 3,534 | ||||||
|
|
||||||||
|
Total investments
|
41,996 | 35,003 | ||||||
|
Cash
|
140 | 85 | ||||||
|
Reinsurance receivables (less allowance for uncollectible receivables of $351 and $366)
|
6,581 | 7,395 | ||||||
|
Insurance receivables (less allowance for doubtful accounts of $202 and $221)
|
1,656 | 1,818 | ||||||
|
Accrued investment income
|
416 | 356 | ||||||
|
Receivables for securities sold and collateral
|
154 | 402 | ||||||
|
Deferred acquisition costs
|
1,108 | 1,125 | ||||||
|
Prepaid reinsurance premiums
|
188 | 237 | ||||||
|
Federal income tax recoverable (includes $320 and $299 due from Loews Corporation)
|
297 | 294 | ||||||
|
Deferred income taxes
|
1,333 | 3,493 | ||||||
|
Property and equipment at cost (less accumulated depreciation of $498 and $641)
|
360 | 393 | ||||||
|
Goodwill and other intangible assets
|
141 | 141 | ||||||
|
Other assets
|
505 | 562 | ||||||
|
Separate account business
|
423 | 384 | ||||||
|
|
||||||||
|
Total assets
|
$ | 55,298 | $ | 51,688 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Insurance reserves:
|
||||||||
|
Claim and claim adjustment expenses
|
$ | 26,816 | $ | 27,593 | ||||
|
Unearned premiums
|
3,274 | 3,406 | ||||||
|
Future policy benefits
|
7,981 | 7,529 | ||||||
|
Policyholders’ funds
|
192 | 243 | ||||||
|
Payables for securities purchased
|
242 | 12 | ||||||
|
Participating policyholders’ funds
|
56 | 20 | ||||||
|
Long term debt
|
2,303 | 2,058 | ||||||
|
Reinsurance balances payable
|
281 | 316 | ||||||
|
Other liabilities
|
2,564 | 2,830 | ||||||
|
Separate account business
|
423 | 384 | ||||||
|
|
||||||||
|
Total liabilities
|
44,132 | 44,391 | ||||||
|
|
||||||||
|
|
||||||||
|
Commitments and contingencies (Notes B, C, F, G, I , and K)
|
||||||||
|
|
||||||||
|
Equity:
|
||||||||
|
Preferred stock (12,500,000 shares authorized)
2008 Senior Preferred (no par value; $100,000 stated value; 10,000 and 12,500 shares issued and outstanding held by Loews Corporation) |
1,000 | 1,250 | ||||||
|
Common stock ($2.50 par value; 500,000,000 shares
authorized; 273,040,243 shares issued; and 269,026,759
and 269,024,408 shares outstanding)
|
683 | 683 | ||||||
|
Additional paid-in capital
|
2,177 | 2,174 | ||||||
|
Retained earnings
|
7,264 | 6,845 | ||||||
|
Accumulated other comprehensive loss
|
(325 | ) | (3,924 | ) | ||||
|
Treasury stock (4,013,484 and 4,015,835 shares), at cost
|
(109 | ) | (109 | ) | ||||
|
Notes receivable for the issuance of common stock
|
(30 | ) | (42 | ) | ||||
|
|
||||||||
|
Total CNA stockholders’ equity
|
10,660 | 6,877 | ||||||
|
Noncontrolling interests
|
506 | 420 | ||||||
|
|
||||||||
|
Total equity
|
11,166 | 7,297 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 55,298 | $ | 51,688 | ||||
|
|
||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
64
Table of Contents
Consolidated Statements of Cash Flows
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income (loss)
|
$ | 481 | $ | (242 | ) | $ | 899 | |||||
|
Adjustments to reconcile net income (loss) to net cash flows
provided by operating activities:
|
||||||||||||
|
(Income) loss from discontinued operations
|
2 | (9 | ) | 6 | ||||||||
|
Loss on disposal of property and equipment
|
14 | 1 | 1 | |||||||||
|
Deferred income tax expense (benefit)
|
177 | (174 | ) | (99 | ) | |||||||
|
Trading portfolio activity
|
(164 | ) | 644 | (12 | ) | |||||||
|
Net realized investment losses, net of participating
policyholders’ interests
|
857 | 1,297 | 311 | |||||||||
|
Undistributed losses (earnings) of equity method investees
|
(223 | ) | 446 | (99 | ) | |||||||
|
Net amortization of investment discount
|
(198 | ) | (278 | ) | (252 | ) | ||||||
|
Depreciation
|
86 | 78 | 64 | |||||||||
|
Changes in:
|
||||||||||||
|
Receivables, net
|
976 | 987 | 1,386 | |||||||||
|
Accrued investment income
|
(60 | ) | (26 | ) | (17 | ) | ||||||
|
Deferred acquisition costs
|
17 | 36 | 29 | |||||||||
|
Prepaid reinsurance premiums
|
49 | 33 | 72 | |||||||||
|
Federal income taxes recoverable/payable
|
(3 | ) | (287 | ) | (38 | ) | ||||||
|
Insurance reserves
|
(612 | ) | (590 | ) | (830 | ) | ||||||
|
Reinsurance balances payable
|
(35 | ) | (85 | ) | (138 | ) | ||||||
|
Other assets
|
53 | 13 | 42 | |||||||||
|
Other liabilities
|
(139 | ) | (287 | ) | (80 | ) | ||||||
|
Other, net
|
3 | 9 | 7 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total adjustments
|
800 | 1,808 | 353 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net cash flows provided by operating activities-continuing
operations
|
$ | 1,281 | $ | 1,566 | $ | 1,252 | ||||||
|
|
||||||||||||
|
Net cash flows used by operating activities-discontinued
operations
|
$ | (23 | ) | $ | (8 | ) | $ | (13 | ) | |||
|
|
||||||||||||
|
Net cash flows provided by operating activities-total
|
$ | 1,258 | $ | 1,558 | $ | 1,239 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Purchases of fixed maturity securities
|
$ | (24,189 | ) | $ | (48,404 | ) | $ | (73,157 | ) | |||
|
Proceeds from fixed maturity securities:
|
||||||||||||
|
Sales
|
19,245 | 41,749 | 69,012 | |||||||||
|
Maturities, calls and redemptions
|
3,448 | 4,092 | 4,744 | |||||||||
|
Purchases of equity securities
|
(269 | ) | (205 | ) | (236 | ) | ||||||
|
Proceeds from sales of equity securities
|
901 | 220 | 340 | |||||||||
|
Change in short term investments
|
(327 | ) | 1,032 | 1,347 | ||||||||
|
Change in collateral on loaned securities and derivatives
|
(5 | ) | (57 | ) | (2,788 | ) | ||||||
|
Change in other investments
|
140 | (295 | ) | (168 | ) | |||||||
|
Purchases of property and equipment
|
(63 | ) | (104 | ) | (160 | ) | ||||||
|
Dispositions
|
- | - | 14 | |||||||||
|
Other, net
|
3 | 46 | (69 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net cash flows used by investing activities-continuing
operations
|
$ | (1,116 | ) | $ | (1,926 | ) | $ | (1,121 | ) | |||
|
|
||||||||||||
|
Net cash flows provided by investing activities-discontinued
operations
|
$ | 23 | $ | 18 | $ | 39 | ||||||
|
|
||||||||||||
|
Net cash flows used by investing activities-total
|
$ | (1,093 | ) | $ | (1,908 | ) | $ | (1,082 | ) | |||
|
|
||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
65
Table of Contents
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Dividends paid to Loews for 2008 Senior Preferred
|
$ | (122 | ) | $ | (19 | ) | $ | - | ||||
|
Dividends paid to common stockholders
|
- | (122 | ) | (95 | ) | |||||||
|
Proceeds from the issuance of debt
|
350 | 250 | - | |||||||||
|
Principal payments on debt
|
(100 | ) | (350 | ) | - | |||||||
|
Return of investment contract account balances
|
(15 | ) | (607 | ) | (122 | ) | ||||||
|
Receipts on investment contract account balances
|
4 | 3 | 3 | |||||||||
|
Payment to redeem 2008 Senior Preferred
|
(250 | ) | - | - | ||||||||
|
Proceeds from the issuance of 2008 Senior Preferred
|
- | 1,250 | - | |||||||||
|
Stock options exercised
|
1 | 1 | 18 | |||||||||
|
Purchase of treasury stock
|
- | (70 | ) | - | ||||||||
|
Other, net
|
12 | 11 | 11 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net cash flows provided (used) by financing
activities-continuing operations
|
$ | (120 | ) | $ | 347 | $ | (185 | ) | ||||
|
|
||||||||||||
|
Net cash flows provided (used) by financing
activities-discontinued operations
|
$ | - | $ | - | $ | - | ||||||
|
|
||||||||||||
|
Net cash flows provided (used) by financing activities-total
|
$ | (120 | ) | $ | 347 | $ | (185 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Effect of foreign exchange rate changes on cash-continuing
operations
|
10 | (13 | ) | 5 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net change in cash
|
55 | (16 | ) | (23 | ) | |||||||
|
Net cash transactions from continuing operations to
discontinued operations
|
- | 17 | 59 | |||||||||
|
Net cash transactions from discontinued operations to
continuing operations
|
- | (17 | ) | (59 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash, beginning of year
|
85 | 101 | 124 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash, end of year
|
$ | 140 | $ | 85 | $ | 101 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash-continuing operations
|
$ | 140 | $ | 85 | $ | 94 | ||||||
|
Cash-discontinued operations
|
- | - | 7 | |||||||||
|
|
||||||||||||
|
Cash-total
|
$ | 140 | $ | 85 | $ | 101 | ||||||
|
|
||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
66
Table of Contents
CNA Financial Corporation
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Stockholders’ Equity
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
Preferred Stock
|
||||||||||||
|
Balance, beginning of period
|
$ | 1,250 | $ | - | $ | - | ||||||
|
Issuance of 2008 Senior Preferred
|
- | 1,250 | - | |||||||||
|
Redemption of 2008 Senior Preferred
|
(250 | ) | - | - | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance, end of period
|
1,000 | 1,250 | - | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Common Stock
|
||||||||||||
|
Balance, beginning and end of period
|
683 | 683 | 683 | |||||||||
|
|
||||||||||||
|
Additional Paid-in Capital
|
||||||||||||
|
Balance, beginning of period
|
2,174 | 2,169 | 2,166 | |||||||||
|
Stock based compensation and other
|
3 | 5 | 3 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance, end of period
|
2,177 | 2,174 | 2,169 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Retained Earnings
|
||||||||||||
|
Balance, beginning of period
|
6,845 | 7,285 | 6,529 | |||||||||
|
Cumulative effect adjustment from change in
other-than-temporary impairment accounting guidance
|
122 | - | - | |||||||||
|
Dividends paid to common stockholders
|
- | (122 | ) | (95 | ) | |||||||
|
Dividends paid to Loews Corporation for 2008 Senior Preferred
|
(122 | ) | (19 | ) | - | |||||||
|
Net income (loss) attributable to CNA
|
419 | (299 | ) | 851 | ||||||||
|
|
||||||||||||
|
Balance, end of period
|
7,264 | 6,845 | 7,285 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Accumulated Other Comprehensive Income (Loss)
|
||||||||||||
|
Balance, beginning of period
|
(3,924 | ) | 103 | 549 | ||||||||
|
Cumulative effect adjustment from change in
other-than-temporary impairment accounting guidance
|
(122 | ) | - | - | ||||||||
|
Other comprehensive income (loss) attributable to CNA
|
3,721 | (4,027 | ) | (446 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance, end of period
|
(325 | ) | (3,924 | ) | 103 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Treasury Stock
|
||||||||||||
|
Balance, beginning of period
|
(109 | ) | (39 | ) | (58 | ) | ||||||
|
Purchase of treasury stock
|
- | (70 | ) | - | ||||||||
|
Stock options exercised
|
- | - | 19 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance, end of period
|
(109 | ) | (109 | ) | (39 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Notes Receivable for the Issuance of Common Stock
|
||||||||||||
|
Balance, beginning of period
|
(42 | ) | (51 | ) | (58 | ) | ||||||
|
Decrease in notes receivable for the issuance of common stock
|
12 | 9 | 7 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance, end of period
|
(30 | ) | (42 | ) | (51 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total CNA Stockholders’ Equity
|
10,660 | 6,877 | 10,150 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Noncontrolling Interests
|
||||||||||||
|
Balance, beginning of period
|
420 | 385 | 335 | |||||||||
|
Net income
|
62 | 57 | 48 | |||||||||
|
Other comprehensive income (loss)
|
26 | (16 | ) | 2 | ||||||||
|
Other
|
(2 | ) | (6 | ) | - | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance, end of period
|
506 | 420 | 385 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total Equity
|
$ | 11,166 | $ | 7,297 | $ | 10,535 | ||||||
|
|
||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
67
Table of Contents
Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and
its controlled subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the
Company. CNA’s property and casualty and the remaining life & group insurance operations are
primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company (CIC),
Continental Assurance Company (CAC) and CNA Surety Corporation (CNA Surety). The Company owned
approximately 62% of the outstanding common stock of CNA Surety as of December 31, 2009. Loews
Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of December
31, 2009.
The accompanying Consolidated Financial Statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (GAAP). All significant intercompany
amounts have been eliminated. The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and 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. For
the year ended December 31, 2009, management has evaluated all
subsequent events through the filing date of February 23, 2010.
Business
The Company’s core property and casualty insurance operations are reported in two business
segments: CNA Specialty and CNA Commercial. The Company’s non-core operations are managed in two
segments: Life & Group Non-Core and Corporate & Other Non-Core. In the fourth quarter of 2009, the
Company revised its property and casualty segments. See Note N for further discussion.
The Company serves a wide variety of customers, including small, medium and large businesses;
associations; professionals; and groups and individuals with a broad range of insurance and risk
management products and services.
Core insurance products include commercial property and casualty coverages. Non-core insurance
products, which primarily have been placed in run-off, include life and accident and health
insurance; retirement products and annuities; and property and casualty reinsurance. CNA services
include risk management, information services, warranty and claims administration. The Company’s
products and services are marketed through independent agents, brokers, and managing general
agents.
Insurance Operations
Premiums:
Insurance premiums on property and casualty insurance contracts are recognized in
proportion to the underlying risk insured which principally are earned ratably over the duration of
the policies. Premiums on accident and health insurance contracts are earned ratably over the
policy year in which they are due. The reserve for unearned premiums on these contracts represents
the portion of premiums written relating to the unexpired terms of coverage.
Insurance receivables are presented net of an estimated allowance for doubtful accounts, which is
recorded on the basis of periodic evaluations of balances due currently or in the future from
insureds, including amounts due from insureds related to losses under high deductible policies,
management’s experience and current economic conditions.
Property and casualty contracts that are retrospectively rated contain provisions that result in an
adjustment to the initial policy premium depending on the contract provisions and loss experience
of the insured during the experience period. For such contracts, the Company estimates the amount
of ultimate premiums that the Company may earn upon completion of the experience period and
recognizes either an asset or a liability for the difference between the initial policy premium and
the estimated ultimate premium. The Company adjusts such estimated ultimate premium amounts during
the course of the experience period based on actual results to date. The resulting adjustment is
recorded as either a reduction of or an increase to the earned premiums for the period.
68
Table of Contents
Claim and claim adjustment expense reserves:
Claim and claim adjustment expense reserves, except
reserves for structured settlements not associated with asbestos and environmental pollution (A&E),
workers’ compensation lifetime claims, accident and health claims and certain claims associated
with discontinued operations, are not discounted and are based on 1) case basis estimates for
losses reported on direct business, adjusted in the aggregate for ultimate loss expectations; 2)
estimates of incurred but not reported losses; 3) estimates of losses on assumed reinsurance; 4)
estimates of future expenses to be incurred in the settlement of claims; 5) estimates of salvage
and subrogation recoveries and 6) estimates of amounts due from insureds related to losses under
high deductible policies. Management considers current conditions and trends as well as past
Company and industry experience in establishing these estimates. The effects of inflation, which
can be significant, are implicitly considered in the reserving process and are part of the recorded
reserve balance. Ceded claim and claim adjustment expense reserves are reported as a component of
Reinsurance receivables on the Consolidated Balance Sheets. See Note O for further information on
claim and claim adjustment expense reserves for discontinued operations.
Claim and claim adjustment expense reserves are presented net of anticipated amounts due from
insureds related to losses under deductible policies of $1.5 billion and $2.0 billion as of
December 31, 2009 and 2008. A significant portion of these amounts is supported by collateral. The
Company also has an allowance for uncollectible deductible amounts, which is presented as a
component of the allowance for doubtful accounts included in Insurance receivables on the
Consolidated Balance Sheets. In 2008, the amount due from policyholders related to losses under
deductible policies within CNA Commercial was reduced by $90 million for insolvent insureds. The
reduction of this amount, which was reflected as unfavorable net prior year reserve development,
had no effect on results of operations as the Company had previously recognized provisions in prior
years. These impacts were reported in Insurance claims and policyholders’ benefits in the
Consolidated Statement of Operations.
Structured settlements have been negotiated for certain property and casualty insurance claims.
Structured settlements are agreements to provide fixed periodic payments to claimants. Certain
structured settlements are funded by annuities purchased from CAC for which the related annuity
obligations are reported in future policy benefits reserves. Obligations for structured
settlements not funded by annuities are included in claim and claim adjustment expense reserves and
carried at present values determined using interest rates ranging from 4.6% to 7.5% at both
December 31, 2009 and 2008. At December 31, 2009 and 2008, the discounted reserves for unfunded
structured settlements were $746 million and $756 million, net of discount of $1.1 billion in both
periods.
Workers’ compensation lifetime claim reserves are calculated using mortality assumptions determined
through statutory regulation and economic factors. Accident and health claim reserves are
calculated using mortality and morbidity assumptions based on Company and industry experience.
Workers’ compensation lifetime claim reserves and accident and health claim reserves are discounted
at interest rates that range from 3.0% to 6.5% for the years ended December 31, 2009 and 2008. At
December 31, 2009 and 2008, such discounted reserves totaled $1.7 billion and $1.6 billion, net of
discount of $482 million in both periods.
Future policy benefits reserves:
Reserves for long term care products are computed using the net
level premium method, which incorporates actuarial assumptions as to interest rates, mortality,
morbidity, persistency, withdrawals and expenses. Actuarial assumptions generally vary by plan,
age at issue and policy duration, and include a margin for adverse deviation. Interest rates range
from 6.0% to 8.6% at December 31, 2009 and 2008, and mortality, morbidity and withdrawal
assumptions are based on Company and industry experience prevailing at the time of issue. Expense
assumptions include the estimated effects of inflation and expenses to be incurred beyond the
premium paying period.
Policyholders’ funds reserves:
Policyholders’ funds reserves primarily include reserves for
investment contracts without life contingencies. For these contracts, policyholder liabilities are
equal to the accumulated policy account values, which consist of an accumulation of deposit
payments plus credited interest, less withdrawals and amounts assessed through the end of the
period. During 2008, the Company exited the indexed group annuity portion of its pension deposit
business and settled the related liabilities with policyholders with no material impact to results
of operations. Cash flows related to the settlement of the liabilities with policyholders were
presented on the Consolidated Statements of Cash Flows in Cash flows from financing activities, as
Return of investment contract account balances. Cash flows related to proceeds from the
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Table of Contents
liquidation of the related assets supporting the policyholder liabilities were presented on the
Consolidated Statements of Cash Flows in Cash flows from operating activities, as Trading portfolio
activity.
Guaranty fund and other insurance-related assessments:
Liabilities for guaranty fund and other
insurance-related assessments are accrued when an assessment is probable, when it can be reasonably
estimated, and when the event obligating the entity to pay an imposed or probable assessment has
occurred. Liabilities for guaranty funds and other insurance-related assessments are not
discounted and are included as part of Other liabilities on the Consolidated Balance Sheets. As of
December 31, 2009 and 2008, the liability balances were $167 million and $170 million. As of
December 31, 2009 and 2008, included in Other assets on the Consolidated Balance Sheets were $5
million and $6 million of related assets for premium tax offsets. This asset is limited to the
amount that is able to be offset against premium tax on future premium collections from business
written or committed to be written.
Reinsurance:
Amounts recoverable from reinsurers are estimated in a manner consistent with claim
and claim adjustment expense reserves or future policy benefits reserves and are reported as
Reinsurance receivables on the Consolidated Balance Sheets. The cost of reinsurance is primarily
accounted for over the life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies or over the reinsurance contract period. The
ceding of insurance does not discharge the primary liability of the Company. An estimated
allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due
from reinsurers, reinsurer solvency, management’s experience and current economic conditions. The
expenses incurred related to uncollectible reinsurance receivables are presented as a component of
Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations.
Reinsurance contracts that do not effectively transfer the underlying economic risk of loss on
policies written by the Company are recorded using the deposit method of accounting, which requires
that premium paid or received by the ceding company or assuming company be accounted for as a
deposit asset or liability. At December 31, 2009 and 2008, the Company had $21 million and $25
million recorded as deposit assets and $112 million and $110 million recorded as deposit
liabilities.
Income on reinsurance contracts accounted for under the deposit method is recognized using an
effective yield based on the anticipated timing of payments and the remaining life of the contract.
When the anticipated timing of payments changes, the effective yield is recalculated to reflect
actual payments to date and the estimated timing of future payments. The deposit asset or
liability is adjusted to the amount that would have existed had the new effective yield been
applied since the inception of the contract. This adjustment is reflected in Other revenues or
Other operating expenses on the Consolidated Statements of Operations as appropriate.
Participating insurance:
Policyholder dividends are accrued using an estimate of the amount to be
paid based on underlying contractual obligations under policies and applicable state laws.
Limitations exist on the amount of income from participating life insurance contracts that may be
distributed to stockholders, and therefore the share of income on these policies that cannot be
distributed to stockholders is excluded from Stockholders’ equity by a charge to operations and
other comprehensive income and the establishment of a corresponding liability.
Deferred acquisition costs:
Acquisition 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 business are deferred and amortized
ratably over the period the related premiums are earned.
Deferred acquisition costs related to accident and health insurance are amortized over the
premium-paying period of the related policies using assumptions consistent with those used for
computing future policy benefit reserves for such contracts. Assumptions as to anticipated
premiums are made at the date of policy issuance or acquisition and are consistently applied during
the lives of the contracts. Deviations from estimated experience are included in results of
operations when they occur. For these contracts, the amortization period is typically the
estimated life of the policy.
The Company evaluates deferred acquisition costs for recoverability. Anticipated investment income
is considered in the determination of the recoverability of deferred acquisition costs.
Adjustments, if necessary, are recorded in current results of operations. Deferred acquisition
costs are presented net of ceding commissions and other ceded acquisition costs. Unamortized
deferred acquisition costs relating to contracts that have been substantially changed by a
modification in benefits, features, rights or coverages that were not
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anticipated in the original contract are not deferred and are included as a charge to operations in
the period during which the contract modification occurred.
Investments in life settlement contracts and related revenue recognition:
Prior to 2002, the
Company purchased investments in life settlement contracts. A life settlement contract is a
contract between the owner of a life insurance policy (the policy owner) and a third-party investor
(investor). Under a life settlement contract, the Company obtained the ownership and beneficiary
rights of an underlying life insurance policy.
The Company accounts for its investments in life settlement contracts using the fair value method.
Under the fair value method, each life settlement contract is carried at its fair value at the end
of each reporting period. The change in fair value, life insurance proceeds received and periodic
maintenance costs, such as premiums, necessary to keep the underlying policy in force, are recorded
in Other revenues on the Consolidated Statement of Operations. The Company’s investments in life
settlement contracts were $130 million and $129 million at December 31, 2009 and 2008, and are
included in Other assets on the Consolidated Balance Sheets. The cash receipts and payments
related to life settlement contracts are included in Cash flows from operating activities on the
Consolidated Statements of Cash Flows.
The following table details the values for life settlement contracts. The determination of fair
value is discussed in Note D.
| December 31, 2009 | Number of Life | Fair Value of Life Settlement | Face Amount of Life Insurance | |||||||||
| Settlement Contracts | Contracts | Policies | ||||||||||
| (In millions) | (In millions) | |||||||||||
|
|
||||||||||||
|
Estimated maturity during:
|
||||||||||||
|
2010
|
100 | $ | 17 | $ | 53 | |||||||
|
2011
|
90 | 15 | 49 | |||||||||
|
2012
|
90 | 13 | 46 | |||||||||
|
2013
|
80 | 11 | 44 | |||||||||
|
2014
|
80 | 10 | 41 | |||||||||
|
Thereafter
|
817 | 64 | 443 | |||||||||
|
|
||||||||||||
|
Total
|
1,257 | $ | 130 | $ | 676 | |||||||
|
|
||||||||||||
The Company uses an actuarial model to estimate the aggregate face amount of life insurance
that is expected to mature in each future year and the corresponding fair value. This model
projects the likelihood of the insured’s death for each in force policy based upon the Company’s
estimated mortality rates, which may vary due to the relatively small size of the portfolio of life
settlement contracts. The number of life settlement contracts presented in the table above is
based upon the average face amount of in force policies estimated to mature in each future year.
The increase in fair value recognized for the years ended December 31, 2009, 2008 and 2007 on
contracts still being held was $10 million, $17 million and $12 million. The gain recognized
during the years ended December 31, 2009, 2008 and 2007 on contracts that matured was $24 million,
$30 million and $38 million.
Separate Account Business
: Separate account assets and liabilities represent contract holder funds
related to investment and annuity products for which the policyholder assumes substantially all the
risk and reward. The assets are segregated into accounts with specific underlying investment
objectives and are legally segregated from the Company. All assets of the separate account
business are carried at fair value with an equal amount recorded for separate account liabilities.
Certain of the separate account investment contracts related to the Company’s pension deposit
business guarantee principal and an annual minimum rate of interest, for which additional amounts
may be recorded in Policyholders’ funds should the aggregate contract value exceed the fair value
of the related assets supporting the business at any point in time. Most of these contracts are
subject to a fair value adjustment if terminated by the policyholder. During 2008, the Company
recorded $68 million of additional Policyholders’ funds liabilities due to declines in the value of
the related separate account assets. If the fair value of the related assets supporting the
business increase to a level that exceeds the aggregate contract value, the amount of any such
increase will accrue to the Company’s benefit to the extent of any remaining additional liability
in Policyholders’ funds. Accordingly, during 2009, the Company released a portion of the additional
amounts originally recorded in 2008, leaving $26 million of additional Policyholders’ funds
liability at December 31, 2009. Fee income accruing to the Company related to separate accounts is
primarily included within Other revenue on the Consolidated Statements of Operations.
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Investments
Valuation of investments:
The Company classifies its fixed maturity securities and its equity
securities as either available-for-sale or trading, and as such, they are carried at fair value.
Changes in fair value of trading securities are reported within Net investment income on the
Consolidated Statements of Operations. Changes in fair value related to available-for-sale
securities are reported as a component of Other comprehensive income. The amortized cost of fixed
maturity securities classified as available-for-sale is adjusted for amortization of premiums and
accretion of discounts to maturity, which are included in Net investment income on the Consolidated
Statements of Operations. Investment valuations are adjusted and losses may be recognized in the
Consolidated Statements of Operations when a decline in value is determined by the Company to be
other-than-temporary. See the Accounting Standards Update section of this note for further
information regarding the Company’s recognition and presentation of other-than-temporary
impairments.
For asset-backed securities included in fixed maturity securities, the Company recognizes income
using an effective yield based on anticipated prepayments and the estimated economic life of the
securities. When estimates of 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 on the
Consolidated Statements of Operations. Interest income on lower rated beneficial interests in
securitized financial assets is determined using the prospective yield method.
The Company’s carrying value of investments in limited partnerships is its share of the net asset
value of each partnership, as determined by the General Partner. Certain partnerships for which
results are not available on a timely basis are reported on a lag, primarily one month. Changes in
net asset values are accounted for under the equity method and recorded within Net investment
income on the Consolidated Statements of Operations.
Other invested assets include certain derivative securities and real estate investments.
Derivative securities are recorded at fair value. See Note C for further discussion of the
Company’s use of and reporting for derivatives. Real estate investments are carried at the lower
of cost or fair value.
Short term investments are carried at fair value.
Realized investment gains (losses):
All securities sold resulting in investment gains (losses) are
recorded on the trade date, except for bank loan participations which are recorded on the date that
the legal agreements are finalized. Realized investment gains (losses) are determined on the basis
of the cost or amortized cost of the specific securities sold.
Securities lending activities:
The Company lends securities to unrelated parties, primarily major
brokerage firms, through an internally managed program and an external program managed by the
Company’s lead custodial bank as agent. The securities lending program is for the purpose of
enhancing income. The Company does not lend securities for operating or financing purposes.
Borrowers of these securities must initially deposit collateral with the Company of at least 102%
and maintain collateral of no less than 100% of the fair value of the securities loaned, regardless
of whether the collateral is cash or securities. Only cash collateral is accepted for the
Company’s internally managed program and is typically invested in the highest quality commercial
paper with maturities of less than 7 days. U.S. Government, agencies or Government National
Mortgage Association securities are accepted as non-cash collateral for the external program. The
Company maintains effective control over all loaned securities and, therefore, continues to report
such securities as Fixed maturity securities on the Consolidated Balance Sheets.
The lending programs are matched-book programs where the collateral is invested to substantially
match the term of the loan which limits risk. In accordance with the Company’s lending agreements,
securities on loan are returned immediately to the Company upon notice. Cash collateral received on
these transactions is invested in short term investments with an offsetting liability recognized
for the obligation to return the collateral. Non-cash collateral, such as securities received by
the Company, is not reflected as an asset of the Company as there exists no right to sell or
repledge the collateral. There was no cash collateral held related to securities lending included
in Short term investments on the Consolidated Balance Sheets at December 31, 2009 and 2008. The
fair value of non-cash collateral was $348 million at December 31, 2008. There was no non-cash
collateral held at December 31, 2009.
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Income Taxes
The Company and its eligible subsidiaries (CNA Tax Group) are included in the consolidated federal
income tax return of Loews and its eligible subsidiaries. The Company accounts for income taxes
under the asset and liability method. Under the asset and liability method, deferred income taxes
are recognized for temporary differences between the financial statement and tax return bases of
assets and liabilities. Future tax benefits are recognized to the extent that realization of such
benefits is more likely than not, and a valuation allowance is established for any portion of a
deferred tax asset that management believes will not be realized.
Pension and Postretirement Benefits
The Company recognizes the overfunded or underfunded status of its defined benefit plans in Other
assets or Other liabilities on the Consolidated Balance Sheets. Changes in funded status related
to prior service costs and actuarial gains and losses are recognized in the year in which the
changes occur through Other comprehensive income. Annual service cost, interest cost, expected
return on plan assets, amortization of prior service cost, and amortization of actuarial losses
are recognized on the Consolidated Statements of Operations. Effective January 1, 2009, due to the
significant number of inactive participants, the Company has amortized actuarial losses over the
average remaining life expectancy of the inactive participants for the CNA Retirement Plan. Previously, the Company amortized actuarial losses over the average remaining service period of
the active participants. This change resulted in an increase to net income of $20 million, net of
taxes, for the year ended December 31, 2009.
Stock-Based Compensation
The Company records compensation expense using the fair value method for all awards it grants,
modifies, repurchases or cancels primarily on a straight-line basis over the requisite service
period, generally four years.
Foreign Currency
Foreign currency translation gains and losses are reflected in Stockholders’ equity as a component
of Accumulated other comprehensive income. The Company’s foreign subsidiaries’ balance sheet
accounts are translated at the exchange rates in effect at each year end and income statement
accounts are either translated at the exchange rate on the date of the transaction or at the
average exchange rates. Foreign currency transaction losses of $14 million, $35 million and $10
million were included in determining net income (loss) for the years ended December 31, 2009, 2008
and 2007.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is based on
the estimated useful lives of the various classes of property and equipment and is determined
principally on the straight-line method. 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. The Company’s owned buildings are depreciated over a period not to
exceed fifty years. Capitalized improvements are depreciated over the remaining useful lives of
the buildings.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived intangible assets of $141 million as of December 31, 2009 and
2008 primarily represent the excess of purchase price over the fair value of the net assets of
acquired entities and businesses. As of December 31, 2009 and 2008, $139 million of the balance
related to CNA Surety. Goodwill and indefinite-lived intangible assets are tested for impairment
annually or when certain triggering events require such tests.
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Table of Contents
Earnings (Loss) Per Share Data
Earnings (loss) per share attributable to the Company’s common stockholders is based on weighted
average outstanding shares. Basic earnings (loss) per share excludes the impact of dilutive
securities and is computed by dividing net income (loss) attributable to CNA by the weighted
average number of common shares outstanding for the period. Diluted earnings (loss) per share
reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
For the years ended December 31, 2009 and 2007, approximately 120 thousand and 270 thousand
potential shares attributable to exercises under stock-based employee compensation plans were
included in the calculation of diluted earnings per share. For the year ended December 31, 2008,
as a result of the net loss, none of the 1.6 million potential shares attributable to exercises
under stock-based employee compensation plans were included in the calculation of loss per share as
the effect would have been antidilutive. For the years ended December 31, 2009 and 2007,
approximately 1.7 million and 300 thousand potential shares attributable to exercises under
stock-based employee compensation plans were not included in the calculation of diluted earnings
per share because the effect would have been antidilutive.
The 2008 Senior Preferred Stock (2008 Senior Preferred) was issued in November 2008 and accrues
cumulative dividends at an initial rate of 10% per year. If declared, dividends are payable
quarterly and any dividends not declared or paid when due will be compounded quarterly. See Note L
for further details.
Supplementary Cash Flow Information
Cash payments made for interest were $124 million, $139 million and $142 million for the years
ended December 31, 2009, 2008 and 2007. Cash refunds received for federal income taxes amounted to
$117 million for the year ended December 31, 2009. Cash payments made for federal income taxes
were $120 million and $420 million for the years ended December 31, 2008 and 2007.
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Table of Contents
Accounting Standards Update
Adopted
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the Financial Accounting Standards Board (FASB) issued updated accounting
guidance which provided accounting and reporting standards for the noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary. It clarified that noncontrolling ownership
interests in a subsidiary should be reported as equity in the consolidated financial statements. It
also required consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. The Company adopted this updated
accounting guidance on January 1, 2009. The adoption had no impact on the Company’s financial
condition or results of operations, but impacted the presentation of these amounts within the
Consolidated Financial Statements.
Effective Date of Fair Value Measurements
In February 2008, the FASB issued updated accounting guidance which delayed the effective date of
fair value measurement disclosures for all non-recurring fair value measurements of nonfinancial
assets and nonfinancial liabilities until the fiscal year beginning after November 15, 2008. The
Company adopted the provisions of this updated accounting guidance as it relates to reporting units
and indefinite-lived intangible assets measured at fair value for the purposes of goodwill and
intangible asset impairment testing as of January 1, 2009. The adoption of these provisions had no
impact on the Company’s financial condition or results of operations.
Recognition and Presentation of Other-Than-Temporary Impairments
In April 2009, the FASB issued updated accounting guidance, which amended the other-than-temporary
impairment (OTTI) loss model for fixed maturity securities. A fixed maturity security is impaired
if the fair value of the security is less than its amortized cost basis, which is its cost adjusted
for accretion, amortization and previously recorded OTTI losses. The updated accounting guidance
requires an OTTI loss equal to the difference between fair value and amortized cost to be
recognized in earnings if the Company intends to sell the fixed maturity security or if it is more
likely than not the Company will be required to sell the fixed maturity security before recovery of
its amortized cost basis.
The remaining fixed maturity securities in an unrealized loss position are evaluated to determine
if a credit loss exists. If the Company does not expect to recover the entire amortized cost basis
of a fixed maturity security, the security is deemed to be other-than-temporarily impaired for
credit reasons. For these securities, the bifurcation of OTTI losses into a credit component and a
non-credit component is required by the updated accounting guidance. The credit component is
recognized in earnings and represents the difference between the present value of the future cash
flows that the Company expects to collect and a fixed maturity security’s amortized cost basis.
The non-credit component is recognized in other comprehensive income and represents the difference
between fair value and the present value of the future cash flows that the Company expects to
collect.
Prior to the adoption of the updated accounting guidance, OTTI losses were not bifurcated between
credit and non-credit components. The difference between fair value and amortized cost was
recognized in earnings for all securities for which the Company did not expect to recover the
amortized cost basis, or for which the Company did not have the ability and intent to hold until
recovery of fair value to amortized cost.
The adoption of this updated accounting guidance as of April 1, 2009 resulted in a cumulative
effect adjustment of $122 million, net of tax, which was reclassified to Accumulated other
comprehensive income (AOCI) from Retained earnings on the Consolidated Statement of Equity. The
cumulative effect adjustment represents the non-credit component of those previously impaired fixed
maturity securities that are still considered OTTI, and the entire amount previously recorded as an
OTTI loss on fixed maturity securities no longer considered OTTI as of April 1, 2009.
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Table of Contents
Employers’ Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued updated accounting guidance which requires enhanced disclosures
regarding plan assets and how investment allocations are made, including the factors that are
pertinent to an understanding of investment policies and procedures, the major categories of plan
assets, the inputs and valuation techniques used to measure the fair value of plan assets, the
effect of fair value measurements using significant unobservable inputs on changes in plan assets
for the period, and significant concentrations of risk within plan assets. The adoption of this
updated accounting guidance as of December 31, 2009 had no impact on the Company’s financial
condition or results of operations. The Company has complied with the disclosure requirements
related to plan assets in Note J.
Recently issued accounting standards to be adopted
Variable Interest Entities
In June 2009, the FASB issued updated accounting guidance which amends the requirements for
determination of the primary beneficiary of a variable interest entity, requires an ongoing
assessment of whether an entity is the primary beneficiary and requires enhanced interim and annual
disclosures. The updated accounting guidance is effective for annual reporting periods beginning
after November 15, 2009, and is not expected to have a significant impact on the Company’s
financial condition or results of operations.
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Table of Contents
Note B. Investments
The significant components of net investment income are presented in the following table.
Net Investment Income
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Fixed maturity securities
|
$ | 1,941 | $ | 1,984 | $ | 2,047 | ||||||
|
Short term investments
|
36 | 115 | 186 | |||||||||
|
Limited partnerships
|
315 | (379 | ) | 183 | ||||||||
|
Equity securities
|
49 | 80 | 25 | |||||||||
|
Trading portfolio – indexed group annuity (a)
|
- | (146 | ) | 10 | ||||||||
|
Trading portfolio – other (b)
|
23 | (3 | ) | - | ||||||||
|
Other
|
6 | 19 | 35 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Gross investment income
|
2,370 | 1,670 | 2,486 | |||||||||
|
Investment expenses
|
(50 | ) | (51 | ) | (53 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net investment income
|
$ | 2,320 | $ | 1,619 | $ | 2,433 | ||||||
|
|
||||||||||||
(a) The gains (losses) related to the indexed group annuity trading portfolio, including net
unrealized gains (losses), were substantially offset by a corresponding change in the
policyholders’ funds reserves supported by this trading portfolio, which was included in
Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations.
(b) The net unrealized losses on trading securities still held included in net investment
income was $5 million and $3 million for the years ended December 31, 2009 and 2008.
Net realized investment gains (losses) are presented in the following table.
Net Realized Investment Gains (Losses)
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Net realized investment gains (losses):
|
||||||||||||
|
|
||||||||||||
|
Fixed maturity securities:
|
||||||||||||
|
Gross realized gains
|
$ | 500 | $ | 532 | $ | 486 | ||||||
|
Gross realized losses
|
(1,667 | ) | (1,363 | ) | (964 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net realized investment losses on fixed maturity securities
|
(1,167 | ) | (831 | ) | (478 | ) | ||||||
|
|
||||||||||||
|
Equity securities:
|
||||||||||||
|
Gross realized gains
|
473 | 22 | 146 | |||||||||
|
Gross realized losses
|
(230 | ) | (512 | ) | (29 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net realized investment gains (losses) on equity securities
|
243 | (490 | ) | 117 | ||||||||
|
|
||||||||||||
|
Derivatives
|
51 | (19 | ) | 32 | ||||||||
|
Short term investments and other
|
16 | 43 | 18 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net realized investment losses, net of participating policyholders’ interests
|
$ | (857 | ) | $ | (1,297 | ) | $ | (311 | ) | |||
|
|
||||||||||||
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Table of Contents
Net change in unrealized gains (losses) in investments is presented in the following table.
Net Change in Unrealized Gains (Losses)
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Net change in unrealized losses on investments:
|
||||||||||||
|
Fixed maturity securities
|
$ | 5,278 | $ | (5,137 | ) | $ | (847 | ) | ||||
|
Equity securities
|
156 | (347 | ) | (47 | ) | |||||||
|
Other
|
(4 | ) | 5 | 2 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total net change in unrealized gains (losses) on investments
|
$ | 5,430 | $ | (5,479 | ) | $ | (892 | ) | ||||
|
|
||||||||||||
The components of other-than-temporary-impairment (OTTI) losses recognized in earnings by
asset type are summarized in the following table.
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Fixed maturity securities available-for-sale:
|
||||||||||||
|
|
||||||||||||
|
U.S Treasury securities and obligations of government agencies
|
$ | - | $ | 29 | $ | 53 | ||||||
|
|
||||||||||||
|
Asset-backed securities:
|
||||||||||||
|
Residential mortgage-backed securities
|
461 | 222 | 209 | |||||||||
|
Commercial mortgage-backed securities
|
193 | 208 | 65 | |||||||||
|
Other asset-backed securities
|
31 | 35 | 37 | |||||||||
|
|
||||||||||||
|
Total asset-backed securities
|
685 | 465 | 311 | |||||||||
|
|
||||||||||||
|
States, municipalities and political subdivisions – tax-exempt securities
|
79 | 1 | 50 | |||||||||
|
Corporate and other taxable bonds
|
357 | 585 | 260 | |||||||||
|
Redeemable preferred stock
|
9 | 1 | 42 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total fixed maturity securities available-for-sale
|
1,130 | 1,081 | 716 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Equity securities available-for-sale:
|
||||||||||||
|
Common stock
|
5 | 140 | 24 | |||||||||
|
Preferred stock
|
217 | 263 | 1 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total equity securities available-for-sale
|
222 | 403 | 25 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net OTTI losses recognized in earnings
|
$ | 1,352 | $ | 1,484 | $ | 741 | ||||||
|
|
||||||||||||
A security is impaired if the fair value of the security is less than its cost adjusted for
accretion, amortization and previously recorded OTTI losses, otherwise defined as an unrealized
loss. When a security is impaired, the impairment is evaluated to determine whether it is
temporary or other-than-temporary.
Significant judgment is required in the determination of whether an OTTI loss has occurred for a
security. The Company follows a consistent and systematic process for determining and recording an
OTTI loss. The Company has established a committee responsible for the OTTI 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 evaluating
securities in an unrealized loss position on at least a quarterly basis.
The Impairment Committee’s assessment of whether an OTTI loss has occurred incorporates both
quantitative and qualitative information. Fixed maturity securities that the Company intends to
sell, or it more likely than not will be required to sell before recovery of amortized cost, are
considered to be other-than-temporarily impaired and the entire difference between the amortized
cost basis and fair value of the security is recognized as an OTTI loss in earnings. The remaining
fixed maturity securities in an unrealized loss position are evaluated to determine if a credit
loss exists. In order to determine if a credit loss exists, the factors considered by the
Impairment Committee include (a) the financial condition and near term prospects of the issuer, (b)
whether the debtor is current on interest and principal payments, (c) credit ratings of the
securities and (d) general market conditions and industry or sector specific outlook. The Company
also considers results and
78
Table of Contents
analysis of cash flow modeling for asset-backed securities, and when appropriate, other fixed
maturity securities. The focus of the analysis for asset-backed securities is on assessing the
sufficiency and quality of underlying collateral and timing of cash flows based on scenario tests.
If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a
security, no credit loss is judged to exist and the asset-backed security is deemed to be
temporarily impaired. If the present value of the expected cash flows is less than amortized cost,
the security is judged to be other-than-temporarily impaired for credit reasons and that shortfall,
referred to as the credit component, is recognized as an OTTI loss in earnings. The difference
between the adjusted amortized cost basis and fair value, referred to as the non-credit component,
is recognized as an OTTI loss in Other comprehensive income.
The Company performs the discounted cash flow analysis using distressed scenarios to determine
future expectations regarding recoverability. For asset-backed securities significant assumptions
enter into these cash flow projections including delinquency rates, probable risk of default, loss
severity upon a default, over collateralization and interest coverage triggers, credit support from
lower level tranches and impacts of rating agency downgrades. The discount rate utilized is either
the yield at acquisition or, for lower rated structured securities, the current yield.
The Company applies the same impairment model as described above for the majority of the
non-redeemable preferred stock securities on the basis that these securities possess
characteristics similar to debt securities and that the issuers maintain their ability to pay
dividends. For all other equity securities, in determining whether the security is
other-than-temporarily impaired, 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 amortized cost, (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 an anticipated recovery in value and (d) general market conditions and industry or sector
specific outlook.
Prior to the adoption of the updated accounting guidance related to OTTI in the second quarter of
2009 as further discussed in Note A, the Company applied the impairment model described in the
paragraph above to both fixed maturity and equity securities.
79
Table of Contents
The following tables provide a summary of fixed maturity and equity securities.
Summary of Fixed Maturity and Equity Securities
| Cost or | Gross | Gross Unrealized Losses | Estimated | Unrealized | ||||||||||||||||||||
| Amortized | Unrealized | Less than | 12 Months | Fair | OTTI | |||||||||||||||||||
| December 31, 2009 | Cost | Gains | 12 Months | or Greater | Value | Losses | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Fixed maturity securities available-for-sale:
|
||||||||||||||||||||||||
|
U.S. Treasury securities and obligations of
government agencies
|
$ | 184 | $ | 16 | $ | 1 | $ | - | $ | 199 | $ | - | ||||||||||||
|
|
||||||||||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||||||
|
Residential mortgage-backed securities
|
7,469 | 72 | 43 | 561 | 6,937 | 246 | ||||||||||||||||||
|
Commercial mortgage-backed
securities
|
709 | 10 | 1 | 134 | 584 | 3 | ||||||||||||||||||
|
Other asset-backed securities
|
858 | 14 | 1 | 39 | 832 | - | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total asset-backed securities
|
9,036 | 96 | 45 | 734 | 8,353 | 249 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
States, municipalities and political
subdivisions – tax-exempt securities
|
7,142 | 201 | 25 | 325 | 6,993 | - | ||||||||||||||||||
|
Corporate and other taxable bonds
|
19,015 | 1,123 | 50 | 249 | 19,839 | 26 | ||||||||||||||||||
|
Redeemable preferred stock
|
51 | 4 | - | 1 | 54 | - | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total fixed maturity securities available-for-sale
|
35,428 | 1,440 | 121 | 1,309 | 35,438 | $ | 275 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total fixed maturity securities trading
|
174 | - | - | - | 174 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Equity securities available-for-sale:
|
||||||||||||||||||||||||
|
Common stock
|
61 | 14 | 1 | 1 | 73 | |||||||||||||||||||
|
Preferred stock
|
572 | 40 | - | 41 | 571 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity securities available-for-sale
|
633 | 54 | 1 | 42 | 644 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 36,235 | $ | 1,494 | $ | 122 | $ | 1,351 | $ | 36,256 | ||||||||||||||
|
|
||||||||||||||||||||||||
Summary of Fixed Maturity and Equity Securities
| Cost or | Gross | Gross Unrealized Losses | Estimated | |||||||||||||||||
| Amortized | Unrealized | Less than | 12 Months | Fair | ||||||||||||||||
| December 31, 2008 | Cost | Gains | 12 Months | or Greater | Value | |||||||||||||||
| (In millions) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Fixed maturity securities available-for-sale:
|
||||||||||||||||||||
|
U.S. Treasury securities and obligations of
government agencies
|
$ | 2,862 | $ | 69 | $ | 1 | $ | - | $ | 2,930 | ||||||||||
|
Asset-backed securities
|
9,670 | 24 | 961 | 969 | 7,764 | |||||||||||||||
|
States, municipalities and political
subdivisions – tax-exempt securities
|
8,557 | 90 | 609 | 623 | 7,415 | |||||||||||||||
|
Corporate and other taxable bonds
|
12,993 | 275 | 1,164 | 1,374 | 10,730 | |||||||||||||||
|
Redeemable preferred stock
|
72 | 1 | 23 | 3 | 47 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total fixed maturity securities
available-for-sale
|
34,154 | 459 | 2,758 | 2,969 | 28,886 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total fixed maturity securities trading
|
1 | - | - | - | 1 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Equity securities available-for-sale:
|
||||||||||||||||||||
|
Common stock
|
134 | 190 | 1 | 3 | 320 | |||||||||||||||
|
Preferred stock
|
882 | 5 | 15 | 321 | 551 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total equity securities available-for-sale
|
1,016 | 195 | 16 | 324 | 871 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 35,171 | $ | 654 | $ | 2,774 | $ | 3,293 | $ | 29,758 | ||||||||||
|
|
||||||||||||||||||||
80
Table of Contents
Activity for the period from April 1, 2009 to December 31, 2009 related to the pretax fixed
maturity credit loss component reflected within Retained earnings for securities still held at
December 31, 2009 was as follows.
| Period from | ||||
| (In millions) | April 1, 2009 to | |||
| December 31, 2009 | ||||
|
Beginning balance of credit losses on fixed maturity securities
|
$ | 192 | ||
|
|
||||
|
Additional credit losses for which an OTTI loss was previously recognized
|
93 | |||
|
Additional credit losses for which an OTTI loss was not previously recognized
|
183 | |||
|
Reductions for securities sold during the period
|
(239 | ) | ||
|
Reductions for securities the Company intends to sell or more likely than not will be required to sell
|
(65 | ) | ||
|
|
||||
|
|
||||
|
Ending balance of credit losses on fixed maturity securities
|
$ | 164 | ||
|
|
||||
Based on current facts and circumstances, the Company has determined that no additional OTTI
losses related to the securities in an unrealized loss position presented in the December 31, 2009
Summary of Fixed Maturity and Equity Securities table above are required to be recorded. A
discussion of some of the factors reviewed in making that determination is presented below.
The market disruption that emerged during 2008 has significantly subsided in 2009. The U.S.
government has initiated programs intended to stabilize and improve markets and the economy. While
the ultimate impact of these programs remains uncertain and economic conditions in the U.S. remain
challenging, financial markets have shown improvement in 2009. Risk free interest rates continued
near multi-year lows and credit spreads narrowed resulting in improvement in the Company’s
unrealized position. However, fair values in the asset-backed sector continue to be depressed
primarily due to continued concerns with underlying residential and commercial collateral.
The classification between investment grade and non-investment grade presented in the discussion
below is based on a ratings methodology that takes into account ratings from the three major
providers, Standard & Poor’s (S&P), Moody’s Investor Services, Inc. (Moody’s) and Fitch Ratings
(Fitch) in that order of preference. If a security is not rated by any of the three, the Company
formulates an internal rating. For securities with credit support from third party guarantees, the
rating reflects the greater of the underlying rating of the issuer or the insured rating.
Asset-Backed Securities
The fair value of total asset-backed holdings at December 31, 2009 was $8,353 million which was
comprised of 2,125 different asset-backed structured securities. The fair value of these
securities does not tend to be influenced by the credit of the issuer but rather the
characteristics and projected cash flows of the underlying collateral. Each security has
deal-specific tranche structures, credit support that results from the unique deal structure,
particular collateral characteristics and other distinct security terms. As a result, seemingly
common factors such as delinquency rates and collateral performance affect each security
differently. Of these securities, 196 have underlying collateral that is either considered
sub-prime or Alt-A in nature. The exposure to sub-prime residential mortgage (sub-prime)
collateral and Alternative A residential mortgages that have lower than normal standards of loan
documentation (Alt-A) collateral is measured by the original deal structure.
Residential mortgage-backed securities include 286 structured securities in a gross unrealized loss
position. In addition, there were 66 agency mortgage-backed pass-through securities which are
guaranteed by agencies of the U.S. Government in a gross unrealized loss position. The aggregate
severity of the gross unrealized loss was approximately 11% of amortized cost.
Commercial mortgage-backed securities include 39 securities in a gross unrealized loss position.
The aggregate severity of the gross unrealized loss was approximately 22% of amortized cost.
Other asset-backed securities include 28 securities in a gross unrealized loss position. The
aggregate severity of the gross unrealized loss was approximately 12% of amortized cost.
The following table summarizes asset-backed securities in a gross unrealized loss position by
ratings distribution at December 31, 2009.
81
Table of Contents
Gross Unrealized Losses by Ratings Distribution
December 31, 2009
(In millions)
(In millions)
| Gross | ||||||||||||
| Amortized | Estimated | Unrealized | ||||||||||
| Rating | Cost | Fair Value | Losses | |||||||||
|
|
||||||||||||
|
U.S. Government Agencies
|
$ | 1,814 | $ | 1,782 | $ | 32 | ||||||
|
|
||||||||||||
|
AAA
|
2,350 | 2,052 | 298 | |||||||||
|
|
||||||||||||
|
AA
|
475 | 389 | 86 | |||||||||
|
|
||||||||||||
|
A
|
391 | 325 | 66 | |||||||||
|
|
||||||||||||
|
BBB
|
349 | 279 | 70 | |||||||||
|
|
||||||||||||
|
Non-investment grade and equity tranches
|
1,180 | 953 | 227 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 6,559 | $ | 5,780 | $ | 779 | ||||||
|
|
||||||||||||
The Company believes the unrealized losses are primarily attributable to broader economic
conditions, liquidity concerns and wider than historical bid/ask spreads, and is not indicative of
the quality of the underlying collateral. The Company has no current intent to sell these
securities, nor is it more likely than not that it will be required to sell prior to recovery of
amortized cost. Generally, non-investment grade securities consist of investments which were
investment grade at the time of purchase but have subsequently been downgraded and primarily
consist of holdings senior to the equity tranche. Additionally, the Company believes that the
unrealized losses on these securities were not due to factors regarding the ultimate collection of
principal and interest, collateral shortfalls, or substantial changes in future cash flow
expectations; accordingly, the Company has determined that there are no additional OTTI losses to
be recorded at December 31, 2009.
States, Municipalities and Political Subdivisions – Tax-Exempt Securities
The tax-exempt portfolio consists primarily of special revenue and assessment bonds, representing
81% of the overall portfolio, followed by general obligation political subdivision bonds at 14% and
state general obligation bonds at 5%.
The unrealized losses on the Company’s investments in tax-exempt municipal securities are due to
market conditions in certain sectors or states that continue to lag behind the broader municipal
market recovery. Market conditions in the tax-exempt sector have improved during 2009. However,
yields for certain issuers and types of securities, such as auction rate and tobacco
securitizations, continue to be higher than historical norms relative to after-tax returns on other
fixed income alternatives. The holdings for all tax-exempt securities in this category include 340
securities in a gross unrealized loss position. The aggregate severity of the total gross
unrealized losses was approximately 10% of amortized cost.
82
Table of Contents
The following table summarizes the ratings distribution of tax-exempt securities in a gross
unrealized loss position at December 31, 2009.
Gross Unrealized Losses by Ratings Distribution
December 31, 2009
(In millions)
(In millions)
| Gross | ||||||||||||
| Amortized | Estimated | Unrealized | ||||||||||
| Rating | Cost | Fair Value | Losses | |||||||||
|
|
||||||||||||
|
AAA
|
$ | 1,344 | $ | 1,280 | $ | 64 | ||||||
|
|
||||||||||||
|
AA
|
985 | 849 | 136 | |||||||||
|
|
||||||||||||
|
A
|
492 | 464 | 28 | |||||||||
|
|
||||||||||||
|
BBB
|
519 | 399 | 120 | |||||||||
|
|
||||||||||||
|
Non-investment grade
|
22 | 20 | 2 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 3,362 | $ | 3,012 | $ | 350 | ||||||
|
|
||||||||||||
The largest exposures at December 31, 2009 as measured by gross unrealized losses were special
revenue bonds issued by several states backed by tobacco settlement funds with gross unrealized
losses of $109 million, and several separate issues of Puerto Rico sales tax revenue bonds with
gross unrealized losses of $79 million. All of these securities are investment grade.
The Company has no current intent to sell these securities, nor is it more likely than not that it
will be required to sell prior to recovery of amortized cost. Additionally, the Company believes
that the unrealized losses on these securities were not due to factors regarding the ultimate
collection of principal and interest; accordingly, the Company has determined that there are no
additional OTTI losses to be recorded at December 31, 2009.
83
Table of Contents
Corporate and Other Taxable Bonds
The holdings in this category include 505 securities in a gross unrealized loss position. The
aggregate severity of the gross unrealized losses was approximately 6% of amortized cost.
The following tables summarize corporate and other taxable bonds in a gross unrealized loss
position at December 31, 2009 across industry sectors and by ratings distribution.
| Estimated | Gross | |||||||||||
| December 31, 2009 | Amortized Cost | Fair Value | Unrealized Losses | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Communications
|
$ | 333 | $ | 327 | $ | 6 | ||||||
|
Consumer, Cyclical
|
409 | 386 | 23 | |||||||||
|
Consumer, Non-cyclical
|
425 | 412 | 13 | |||||||||
|
Energy
|
271 | 259 | 12 | |||||||||
|
Financial
|
1,918 | 1,752 | 166 | |||||||||
|
Industrial
|
364 | 350 | 14 | |||||||||
|
Utilities
|
654 | 614 | 40 | |||||||||
|
Other
|
539 | 514 | 25 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 4,913 | $ | 4,614 | $ | 299 | ||||||
|
|
||||||||||||
Gross Unrealized Losses by Ratings Distribution
December 31, 2009
(In millions)
(In millions)
| Gross | ||||||||||||
| Estimated | Unrealized | |||||||||||
| Rating | Amortized Cost | Fair Value | Losses | |||||||||
|
|
||||||||||||
|
AAA
|
$ | 191 | $ | 183 | $ | 8 | ||||||
|
|
||||||||||||
|
AA
|
344 | 339 | 5 | |||||||||
|
|
||||||||||||
|
A
|
1,161 | 1,103 | 58 | |||||||||
|
|
||||||||||||
|
BBB
|
2,287 | 2,150 | 137 | |||||||||
|
|
||||||||||||
|
Non-investment grade
|
930 | 839 | 91 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 4,913 | $ | 4,614 | $ | 299 | ||||||
|
|
||||||||||||
The unrealized losses on corporate and other taxable bonds are primarily attributable to
lingering impacts of the broader credit market deterioration throughout 2008 that resulted in
widening of credit spreads over risk free interest rates beyond historical norms. These conditions
continue in certain sectors, such as financial, that the market continues to view as out of favor.
Overall conditions in the corporate bond market have significantly improved throughout 2009
resulting in improvement in the Company’s unrealized position. The Company has no current intent
to sell these securities, nor is it more likely than not that it will be required to sell prior to
recovery of amortized cost. Additionally, the Company believes that the unrealized losses were
not due to factors regarding the ultimate collection of principal and interest; accordingly, the
Company has determined that there are no additional OTTI losses to be recorded at December 31,
2009.
The Company has invested in securities with characteristics of both debt and equity investments,
often referred to as hybrid debt securities. Such securities are typically debt instruments issued
with long or extendable maturity dates, may provide for the ability to defer interest payments
without defaulting and are usually lower in the capital structure of the issuer than traditional
bonds. The financial industry sector presented above includes hybrid debt securities with an
aggregate fair value of $637 million and an aggregate amortized cost of $722 million.
84
Table of Contents
Contractual Maturity
The following table summarizes available-for-sale fixed maturity securities by contractual maturity
at December 31, 2009 and 2008. Actual maturities may differ from contractual maturities because
certain securities may be called or prepaid with or without call or prepayment penalties.
Securities not due at a single date are allocated based on weighted average life.
| Contractual Maturity | December 31, 2009 | December 31, 2008 | ||||||||||||||
| Cost or | Estimated | Cost or | Estimated | |||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
Due in one year or less
|
$ | 1,240 | $ | 1,219 | $ | 3,105 | $ | 2,707 | ||||||||
|
Due after one year through five years
|
10,046 | 10,244 | 10,295 | 9,210 | ||||||||||||
|
Due after five years through ten years
|
10,646 | 10,538 | 5,929 | 4,822 | ||||||||||||
|
Due after ten years
|
13,496 | 13,437 | 14,825 | 12,147 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 35,428 | $ | 35,438 | $ | 34,154 | $ | 28,886 | ||||||||
|
|
||||||||||||||||
As of December 31, 2009, the Company held three non-income producing fixed maturity securities
aggregating $1 million of fair value. As of December 31, 2008, the Company did not hold any
non-income producing fixed maturity securities. As of December 31, 2009 and 2008, no investments
exceeded 10% of stockholders’ equity, other than investments in U.S. Treasury and U.S. Government
agency securities.
Auction Rate Securities
The investment portfolio includes auction rate securities which are primarily issued by student
loan agencies from ten states and are substantially guaranteed by the Federal Family Education Loan
Program (FFELP). The fair value of auction rate securities held at December 31, 2009 was $979
million, with no gross unrealized gains and gross unrealized losses of $71 million. The average
rating on these holdings was AAA. At December 31, 2009, all auction rate securities were paying
the applicable coupon rate.
Limited Partnerships
The carrying value of limited partnerships as of December 31, 2009 and 2008 was $1,787 million and
$1,683 million, which includes undistributed earnings of $507 million and $310 million. Limited
partnerships comprising 48% of the total carrying value are reported on a current basis through
December 31, 2009 with no reporting lag, 41% are reported on a one month lag and the remainder are
reported on more than a one month lag. As of December 31, 2009 and 2008, the Company had 70 and 82
active limited partnership investments. The number of limited partnerships held and the strategies
employed provide diversification to the limited partnership portfolio and the overall invested
asset portfolio. The Company generally does not invest in highly leveraged partnerships.
Of the limited partnerships held, 89% at December 31, 2009 and 2008 employ strategies that generate
returns through investing in securities that are marketable while engaging in various management
techniques primarily in public fixed income and equity markets. These hedge fund strategies
include both long and short positions in fixed income, equity and derivative instruments. The
hedge fund strategies may seek to generate gains from mispriced or undervalued securities, price
differentials between securities, distressed investments, sector rotation, or various arbitrage
disciplines. Within hedge fund strategies, approximately 43% are equity related, 30% pursue a
multi-strategy approach, 21% are focused on distressed investments and 6% are fixed income related
at December 31, 2009.
Limited partnerships representing 7% at December 31, 2009 and 2008 were invested in private equity.
The remaining were invested in various other partnerships including real estate. The ten largest
limited partnership positions held totaled $1,178 million and $915 million as of December 31, 2009
and December 31, 2008. Based on the most recent information available regarding the Company’s
percentage ownership of the individual limited partnerships, the carrying value reflected on the
Consolidated Balance Sheets represents approximately 4% and 3% of the aggregate partnership equity
at December 31, 2009 and 2008, and the related
85
Table of Contents
income reflected on the Consolidated Statements of Operations represents approximately 4% and 3% of
the changes in partnership equity for all limited partnership investments for the years ended
December 31, 2009 and 2008. The largest contributor to income had a carrying value of
$165 million at December 31, 2009 with related income of $120 million. The Company owned
approximately 7% of this limited partnership at December 31, 2009.
The risks associated with limited partnership investments may include losses due to leveraging,
short-selling, derivatives or other speculative investment practices. The use of leverage
increases volatility generated by the underlying investment strategies.
The Company’s limited partnership investments contain withdrawal provisions that generally limit
liquidity for a period of thirty days up to one year and in some cases do not permit withdrawals.
Typically, withdrawals require advanced written notice of up to 90 days.
Investment Commitments
As of December 31, 2009, the Company had committed approximately $235 million to future capital
calls from various third-party limited partnership investments in exchange for an ownership
interest in the related partnerships.
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, 2009, the Company had commitments to purchase $304 million and sell $172
million of various bank loan participations. 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, 2009, the
Company had obligations on unfunded bank loan participations in the amount of $13 million.
Investments on Deposit
The Company may from time to time invest in securities that may be restricted in whole or in part.
As of December 31, 2009 and 2008, the Company did not hold any significant positions in investments
whose sale was restricted other than limited partnerships.
Securities with carrying values of approximately $2.7 billion and $2.1 billion were deposited by
the Company’s insurance subsidiaries under requirements of regulatory authorities as of December
31, 2009 and 2008.
Cash and securities with carrying values of approximately $9 million and $10 million were deposited
with financial institutions as collateral for letters of credit as of December 31, 2009 and 2008.
In addition, cash and securities were deposited in trusts with financial institutions to secure
reinsurance and other obligations with various third parties. The carrying values of these
deposits were approximately $311 million and $284 million as of December 31, 2009 and 2008.
86
Table of Contents
Note C. Derivative Financial Instruments
A derivative is typically defined as an instrument whose value is “derived” from an underlying
instrument, index or rate, has a notional amount, requires little or no initial investment and can
be net settled. Derivatives include, but are not limited to, the following types of financial
instruments: interest rate swaps, interest rate caps and floors, put and call options, warrants,
futures, forwards, commitments to purchase securities, credit default swaps and combinations of the
foregoing.
The Company uses derivatives in the normal course of business, primarily in an attempt to reduce
its exposure to market risk (principally interest rate risk, equity stock price risk and foreign
currency risk) stemming from various assets and liabilities and credit risk (the ability of an
obligor to make timely payment of principal and/or interest). The Company’s principal objective
under such risk strategies is to achieve the desired reduction in economic risk, even if the
position does not receive hedge accounting treatment.
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. Derivatives
entered into for hedging, regardless of the choice to designate hedge accounting, shall have a
maturity that effectively correlates to the underlying hedged asset or 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 securities lending, to engage in derivative transactions.
The Company has exposure to economic losses due to interest rate risk arising from changes in the
level of, or volatility of, interest rates. The Company attempts to mitigate its exposure to
interest rate risk in the normal course of portfolio management which includes rebalancing its
existing portfolios of assets and liabilities. In addition, various derivative financial
instruments are used to modify the interest rate risk exposures of certain assets and liabilities.
These strategies include the use of interest rate swaps, interest rate caps and floors, options,
futures, forwards and commitments to purchase securities. These instruments are generally used to
lock interest rates or market values, to shorten or lengthen durations of fixed maturity securities
or investment contracts, or to hedge (on an economic basis) interest rate risks associated with
investments and variable rate debt.
The Company is exposed to equity price risk as a result of its investment in equity securities and
equity derivatives. Equity price risk results from changes in the level or volatility of equity
prices, which affect the value of equity securities, or instruments that derive their value from
such securities. The Company attempts to mitigate its exposure to such risks by limiting its
investment in any one security or index. The Company may also manage this risk by utilizing
instruments such as options, swaps, futures and collars to protect appreciation in securities held.
The Company has exposure to credit risk arising from the uncertainty associated with a financial
instrument obligor’s ability to make timely principal and/or interest payments. The Company
attempts to mitigate this risk by limiting credit concentrations, practicing diversification, and
frequently monitoring the credit quality of issuers and counterparties. In addition, the Company
may utilize credit derivatives such as credit default swaps (CDS) to modify the credit risk
inherent in certain investments. Credit default swaps involve a transfer of credit risk from one
party to another in exchange for periodic payments.
Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange
rates will impact the fair value of financial instruments denominated in a foreign currency. The
Company’s foreign transactions are primarily denominated in British pounds, Euros and Canadian
dollars. The Company typically manages this risk via asset/liability currency matching and through
the use of foreign currency forwards.
In addition to the derivatives used for risk management purposes described above, the Company may
also use derivatives for purposes of income enhancement. Income enhancement transactions are
entered into with the intention of providing additional income or yield to a particular portfolio
segment or instrument. Income enhancement transactions are limited in scope and primarily involve
the sale of covered options in which the Company receives a premium in exchange for selling a call
or put option.
The Company will also use CDS to sell credit protection against a specified credit event. In
selling credit protection, CDS are used to replicate fixed income securities when credit exposure
to certain issuers is not
87
Table of Contents
available or when it is economically beneficial to transact in the derivative market compared to
the cash market alternative. Credit risk includes both the default event risk and market value
exposure due to fluctuations in credit spreads. In selling CDS protection, the Company receives a
periodic premium in exchange for providing credit protection on a single name reference obligation
or a credit derivative index. If there is an event of default as defined by the CDS agreement, the
Company is required to pay the counterparty the referenced notional amount of the CDS contract and
in exchange the Company is entitled to receive the referenced defaulted security or the cash
equivalent.
The tables below summarize CDS contracts where the Company sold credit protection as of December
31, 2009 and 2008. The fair value of the contracts represents the amount that the Company would
have to pay at those dates to exit the derivative positions. The maximum amount of future payments
assumes no residual value in the defaulted securities that the Company would receive as part of the
contract terminations and is equal to the notional value of the CDS contracts.
Credit Ratings of Underlying Reference Obligations
| December 31, 2009 | ||||||||||||
| (In millions) | Fair Value of | Maximum Amount of | Weighted | |||||||||
| Credit Default | Future Payments under | Average Years | ||||||||||
| Swaps | Credit Default Swaps | to Maturity | ||||||||||
|
B
|
$ | - | $ | 8 | 3.1 | |||||||
|
|
||||||||||||
|
Total
|
$ | - | $ | 8 | 3.1 | |||||||
|
|
||||||||||||
Credit Ratings of Underlying Reference Obligations
| December 31, 2008 | ||||||||||||
| (In millions) | Fair Value of | Maximum Amount of | Weighted | |||||||||
| Credit Default | Future Payments under | Average Years | ||||||||||
| Swaps | Credit Default Swaps | to Maturity | ||||||||||
|
AAA/AA/A
|
$ | (8 | ) | $ | 40 | 12.3 | ||||||
|
BBB
|
(4 | ) | 55 | 3.1 | ||||||||
|
B
|
(2 | ) | 8 | 4.1 | ||||||||
|
CCC and lower
|
(29 | ) | 45 | 4.5 | ||||||||
|
|
||||||||||||
|
Total
|
$ | (43 | ) | $ | 148 | 6.1 | ||||||
|
|
||||||||||||
Credit exposure associated with non-performance by the counterparties to derivative
instruments is generally limited to the uncollateralized fair value of the asset related to the
instruments recognized on the Consolidated Balance Sheets. The Company attempts to mitigate the
risk of non-performance by monitoring the creditworthiness of counterparties and diversifying
derivatives to multiple counterparties. The Company generally requires that all over-the-counter
derivative contracts be governed by an International Swaps and Derivatives Association (ISDA)
Master Agreement, and exchanges collateral under the terms of these agreements with its derivative
investment counterparties depending on the amount of the exposure and the credit rating of the
counterparty. The Company does not offset its net derivative positions against the fair value of
the collateral provided. The fair value of cash collateral provided by the Company was $7 million
and $74 million at December 31, 2009 and 2008. The fair value of cash collateral received from
counterparties was $1 million and $6 million at December 31, 2009 and 2008.
Derivative securities are recorded at fair value. See Note D for information regarding the fair
value of derivatives securities. The Company’s accounting for changes in the fair value of
derivatives not held in a trading portfolio is reported in Net realized investment gains (losses)
on the Consolidated Statements of Operations. The derivatives held for trading purposes are
carried at fair value with the related gains and losses included within Net investment income on
the Consolidated Statements of Operations.
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A summary of the recognized gains (losses) related to derivative financial instruments follows.
Recognized Gains (Losses)
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Without hedge designation
|
||||||||||||
|
Interest rate swaps
|
$ | 61 | $ | (59 | ) | $ | 11 | |||||
|
Credit default swaps – purchased protection
|
(47 | ) | 86 | 95 | ||||||||
|
Credit default swaps – sold protection
|
3 | (35 | ) | (40 | ) | |||||||
|
Total return swaps
|
(2 | ) | - | - | ||||||||
|
Futures purchased
|
- | - | 7 | |||||||||
|
Futures sold, not yet purchased
|
21 | (11 | ) | (38 | ) | |||||||
|
Currency forwards
|
- | 2 | (4 | ) | ||||||||
|
Options embedded in convertible debt securities
|
- | 1 | 1 | |||||||||
|
Equity warrants
|
- | (2 | ) | - | ||||||||
|
Options written
|
15 | - | - | |||||||||
|
|
||||||||||||
|
Trading activities
|
||||||||||||
|
Futures purchased
|
- | (131 | ) | - | ||||||||
|
Futures sold, not yet purchased
|
(2 | ) | 1 | - | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 49 | $ | (148 | ) | $ | 32 | |||||
|
|
||||||||||||
The Company’s derivative activities in the trading portfolio in 2009 are associated with the
resumption of a trading portfolio for income enhancement purposes. The Company’s derivative
activities in the trading portfolio in 2008 were associated with its pension deposit business,
through which the Company was exposed to equity price risk associated with its indexed group
annuity contracts. A corresponding increase or decrease was reflected in the Policyholders’ funds
reserves supported by this trading portfolio, which was included in Insurance claims and
policyholders’ benefits on the Consolidated Statements of Operations. During 2008, the Company
exited the indexed group annuity portion of its pension deposit business.
89
Table of Contents
A summary of the aggregate contractual or notional amounts and gross estimated fair values related
to derivative financial instruments reported as Other invested assets or Other liabilities on the
Consolidated Balance Sheets follows. The contractual or notional amounts for derivatives are used
to calculate the exchange of contractual payments under the agreements and may not be
representative of the potential for gain or loss on these instruments.
Derivative Financial Instruments
| Contractual/ | ||||||||||||
| December 31, 2009 | Notional | Estimated Fair Value | ||||||||||
| (In millions) | Amount | Asset | (Liability) | |||||||||
|
Without hedge designation
|
||||||||||||
|
Credit default swaps – purchased protection
|
$ | 116 | $ | - | $ | (11 | ) | |||||
|
Credit default swaps – sold protection
|
8 | - | - | |||||||||
|
Equity warrants
|
2 | - | - | |||||||||
|
|
||||||||||||
|
Trading activities
|
||||||||||||
|
Futures sold, not yet purchased
|
132 | - | - | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 258 | $ | - | $ | (11 | ) | |||||
|
|
||||||||||||
Derivative Financial Instruments
| Contractual/ | ||||||||||||
| December 31, 2008 | Notional | Estimated Fair Value | ||||||||||
| (In millions) | Amount | Asset | (Liability) | |||||||||
|
Without hedge designation
|
||||||||||||
|
Interest rate swaps
|
$ | 900 | $ | - | $ | (66 | ) | |||||
|
Credit default swaps – purchased protection
|
405 | 24 | (2 | ) | ||||||||
|
Credit default swaps – sold protection
|
148 | - | (43 | ) | ||||||||
|
Equity warrants
|
4 | - | - | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 1,457 | $ | 24 | $ | (111 | ) | |||||
|
|
||||||||||||
During the year ended December 31, 2009 new derivative transactions entered into totaled
approximately $19 billion in notional value while derivative termination activity totaled
approximately $20 billion. The activity during the year ended December 31, 2009 was primarily
attributable to interest rate futures, interest rate options and interest rate swaps.
90
Table of Contents
Note D. Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
following fair value hierarchy is used in selecting inputs, with the highest priority given to
Level 1, as these are the most transparent or reliable.
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model-derived valuations in which all
significant inputs are observable in active markets.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are
not observable.
The Company attempts to establish fair value as an exit price in an orderly transaction consistent
with normal settlement market conventions. The Company is responsible for the valuation process
and seeks to obtain quoted market prices for all securities. When quoted market prices in active
markets are not available, the Company uses a number of methodologies to establish fair value
estimates including: discounted cash flow models, prices from recently executed transactions of
similar securities, or broker/dealer quotes, utilizing market observable information to the extent
possible. In conjunction with modeling activities, the Company may use external data as inputs.
The modeled inputs are consistent with observable market information, when available, or with the
Company’s assumptions as to what market participants would use to value the securities. The
Company also uses pricing services as a significant source of data. The Company monitors all the
pricing inputs to determine if the markets from which the data is gathered are active. As further
validation of the Company’s valuation process, the Company samples past fair value estimates and
compares the valuations to actual transactions executed in the market on similar dates.
91
Table of Contents
Assets and Liabilities Measured at Fair Value
Assets and liabilities measured at fair value on a recurring basis are summarized below.
| Total | ||||||||||||||||
| assets/(liabilities) | ||||||||||||||||
| December 31, 2009 | Level 1 | Level 2 | Level 3 | at fair value | ||||||||||||
| (in millions) | ||||||||||||||||
|
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Fixed maturity securities:
|
||||||||||||||||
|
U.S. Treasury securities and obligations of
government agencies
|
$ | 247 | $ | 54 | $ | - | $ | 301 | ||||||||
|
|
||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||
|
Residential mortgage-backed securities
|
- | 6,308 | 629 | 6,937 | ||||||||||||
|
Commercial mortgage-backed securities
|
- | 461 | 123 | 584 | ||||||||||||
|
Other asset-backed securities
|
- | 484 | 348 | 832 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total asset-backed securities
|
- | 7,253 | 1,100 | 8,353 | ||||||||||||
|
|
||||||||||||||||
|
States, municipalities and political subdivisions -
tax-exempt securities
|
- | 6,273 | 756 | 7,029 | ||||||||||||
|
Corporate and other taxable bonds
|
139 | 19,127 | 609 | 19,875 | ||||||||||||
|
Redeemable preferred stock
|
3 | 49 | 2 | 54 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total fixed maturity securities
|
389 | 32,756 | 2,467 | 35,612 | ||||||||||||
|
|
||||||||||||||||
|
Equity securities
|
503 | 130 | 11 | 644 | ||||||||||||
|
Short term investments
|
3,552 | 397 | - | 3,949 | ||||||||||||
|
Life settlement contracts, included in Other assets
|
- | - | 130 | 130 | ||||||||||||
|
Discontinued operations investments, included in Other
liabilities
|
19 | 106 | 16 | 141 | ||||||||||||
|
Separate account business
|
43 | 342 | 38 | 423 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 4,506 | $ | 33,731 | $ | 2,662 | $ | 40,899 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative financial instruments, included in Other
liabilities
|
$ | - | $ | - | $ | (11 | ) | $ | (11 | ) | ||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total liabilities
|
$ | - | $ | - | $ | (11 | ) | $ | (11 | ) | ||||||
|
|
||||||||||||||||
92
Table of Contents
| Total | ||||||||||||||||
| assets/(liabilities) | ||||||||||||||||
| December 31, 2008 | Level 1 | Level 2 | Level 3 | at fair value | ||||||||||||
| (in millions) | ||||||||||||||||
|
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Fixed maturity securities
|
$ | 2,028 | $ | 24,367 | $ | 2,492 | $ | 28,887 | ||||||||
|
Equity securities
|
567 | 94 | 210 | 871 | ||||||||||||
|
Derivative financial instruments, included in Other
invested assets
|
- | - | 24 | 24 | ||||||||||||
|
Short term investments
|
2,926 | 608 | - | 3,534 | ||||||||||||
|
Life settlement contracts, included in Other assets
|
- | - | 129 | 129 | ||||||||||||
|
Discontinued operations investments, included in
Other
liabilities
|
83 | 59 | 15 | 157 | ||||||||||||
|
Separate account business
|
40 | 306 | 38 | 384 | ||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 5,644 | $ | 25,434 | $ | 2,908 | $ | 33,986 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative financial instruments, included in Other
liabilities
|
$ | - | $ | - | $ | (111 | ) | $ | (111 | ) | ||||||
|
|
||||||||||||||||
|
Total liabilities
|
$ | - | $ | - | $ | (111 | ) | $ | (111 | ) | ||||||
|
|
||||||||||||||||
93
Table of Contents
The tables below present a reconciliation for all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) for the years ended
December 31, 2009 and 2008.
| Net realized | ||||||||||||||||||||||||||||||||
| Net realized | investment gains | |||||||||||||||||||||||||||||||
| investment | (losses) and net | |||||||||||||||||||||||||||||||
| gains (losses) | change in | Net unrealized | ||||||||||||||||||||||||||||||
| and net | unrealized | gains (losses) on | ||||||||||||||||||||||||||||||
| change in | appreciation | Level 3 assets | ||||||||||||||||||||||||||||||
| unrealized | (depreciation) | Purchases, | and liabilities | |||||||||||||||||||||||||||||
| appreciation | recognized in | sales, | held at | |||||||||||||||||||||||||||||
| (depreciation) | other | issuances | Transfers | Transfers | Balance at | December 31, | ||||||||||||||||||||||||||
| Balance at | recognized in | comprehensive | and | into | out of | December 31, | 2009 recognized | |||||||||||||||||||||||||
| Level 3 | January 1, 2009 | net income* | income | settlements | Level 3 | Level 3 | 2009 | in net income* | ||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Fixed maturity securities:
|
||||||||||||||||||||||||||||||||
|
Asset-backed securities:
|
||||||||||||||||||||||||||||||||
|
Residential mortgage-backed
securities
|
$ | 782 | $ | (32 | ) | $ | 117 | $ | (52 | ) | $ | 71 | $ | (257 | ) | $ | 629 | $ | (12 | ) | ||||||||||||
|
Commercial mortgage-backed
securities
|
186 | (170 | ) | 185 | (24 | ) | 28 | (82 | ) | 123 | (175 | ) | ||||||||||||||||||||
|
Other asset-backed securities
|
139 | (26 | ) | 56 | 180 | 153 | (154 | ) | 348 | - | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total asset-backed securities
|
1,107 | (228 | ) | 358 | 104 | 252 | (493 | ) | 1,100 | (187 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
States, municipalities and
political
subdivisions - tax-exempt
securities
|
750 | - | 72 | (66 | ) | - | - | 756 | - | |||||||||||||||||||||||
|
Corporate and other taxable bonds
|
622 | (10 | ) | 126 | 75 | 23 | (227 | ) | 609 | (11 | ) | |||||||||||||||||||||
|
Redeemable preferred stock
|
13 | (9 | ) | 9 | 7 | - | (18 | ) | 2 | (9 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total fixed maturity securities
|
2,492 | (247 | ) | 565 | 120 | 275 | (738 | ) | 2,467 | (207 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Equity securities
|
210 | - | (1 | ) | 5 | - | (203 | ) | 11 | - | ||||||||||||||||||||||
|
Derivative financial instruments, net
|
(87 | ) | 14 | - | 62 | - | - | (11 | ) | (10 | ) | |||||||||||||||||||||
|
Short term investments
|
- | - | 1 | 7 | - | (8 | ) | - | - | |||||||||||||||||||||||
|
Life settlement contracts
|
129 | 34 | - | (33 | ) | - | - | 130 | 10 | |||||||||||||||||||||||
|
Discontinued operations investments
|
15 | (4 | ) | 7 | (2 | ) | - | - | 16 | - | ||||||||||||||||||||||
|
Separate account business
|
38 | (1 | ) | 5 | (1 | ) | - | (3 | ) | 38 | - | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 2,797 | $ | (204 | ) | $ | 577 | $ | 158 | $ | 275 | $ | (952 | ) | $ | 2,651 | $ | (207 | ) | |||||||||||||
|
|
||||||||||||||||||||||||||||||||
94
Table of Contents
| Net realized | |||||||||||||||||||||||||||||||||
| Net realized | investment gains | ||||||||||||||||||||||||||||||||
| investment | (losses) and net | ||||||||||||||||||||||||||||||||
| gains (losses) | change in | Net unrealized | |||||||||||||||||||||||||||||||
| and net | unrealized | gains (losses) on | |||||||||||||||||||||||||||||||
| change in | appreciation | Level 3 assets | |||||||||||||||||||||||||||||||
| unrealized | (depreciation) | Purchases, | and liabilities | ||||||||||||||||||||||||||||||
| appreciation | recognized in | sales, | held at | ||||||||||||||||||||||||||||||
| Balance at | (depreciation) | other | issuances | Transfers | Transfers | Balance at | December 31, | ||||||||||||||||||||||||||
| January 1, | recognized in | comprehensive | and | into | out of | December 31, | 2008 recognized | ||||||||||||||||||||||||||
| Level 3 | 2008 | net loss* | loss | settlements | Level 3 | Level 3 | 2008 | in net loss* | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Fixed maturity securities
|
$ | 2,684 | $ | (379 | ) | $ | (505 | ) | $ | (178 | ) | $ | 1,475 | $ | (605 | ) | $ | 2,492 | $ | (378 | ) | ||||||||||||
|
Equity securities
|
196 | (16 | ) | 6 | 25 | 22 | (23 | ) | 210 | (4 | ) | ||||||||||||||||||||||
|
Derivative financial instruments, net
|
2 | (10 | ) | - | (79 | ) | - | - | (87 | ) | (89 | ) | |||||||||||||||||||||
|
Short term investments
|
85 | - | - | - | - | (85 | ) | - | - | ||||||||||||||||||||||||
|
Life settlement contracts
|
115 | 48 | - | (34 | ) | - | - | 129 | 17 | ||||||||||||||||||||||||
|
Discontinued operations investments
|
42 | (1 | ) | (5 | ) | (4 | ) | - | (17 | ) | 15 | - | |||||||||||||||||||||
|
Separate account business
|
30 | - | - | (18 | ) | 26 | - | 38 | - | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Total
|
$ | 3,154 | $ | (358 | ) | $ | (504 | ) | $ | (288 | ) | $ | 1,523 | $ | (730 | ) | $ | 2,797 | $ | (454 | ) | ||||||||||||
|
|
|||||||||||||||||||||||||||||||||
95
Table of Contents
*Net realized and unrealized gains and losses shown above are recognized in Net income (loss) as
follows:
| Major Category of Assets and Liabilities | Consolidated Statement of Operations Line Items | |
|
Fixed maturity securities available-for-sale
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
Fixed maturity securities trading
|
Net investment income
|
|
|
|
|
|
|
Equity securities
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
Derivative financial instruments held in a
trading portfolio
|
Net investment income
|
|
|
|
|
|
|
Derivative financial instruments, other
|
Net realized investment gains (losses)
|
|
|
|
|
|
|
Life settlement contracts
|
Other revenues
|
|
Securities shown in the Level 3 tables on the previous pages may be transferred in or out
based on the availability of observable market information used to verify pricing sources or used
in pricing models. The availability of observable market information varies based on market
conditions and trading volume and may cause securities to move in and out of Level 3 from reporting
period to reporting period.
The following section describes the valuation methodologies used to measure different financial
instruments at fair value, including an indication of the level in the fair value hierarchy in
which the instrument is generally classified.
Fixed Maturity Securities
Level 1 securities include highly liquid government bonds within the U.S. Treasury securities
category and debt securities issued by foreign governments, which are included in the corporate and
other taxable bond category, for which quoted market prices are available. The remaining fixed
maturity securities are valued using pricing for similar securities, recently executed
transactions, cash flow models with yield curves, broker/dealer quotes and other pricing models
utilizing observable inputs. The valuation for most fixed maturity securities is classified as
Level 2. Securities within Level 2 include certain corporate bonds, municipal bonds, asset-backed
securities, mortgage-backed pass-through securities and redeemable preferred stock. Level 2
securities may also include securities that have firm sale commitments and prices that are not
recorded until the settlement date. Securities are generally assigned to Level 3 in cases where
broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as
to whether these quotes are based on information that is observable in the marketplace. These
securities include certain corporate bonds, asset-backed securities, municipal bonds and redeemable
preferred stock. Within corporate bonds and municipal bonds, Level 3 securities also include
tax-exempt auction rate certificates. Fair value of auction rate securities is determined utilizing
a pricing model with three primary inputs. The interest rate and spread inputs are observable from
like instruments while the maturity date assumption is unobservable due to the uncertain nature of
the principal prepayments prior to maturity.
Equity Securities
Level 1 securities include publicly traded securities valued using quoted market prices. Level 2
securities are primarily non-redeemable preferred securities and common stocks valued using pricing
for similar securities, recently executed transactions, broker/dealer quotes and other pricing
models utilizing observable inputs. Level 3 securities include equity securities that are priced
using internal models with inputs that are not market observable.
Derivative Financial Instruments
Exchange traded derivatives are valued using quoted market prices and are classified within Level 1
of the fair value hierarchy. Level 2 derivatives primarily include currency forwards valued using
observable market forward rates. Over-the-counter derivatives, principally interest rate swaps,
credit default swaps, equity warrants and options, are valued using inputs including broker/dealer
quotes and are classified within Level 3 of the valuation hierarchy due to a lack of transparency
as to whether these quotes are based on information that is observable in the marketplace.
96
Table of Contents
Short Term Investments
The valuation of securities that are actively traded or have quoted prices are classified as Level
1. These securities include money market funds and treasury bills. Level 2 includes commercial
paper, for which all inputs are observable.
Life Settlement Contracts
The fair values of life settlement contracts are determined as the present value of the anticipated
death benefits less anticipated premium payments based on contract terms that are distinct for each
insured, as well as the Company’s own assumptions for mortality, premium expense, and the rate of
return that a buyer would require on the contracts, as no comparable market pricing data is
available.
Discontinued Operations Investments
Assets relating to the Company’s discontinued operations include fixed maturity securities and
short term investments. The valuation methodologies for these asset types have been described
above.
Separate Account Business
Separate account business includes fixed maturity securities, equities and short term investments.
The valuation methodologies for these asset types have been described above.
97
Table of Contents
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount and estimated fair value of the Company’s financial instrument assets and
liabilities which are not measured at fair value on the Consolidated Balance Sheets are listed in
the table below.
Financial Assets and Liabilities
| December 31 | 2009 | 2008 | ||||||||||||||
| (In millions) | Carrying | Estimated | Carrying | Estimated | ||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Financial assets
|
||||||||||||||||
|
Notes receivable for the issuance of common stock
|
$ | 30 | $ | 29 | $ | 42 | $ | 42 | ||||||||
|
|
||||||||||||||||
|
Financial liabilities
|
||||||||||||||||
|
Premium deposits and annuity contracts
|
$ | 105 | $ | 106 | $ | 111 | $ | 113 | ||||||||
|
Long term debt
|
2,303 | 2,290 | 2,058 | 1,585 | ||||||||||||
The following methods and assumptions were used to estimate the fair value of these financial
assets and liabilities.
The fair values of notes receivable for the issuance of common stock were estimated using
discounted cash flows utilizing interest rates currently offered for obligations securitized with
similar collateral.
Premium deposits and annuity contracts were valued based on cash surrender values, estimated fair
values or policyholder liabilities, net of amounts ceded related to sold business.
The Company’s senior notes and debentures were valued based on quoted market prices. The fair
value for other long term debt was estimated using discounted cash flows based on current
incremental borrowing rates for similar borrowing arrangements.
The carrying amounts reported on the Consolidated Balance Sheets for Cash, Accrued investment
income, Receivables for securities sold and collateral, Federal income taxes recoverable/payable,
Payables for securities purchased, and certain other assets and other liabilities approximate fair
value due to the short term nature of these items. These assets and liabilities are not listed in
the table above.
98
Table of Contents
Note E. Income Taxes
The CNA Tax Group is included in the consolidated federal income tax return of Loews and its
eligible subsidiaries. Loews and the Company have agreed that for each taxable year, the Company
will 1) be paid by Loews the amount, if any, by which the Loews consolidated federal income tax
liability is reduced by virtue of the inclusion of the CNA Tax Group in the Loews consolidated
federal income tax return, or 2) pay to Loews an amount, if any, equal to the federal income tax
that would have been payable by the CNA Tax Group filing a separate consolidated tax return. In
the event that Loews should have a net operating loss in the future computed on the basis of filing
a separate consolidated tax return without the CNA Tax Group, the Company may be required to repay
tax recoveries previously received from Loews. This agreement may be cancelled by either party
upon 30 days written notice.
For the year ended December 31, 2009, the Company received from Loews $196 million related to
federal income taxes. For the years ended December 31, 2008 and 2007, the Company paid Loews $65
million and $354 million related to federal income taxes. The Company’s consolidated federal
income taxes recoverable at December 31, 2009 reflects a $320 million recoverable from Loews and a
$23 million net payable related to affiliates less than 80% owned and/or foreign subsidiaries,
which settle their income taxes directly with the Internal Revenue Service (IRS) and/or foreign
jurisdictions. At December 31, 2008, the Company’s consolidated federal income taxes recoverable
reflected a $299 million recoverable from Loews and a $5 million payable related to affiliates less
than 80% owned and/or foreign subsidiaries.
For 2008 through 2010, the IRS invited Loews and the Company to participate in the Compliance
Assurance Process (CAP), which is a voluntary program for a limited number of large corporations.
Under CAP, the IRS conducts a real–time audit and works contemporaneously with the Company to
resolve any issues prior to the filing of the tax return. Loews and the Company agreed to
participate. The Company believes that this approach should reduce tax-related uncertainties, if
any. The Loews consolidated federal income tax return for 2008 is currently under examination by
the IRS. The Loews consolidated federal income tax return for 2006 remains subject to examination
by the IRS.
At December 31, 2009 or 2008, there is no unrecognized tax benefit.
The Company recognizes interest accrued related to: 1) unrecognized tax benefits in Interest
expense and 2) tax refund claims in Other revenues on the Consolidated Statements of Operations.
The Company recognizes penalties (if any) in Income tax expense (benefit) on the Consolidated
Statements of Operations. During 2009 and 2007, the Company recognized $2 million and $1 million
of interest income and no penalties. During 2008, the Company recognized no interest and no
penalties. There are no amounts accrued for interest or penalties at December 31, 2009 or 2008.
A reconciliation between the Company’s federal income tax (expense) benefit at statutory rates and
the recorded income tax (expense) benefit, after giving effect to noncontrolling interest, but
before giving effect to discontinued operations, is as follows.
Tax Reconciliation
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
Income tax (expense) benefit at statutory rates
|
$ | (189 | ) | $ | 198 | $ | (428 | ) | ||||
|
Tax benefit from tax exempt income
|
119 | 118 | 100 | |||||||||
|
Foreign taxes and credits
|
19 | (2 | ) | (3 | ) | |||||||
|
Other tax (expense) benefit, including IRS settlements
|
(6 | ) | (3 | ) | 14 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Effective income tax (expense) benefit
|
$ | (57 | ) | $ | 311 | $ | (317 | ) | ||||
|
|
||||||||||||
Provision has been made for the expected U.S. federal income tax liabilities applicable to
undistributed earnings of subsidiaries, except for certain subsidiaries for which the Company
intends to invest the undistributed earnings indefinitely, or recover such undistributed earnings
tax-free. At December 31, 2009, the Company has not provided deferred taxes of $180 million, if
sold through a taxable sale, on $514 million of undistributed
earnings related to a domestic
affiliate. Additionally, at December 31, 2009, the Company has not provided deferred taxes of $27
million on $76 million of undistributed earnings related to foreign subsidiaries.
99
Table of Contents
The current and deferred components of the Company’s income tax (expense) benefit, excluding taxes
on discontinued operations, are as follows.
Current and Deferred Taxes
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
Current tax (expense) benefit
|
$ | 120 | $ | 137 | $ | (418 | ) | |||||
|
Tax benefit recognized for uncertainties in the income statement
|
- | - | 2 | |||||||||
|
Deferred tax (expense) benefit
|
(177 | ) | 174 | 99 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total income tax (expense) benefit
|
$ | (57 | ) | $ | 311 | $ | (317 | ) | ||||
|
|
||||||||||||
Total income tax presented above includes foreign tax expense of approximately $39 million,
$26 million and $43 million related to income from continuing foreign operations of approximately
$126 million, $85 million and $122 million for the years ended December 31, 2009, 2008 and 2007.
The deferred tax effects of the significant components of the Company’s deferred tax assets and
liabilities are set forth in the table below. The amounts presented for 2008 for certain components
in the table below have been corrected from amounts previously reported.
These corrections had no impact on the net deferred tax asset at December 31, 2008; however,
individual components were corrected by amounts ranging from an increase of $194 million to a
decrease of $144 million.
Components of Net Deferred Tax Asset
| December 31 | 2009 | 2008 | ||||||
| (In millions) | ||||||||
|
Deferred Tax Assets:
|
||||||||
|
Insurance reserves:
|
||||||||
|
Property and casualty claim and claim adjustment expense reserves
|
$ | 606 | $ | 694 | ||||
|
Unearned premium reserves
|
111 | 90 | ||||||
|
Receivables
|
185 | 199 | ||||||
|
Employee benefits
|
279 | 306 | ||||||
|
Life settlement contracts
|
72 | 73 | ||||||
|
Investment valuation differences
|
316 | 496 | ||||||
|
Net unrealized losses
|
- | 1,905 | ||||||
|
Net loss and tax credits carried forward
|
56 | 24 | ||||||
|
Other assets
|
153 | 163 | ||||||
|
|
||||||||
|
Gross deferred tax assets
|
1,778 | 3,950 | ||||||
|
|
||||||||
|
|
||||||||
|
Deferred Tax Liabilities:
|
||||||||
|
Deferred acquisition costs
|
297 | 301 | ||||||
|
Net unrealized gains
|
5 | - | ||||||
|
Other liabilities
|
143 | 156 | ||||||
|
|
||||||||
|
Gross deferred tax liabilities
|
445 | 457 | ||||||
|
|
||||||||
|
|
||||||||
|
Net deferred tax asset
|
$ | 1,333 | $ | 3,493 | ||||
|
|
||||||||
Although realization of deferred tax assets is not assured, management believes it is more
likely than not that the recognized net deferred tax asset will be realized through recoupment of
ordinary and capital taxes paid in prior carryback years and through future earnings, reversal of
existing temporary differences and available tax planning strategies. As a result, no valuation
allowance was recorded at December 31, 2009 or 2008.
100
Table of Contents
Note F. Claim and Claim Adjustment Expense Reserves
The Company’s property and casualty insurance claim and claim adjustment expense reserves represent
the estimated amounts necessary to resolve all outstanding claims, including claims that are
incurred but not reported (IBNR) as of the reporting date. The Company’s reserve projections are
based primarily on detailed analysis of the facts in each case, the Company’s experience with
similar cases and various historical development patterns. Consideration is given to such
historical patterns as field reserving trends and claims settlement practices, loss payments,
pending levels of unpaid claims and product mix, as well as court decisions, economic conditions
and public attitudes. All of these factors can affect the estimation of claim and claim adjustment
expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment
expense reserves for catastrophic events that have occurred, is an estimation process. Many
factors can ultimately affect the final settlement of a claim and, therefore, the necessary
reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials
and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of
reserving determinations since the longer the span between the incidence of a loss and the payment
or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly,
short-tail claims, such as property damage claims, tend to be more reasonably estimable than
long-tail claims, such as general liability and professional liability claims. Adjustments to
prior year reserve estimates, if necessary, are reflected in the results of operations in the
period that the need for such adjustments is determined.
Catastrophes are an inherent risk of the property and casualty insurance business and have
contributed to material period-to-period fluctuations in the Company’s results of operations and/or
equity. The Company reported catastrophe losses, net of reinsurance, of $89 million, $358 million
and $78 million for the years ended December 31, 2009, 2008 and 2007 for events occurring in those
years. Catastrophe losses in 2009 related primarily to tornadoes, floods, hail and wind. The
catastrophe losses in 2008 related primarily to Hurricanes Gustav and Ike. There can be no
assurance that the Company’s ultimate cost for catastrophes will not exceed current estimates.
101
Table of Contents
The table below provides a reconciliation between beginning and ending claim and claim adjustment
expense reserves, including claim and claim adjustment expense reserves of the life company.
Reconciliation of Claim and Claim Adjustment Expense Reserves
| As of and for the years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Reserves, beginning of year:
|
||||||||||||
|
Gross
|
$ | 27,593 | $ | 28,588 | $ | 29,636 | ||||||
|
Ceded
|
6,288 | 7,056 | 8,191 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net reserves, beginning of year
|
21,305 | 21,532 | 21,445 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net incurred claim and claim adjustment expenses:
|
||||||||||||
|
Provision for insured events of current year
|
4,793 | 5,193 | 4,939 | |||||||||
|
(Decrease) increase in provision for insured events of prior years
|
(240 | ) | (5 | ) | 231 | |||||||
|
Amortization of discount
|
122 | 123 | 120 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total net incurred (a)
|
4,675 | 5,311 | 5,290 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net payments attributable to:
|
||||||||||||
|
Current year events
|
917 | 1,034 | 867 | |||||||||
|
Prior year events
|
3,942 | 4,328 | 4,447 | |||||||||
|
Reinsurance recoverable against net reserve transferred under
retroactive reinsurance agreements
|
(3 | ) | (10 | ) | (17 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total net payments
|
4,856 | 5,352 | 5,297 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Foreign currency translation adjustment
|
98 | (186 | ) | 94 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net reserves, end of year
|
21,222 | 21,305 | 21,532 | |||||||||
|
Ceded reserves, end of year
|
5,594 | 6,288 | 7,056 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Gross reserves, end of year
|
$ | 26,816 | $ | 27,593 | $ | 28,588 | ||||||
|
|
||||||||||||
| (a) |
Total net incurred above does not agree to Insurance claims and policyholders’ benefits as
reflected on the Consolidated Statements of Operations due to expenses incurred related to
uncollectible reinsurance and loss deductible receivables, and benefit expenses related to
future policy benefits and policyholders’ funds, which are not reflected in the table above.
|
The changes in provision for insured events of prior years (net prior year claim and claim
adjustment expense reserve development) were as follows.
Reserve Development
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Asbestos and environmental pollution
|
$ | 155 | $ | 110 | $ | 7 | ||||||
|
Other
|
(396 | ) | (117 | ) | 213 | |||||||
|
|
||||||||||||
|
Property and casualty reserve development
|
(241 | ) | (7 | ) | 220 | |||||||
|
|
||||||||||||
|
Life reserve development in life company
|
1 | 2 | 11 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | (240 | ) | $ | (5 | ) | $ | 231 | ||||
|
|
||||||||||||
102
Table of Contents
The following tables summarize the gross and net carried reserves as of December 31, 2009 and
2008.
December 31, 2009
| Gross and Net Carried | |||||||||||||||||||||
| Claim and Claim Adjustment Expense Reserves | Life & | Corporate | |||||||||||||||||||
| CNA | CNA | Group | & Other | ||||||||||||||||||
| (In millions) | Specialty | Commercial | Non-Core | Non-Core | Total | ||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Gross Case Reserves
|
$ | 2,208 | $ | 6,510 | $ | 2,502 | $ | 1,548 | $ | 12,768 | |||||||||||
|
Gross IBNR Reserves
|
4,714 | 6,495 | 381 | 2,458 | 14,048 | ||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Total Gross Carried Claim and Claim
Adjustment Expense Reserves
|
$ | 6,922 | $ | 13,005 | $ | 2,883 | $ | 4,006 | $ | 26,816 | |||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Net Case Reserves
|
$ | 1,781 | $ | 5,269 | $ | 1,765 | $ | 972 | $ | 9,787 | |||||||||||
|
Net IBNR Reserves
|
4,085 | 5,580 | 255 | 1,515 | 11,435 | ||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Total Net Carried Claim and Claim
Adjustment Expense Reserves
|
$ | 5,866 | $ | 10,849 | $ | 2,020 | $ | 2,487 | $ | 21,222 | |||||||||||
|
|
|||||||||||||||||||||
|
December 31, 2008
|
|||||||||||||||||||||
| Gross and Net Carried | |||||||||||||||||||||
| Claim and Claim Adjustment Expense Reserves | Life & | Corporate | |||||||||||||||||||
| CNA | CNA | Group | & Other | ||||||||||||||||||
| (In millions) | Specialty | Commercial | Non-Core | Non-Core | Total | ||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Gross Case Reserves
|
$ | 2,105 | $ | 6,772 | $ | 2,473 | $ | 1,823 | $ | 13,173 | |||||||||||
|
Gross IBNR Reserves
|
4,616 | 6,837 | 389 | 2,578 | 14,420 | ||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Total Gross Carried Claim and Claim
Adjustment Expense Reserves
|
$ | 6,721 | $ | 13,609 | $ | 2,862 | $ | 4,401 | $ | 27,593 | |||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Net Case Reserves
|
$ | 1,639 | $ | 5,505 | $ | 1,656 | $ | 1,126 | $ | 9,926 | |||||||||||
|
Net IBNR Reserves
|
3,896 | 5,673 | 249 | 1,561 | 11,379 | ||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Total Net Carried Claim and Claim
Adjustment Expense Reserves
|
$ | 5,535 | $ | 11,178 | $ | 1,905 | $ | 2,687 | $ | 21,305 | |||||||||||
|
|
|||||||||||||||||||||
The following provides discussion of the Company’s Asbestos and Environmental Pollution (A&E)
reserves.
A&E Reserves
The Company’s property and casualty insurance subsidiaries have actual and potential exposures
related to A&E claims.
Establishing reserves for A&E claim and claim adjustment expenses is subject to uncertainties that
are greater than those presented by other claims. Traditional actuarial methods and techniques
employed to estimate the ultimate cost of claims for more traditional property and casualty
exposures are less precise in estimating claim and claim adjustment expense reserves for A&E,
particularly in an environment of emerging or potential claims and coverage issues that arise from
industry practices and legal, judicial and social conditions. Therefore, these traditional
actuarial methods and techniques are necessarily supplemented with additional estimating techniques
and methodologies, many of which involve significant judgments that are required of management.
Accordingly, a high degree of uncertainty remains for the Company’s ultimate liability for A&E
claim and claim adjustment expenses.
In addition to the difficulties described above, estimating the ultimate cost of both reported and
unreported A&E 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; allocation of liability among numerous
parties, some of whom may be in bankruptcy proceedings, and in particular the application of “joint
and several” liability to specific insurers on a risk; inconsistent court
103
Table of Contents
decisions and developing legal theories; continuing aggressive tactics of plaintiffs’ lawyers; the
risks and lack of predictability inherent in major litigation; enactment of state and federal
legislation to address asbestos claims and challenges to such litigation; increases and decreases
in the frequency of asbestos and environmental pollution claims which cannot now be anticipated;
increases and decreases in costs to defend asbestos and pollution claims; changing liability
theories against the Company’s policyholders in asbestos and environmental matters; possible
exhaustion of underlying umbrella and excess coverage; and future developments pertaining to the
Company’s ability to recover reinsurance for asbestos and pollution claims.
The Company has performed actuarial ground up reviews of all open A&E claims to evaluate the
adequacy of the Company’s A&E reserves. In performing its actuarial 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 and severity, trial conditions, prior settlement
history, settlement demands and defense costs; the impact of bankruptcies of other parties on the
policyholder; the policies issued by the Company, 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. In the past, our actuarial ground up reviews of all open A&E claims have been
completed in the fourth quarter. Going forward, the Company plans to perform its environmental
review in the third quarter and its asbestos review in the fourth quarter.
The following table provides data related to the Company’s A&E claim and claim adjustment expense
reserves.
A&E Reserves
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Environmental | Environmental | |||||||||||||||
| Asbestos | Pollution | Asbestos | Pollution | |||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
Gross reserves
|
$ | 2,046 | $ | 482 | $ | 2,112 | $ | 392 | ||||||||
|
Ceded reserves
|
(909 | ) | (196 | ) | (910 | ) | (130 | ) | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Net reserves
|
$ | 1,137 | $ | 286 | $ | 1,202 | $ | 262 | ||||||||
|
|
||||||||||||||||
Asbestos
The Company’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 its most recent actuarial ground up review, the Company noted adverse development in various
asbestos accounts due to increases in average claim severity and defense expense arising from
increased trial activity. Additionally, the Company has not seen a decline in the overall emergence
of new accounts during the last few years. As a result of these factors, the Company recorded $79
million of unfavorable asbestos-related net claim and claim adjustment expense reserve development
for the year ended December 31, 2009.
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The table below provides a reconciliation between the Company’s beginning and ending net reserves
for asbestos.
Asbestos Reserves
| December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Beginning net reserves
|
$ | 1,202 | $ | 1,322 | $ | 1,452 | ||||||
|
|
||||||||||||
|
Unfavorable net prior year claim and
claim adjustment expense reserve
development
|
79 | 27 | 6 | |||||||||
|
Paid claims, net of reinsurance recoveries
|
(144 | ) | (147 | ) | (136 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Ending net reserves
|
$ | 1,137 | $ | 1,202 | $ | 1,322 | ||||||
|
|
||||||||||||
The ultimate cost of reported claims, and in particular A&E claims, is subject to a great many
uncertainties, including future developments of various kinds that the Company does not control and
that are difficult or impossible to foresee accurately. With respect to the litigation identified,
pending rulings are critical to the evaluation of the ultimate cost to the Company. Accordingly,
the extent of losses beyond any amounts that may be accrued are not readily determinable at this
time.
Some asbestos-related defendants have asserted that their insurance policies are not subject to
aggregate limits on coverage. The Company 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 its 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 the Company. Where the
Company cannot settle a claim on acceptable terms, the Company aggressively litigates the claim.
However, adverse developments with respect to such matters could have a material adverse effect on
the Company’s results of operations and/or equity.
Certain asbestos claim litigation in which the Company is currently engaged is described below:
A.P. Green:
On February 13, 2003, the Company 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, the Company is required to pay $70 million, net of reinsurance
recoveries, over a ten year period commencing after the final approval of a bankruptcy plan of
reorganization. The settlement received initial bankruptcy court approval on August 18, 2003. The
debtor’s plan of reorganization includes an injunction to protect the Company from any future
claims. The bankruptcy court issued an opinion on September 24, 2007 recommending confirmation of
that plan. On July 25, 2008, the District Court affirmed the Bankruptcy Court’s ruling. Several
insurers have appealed that ruling to the Third Circuit Court of Appeals; that appeal was argued on
May 21, 2009 and the parties are awaiting the court’s decision.
Direct
Action Case – Montana:
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 the Company, 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,
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Montana. The Montana direct action is currently stayed because of W.R. Grace’s pending bankruptcy.
On April 7, 2008, W.R. Grace announced a settlement in principle with the asbestos personal injury
claimants committee subject to confirmation of a plan of reorganization by the bankruptcy court.
The confirmation hearing is held in two phases. The first phase was held in June 2009. The second
phase concluded in January 2010. The settlement in principle with the asbestos claimants has no
present impact on the stay currently imposed on the Montana direct action and with respect to such
claims, 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) 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.
The Company 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 the Company’s business, insurer financial
strength and debt ratings, results of operations and/or equity.
Environmental Pollution
In its most recent actuarial ground up review, the Company noted adverse development in various
pollution accounts due to changes in the liabilities attributed to our policyholders and adverse
changes in case law impacting insurers’ coverage obligations. These changes in turn increased the
Company’s account estimates on certain accounts. In addition, the frequency of environmental
pollution claims did not decline at the rate previously anticipated. As a result of these factors,
the Company recorded $76 million of unfavorable environmental pollution net claim and claim
adjustment expense reserve development for the year ended December 31, 2009.
The table below provides a reconciliation between the Company’s beginning and ending net reserves
for environmental pollution.
Environmental Pollution Reserves
| December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Beginning net reserves
|
$ | 262 | $ | 242 | $ | 285 | ||||||
|
|
||||||||||||
|
Unfavorable net prior year claim and
claim adjustment expense reserve
development
|
76 | 83 | 1 | |||||||||
|
Paid claims, net of reinsurance recoveries
|
(52 | ) | (63 | ) | (44 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Ending net reserves
|
$ | 286 | $ | 262 | $ | 242 | ||||||
|
|
||||||||||||
Net Prior Year Development
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals,
net of reinsurance, for prior years are defined as net prior year development. These changes can
be favorable or unfavorable. The following tables and discussion include the net prior year
development recorded for CNA Specialty, CNA Commercial and Corporate & Other Non-Core segments for
the years ended December 31, 2009, 2008 and 2007. The net prior year development presented below
includes premium development due to its direct relationship to claim and claim adjustment expense
reserve development. The net prior year development presented below includes the impact of
commutations, but excludes the impact of increases or
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decreases in the allowance for uncollectible reinsurance. See Note H for further discussion of the
provision for uncollectible reinsurance.
Favorable net prior year development of $53 million was recorded in the Life & Group Non-Core
segment for the year ended December 31, 2009 compared with unfavorable net prior year development
of $15 million and $147 million for the years ended December 31, 2008 and 2007. Included in the
2009 favorable development is the impact of a settlement reached in 2009 with Willis Limited that
resolved litigation related to the placement of personal accident reinsurance between 1997 and 1999
in connection with the IGI Program. Under this settlement agreement, Willis Limited agreed to pay
the Company a total of $130 million, which is reported as a loss recovery of $94 million, net of
reinsurance. The 2007 unfavorable net prior year development primarily related to the settlement
of the original IGI Program contingency in 2007. The Company reached agreement in 2007 to settle
the arbitration matter for a one-time payment of $250 million, which resulted in an incurred loss,
net of reinsurance, of $167 million pretax. The 2009 settlement represents a partial recoupment of
the amounts paid by the Company in 2007.
2009 Net Prior Year Development
| Corporate | |||||||||||||||||||||
| (In millions) | CNA | CNA | & Other Non- | ||||||||||||||||||
| Specialty | Commercial | Core | Total | ||||||||||||||||||
|
|
|||||||||||||||||||||
|
Pretax (favorable) unfavorable net prior year
claim and allocated claim adjustment expense
reserve development:
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Core (Non-A&E)
|
$ | (218 | ) | $ | (255 | ) | $ | 29 | $ | (444 | ) | ||||||||||
|
A&E
|
- | - | 155 | 155 | |||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Pretax (favorable) unfavorable net prior year
development before impact of premium development
|
(218 | ) | (255 | ) | 184 | (289 | ) | ||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Pretax (favorable) unfavorable premium development
|
(6 | ) | 87 | - | 81 | ||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Total pretax (favorable) unfavorable net prior
year development
|
$ | (224 | ) | $ | (168 | ) | $ | 184 | $ | (208 | ) | ||||||||||
|
|
|||||||||||||||||||||
|
2008 Net Prior Year Development
|
|||||||||||||||||||||
| Corporate | |||||||||||||||||||||
| (In millions) | CNA | CNA | & Other Non- | ||||||||||||||||||
| Specialty | Commercial | Core | Total | ||||||||||||||||||
|
|
|||||||||||||||||||||
|
Pretax (favorable) unfavorable net prior year claim and
allocated claim adjustment expense reserve development:
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Core (Non-A&E)
|
$ | (97 | ) | $ | (101 | ) | $ | 13 | $ | (185 | ) | ||||||||||
|
A&E
|
- | - | 110 | 110 | |||||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Pretax (favorable) unfavorable net prior year development
before impact of premium development
|
(97 | ) | (101 | ) | 123 | (75 | ) | ||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Pretax (favorable) unfavorable premium development
|
(9 | ) | 5 | (1 | ) | (5 | ) | ||||||||||||||
|
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||
|
Total pretax (favorable) unfavorable net prior year development
|
$ | (106 | ) | $ | (96 | ) | $ | 122 | $ | (80 | ) | ||||||||||
|
|
|||||||||||||||||||||
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2007 Net Prior Year Development
| Corporate | ||||||||||||||||
| (In millions) | CNA | CNA | & Other Non- | |||||||||||||
| Specialty | Commercial | Core | Total | |||||||||||||
|
|
||||||||||||||||
|
Pretax (favorable) unfavorable net prior year claim and
allocated claim adjustment expense reserve development:
|
||||||||||||||||
|
|
||||||||||||||||
|
Core (Non-A&E)
|
$ | 35 | $ | (164 | ) | $ | 84 | $ | (45 | ) | ||||||
|
A&E
|
- | - | 7 | 7 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Pretax (favorable) unfavorable net prior year development
before impact of premium development
|
35 | (164 | ) | 91 | (38 | ) | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Pretax favorable premium development
|
(11 | ) | (19 | ) | (5 | ) | (35 | ) | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total pretax (favorable) unfavorable net prior year development
|
$ | 24 | $ | (183 | ) | $ | 86 | $ | (73 | ) | ||||||
|
|
||||||||||||||||
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2009 Net Prior Year Development
CNA Specialty
The favorable claim and allocated claim adjustment expense reserve development was primarily due to
professional liability and surety coverages.
Approximately $81 million of favorable claim and allocated claim adjustment expense reserve
development was recorded for professional liability coverages, primarily financial institutions,
accountants and lawyers, directors and officers, and life agents coverages. For financial
institutions, favorable development was recorded due to favorable experience on a number of large
claims in accident years 2003 and prior and decreased frequency of large claims in accident years
2007 and prior. Favorable development was recorded in accountants and lawyers due to better than
expected large claim frequency in accident years 2004 through 2006. The remaining favorable
development was recorded in directors and officers and life agents coverages due to lower than
expected large claim frequency.
Favorable claim and allocated claim adjustment expense reserve development of approximately $66
million for medical professional liability was recorded primarily due to better than expected
frequency and severity in accident years 2005 and prior, including claims closing favorable to
expectations and favorable changes on individually reviewed accounts.
Favorable claim and allocated claim adjustment expense reserve development of $51 million was
recorded in surety programs driven by claim activity substantially below expectations, primarily in
accident years 2004 through 2007.
Favorable claim and claim adjustment expense reserve development of $4 million was recorded as a
result of favorable outcomes on claims relating to catastrophes in accident year 2005.
Additional favorable claim development of approximately $19 million was recorded in CNA Specialty’s
international programs. This favorable development was primarily due to favorable emergence
relative to expectations in European non-financial directors and officers and errors and omissions
coverages.
CNA Commercial
The favorable claim and allocated claim adjustment expense reserve development was primarily due to
property, general liability and international affiliate coverages, partially offset by unfavorable
experience in worker’s compensation coverages.
Approximately $149 million of favorable claim and allocated claim adjustment expense reserve
development was recorded for property coverages. Favorable catastrophe claim and claim adjustment
expense reserve development of approximately $101 million was recorded, driven by the favorable
settlement of several claims primarily in accident years 2005 and 2007, and better than expected
frequency and severity on claims in accident year 2008. An additional $48 million of favorable
claim and allocated claim adjustment expense reserve development was due to non-catastrophe related
losses, primarily on large property and marine coverages in accident years 2007 and 2008.
Approximately $103 million of favorable claim and allocated claim adjustment expense reserve
development was recorded for general liability coverages. Favorable development of approximately
$78 million was primarily due to claims closing favorable to expectations on non-construction
defect exposures in accident years 2006 and prior. An additional $25 million of favorable claim
and allocated claim adjustment expense reserve development was due to decreased frequency and
severity trends related to construction defect exposures in accident years 2003 and prior.
Approximately $35 million of unfavorable claim and allocated claim adjustment expense reserve
development was related to increased severity of indemnity losses relative to expectations on
workers’ compensation claims related to Defense Base Act contractors primarily in accident years
2004 through 2008.
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Table of Contents
Approximately $49 million of unfavorable claim and allocated claim adjustment expense reserve
development was due to increased paid and incurred severity on workers’ compensation business
primarily in the small and middle markets businesses in accident years 2004, 2007 and 2008.
Approximately $40 million of unfavorable premium development was related to changes in estimated
ultimate premium on retrospectively rated coverages. Additional unfavorable premium development was
due to an estimated liability for an assessment related to a reinsurance association driven by
large workers’ compensation policies and less premium processing on auditable policies due to
reduced exposures in the current economic environment.
The remaining favorable claim and allocated claim adjustment expense reserve development of
approximately $80 million was recorded in CNA Commercial’s international programs primarily due to
favorable loss emergence relative to expectations across several accident years and coverages.
Approximately $33 million of favorable development was driven by European property, cargo, and
personal accident and travel businesses in recognition of both frequency and severity emerging
favorably to prior expectations, particularly in accident years 2007 and 2008. An additional $29
million of favorable development within a Hawaiian affiliate was primarily driven by improved
frequency. The remaining $18 million of favorable development was due to Canadian commercial
lines, primarily in casualty programs and primarily driven by severity emerging favorable to prior
expectations.
Corporate & Other Non-Core
Unfavorable claim and allocated claim adjustment expense reserve development was recorded related
to asbestos and environmental pollution, as discussed previously in this Note in the Asbestos and
Environmental Pollution sections. An additional $25 million of unfavorable claim and allocated
claim adjustment expense reserve development was recorded due to higher than anticipated litigation
costs related to mass tort exposures, primarily in accident years 1997 and prior.
2008 Net Prior Year Development
CNA Specialty
The favorable claim and allocated claim adjustment expense reserve development was primarily due to
favorable experience in medical professional liability, surety business, and CNA Specialty’s
international programs, partially offset by unfavorable experience in professional liability
coverages.
Favorable claim and allocated claim adjustment expense reserve development of approximately $52
million for medical professional liability was primarily due to better than expected frequency of
large losses in accident years 2005 and 2006 for healthcare facilities and medical technology
firms. Approximately $16 million of unfavorable development was recorded for professional liability
primarily reflecting an increase in the frequency of large claims related to large law firms in
accident years 1998 through 2005 and fidelity claims in accident year 2007, partially offset by
favorable development related to favorable outcomes on individual claims related to small
accounting firms in accident years 2004 through 2006. Favorable development of approximately $36
million for surety coverages was due to better than expected frequency in accident years 2002
through 2006.
Approximately $26 million of favorable claim and allocated claim adjustment expense reserve
development was primarily due to favorable incurred loss emergence within CNA Specialty’s
international programs in accident year 2006 and prior. This favorability was driven primarily by
decreased severity in the overall book of business.
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Table of Contents
CNA Commercial
The favorable claim and allocated claim adjustment expense reserve development was primarily due to
favorable experience in general liability and property coverages including marine exposures,
partially offset by unfavorable experience in workers’ compensation (including excess workers’
compensation coverages) and large account business.
For general liability excluding construction defect, $259 million in favorable claim and allocated
claim adjustment expense reserve development was due to decreased frequency and severity of claims
across multiple accident years. The improvement was due to underwriting initiatives and favorable
outcomes on individual claims. Favorable development of $207 million associated with construction
defect exposures was due to lower severity resulting from various claim handling initiatives and
lower than expected frequency of claims, primarily in accident years 1999 and prior. Claim handling
initiatives have resulted in an increase in the number of claims closed without payment and
increased recoveries from other parties involved in the claims. The lower construction defect
frequency is due to underwriting initiatives designed to limit the exposure to future construction
defect claims. For property coverages including marine exposures, approximately $150 million of
favorable development was primarily the result of decreased frequency and severity in recent years.
The $150 million of favorable property and marine development includes approximately $47 million
due to favorable outcomes on claims relating to catastrophes, primarily in accident year 2005.
Approximately $30 million of favorable claim and allocated claim adjustment expense reserve
development was primarily due to decreased frequency and severity of claims in the Company’s excess
and surplus program covering facilities that provide services to developmentally disabled
individuals in accident years 2000 through 2004. Approximately $34 million of favorable claim and
allocated claim adjustment expense reserve development was primarily due to favorable incurred loss
emergence within CNA Commercial’s international programs in accident years 2006 and prior. This
favorability was driven primarily by decreased severity in the overall book of business. The
remaining favorable development was primarily the result of favorable experience across several
miscellaneous coverages in CNA Commercial.
Unfavorable development of $248 million for workers’ compensation was primarily the result of the
impact of claim cost inflation on lifetime medical and home health care claims in accident years
1999 and prior. The changes were driven by increased life expectancy due to advances in medical
care and increasing medical inflation. Unfavorable development of $161 million for large account
business was also driven primarily by workers’ compensation claim cost inflation primarily in
accident years 2001 and prior. Unfavorable development of $114 million on excess workers’
compensation was due to claims in accident years 2002 and prior. Increasing medical inflation,
increased life expectancy resulting from advances in medical care, and reviews of individual claims
have resulted in higher cost estimates of existing claims and a higher estimate of the number of
claims expected to reach excess layers.
In 2008, the amount due from policyholders related to losses under deductible policies within CNA
Commercial was reduced by $90 million for insolvent insureds. The reduction of this amount, which
was reflected as unfavorable net prior year reserve development, had no effect on 2008 results of
operations as the Company had previously recognized provisions in prior years. These impacts were
reported in Insurance claims and policyholders’ benefits in the 2008 Consolidated Statement of
Operations.
Corporate & Other Non-Core
The Company noted adverse development in various pollution accounts due to changes in liability
and/or coverage circumstances. These changes in turn increased the Company’s estimates for incurred
but not reported claims. As a result, the Company increased pollution reserves by $83 million in
2008.
The remainder of the unfavorable claim and allocated claim adjustment expense reserve development
was primarily related to commutations of ceded reinsurance arrangements. The unfavorable
development was substantially offset by a release of a previously established allowance for
uncollectible reinsurance.
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Table of Contents
2007 Net Prior Year Development
CNA Specialty
Approximately $39 million of unfavorable claim and allocated claim adjustment expense reserve
development was recorded for large law firm exposures. The change was due to increased severity
estimates on large claims in accident years 2005 and prior. The increase in severity was due to a
comprehensive case by case claim review for large law firm exposures, causing an overall increase
in estimated ultimate loss.
Approximately $15 million of favorable claim and allocated claims adjustment expense reserve
development was recorded in international specialty coverages. This favorable development was
recorded primarily due to decreased frequency and severity in accident years 2003 through 2006.
Approximately $37 million of favorable claim and allocated claim adjustment expense reserve
development was recorded on claims for healthcare facilities across several accident years. This
was primarily due to decreased severity on claims within the general liability exposures and
decreased incurred losses as a result of changes in individual claims reserve estimates.
Approximately $67 million of unfavorable claim and allocated claim adjustment expense reserve
development was recorded on claims for architects and engineers. This unfavorable development was
primarily due to large loss emergence in accident years 1999 through 2004.
Approximately $16 million of favorable claim and claim adjustment expense reserve development was
recorded due primarily to better than expected loss experience in the vehicle warranty coverages in
accident year 2006. The reserves for this business were initially estimated based on the loss
ratio expected for the business. Subsequent estimates rely more heavily on the actual case
incurred losses, which have been significantly lower than expected.
Approximately $24 million of favorable claim and claim adjustment expense reserve development was
related to surety business resulting from better than expected salvage and subrogation recoveries
from older accident years and a lack of emergence of large claims in more recent accident years.
CNA Commercial
Approximately $184 million of favorable claim and allocated claim adjustment expense reserve
development was due to decreased frequency and severity on claims within the general liability
exposures in accident years 2005 and prior, as well as lower frequency in accident years 1997 and
prior related to construction defect. Additionally, there was approximately $17 million of
favorable premium development resulting from audits on general liability policies.
Approximately $140 million of favorable claim and allocated claim adjustment expense reserve
development was due to decreased frequency and severity on claims related to property exposures,
primarily in accident years 2005 and 2006. Included in this favorable development is approximately
$39 million related to the 2005 hurricanes.
Approximately $44 million of favorable claim and allocated claims adjustment expense reserve
development was recorded in international commercial coverages. This favorable development was
recorded primarily due to decreased frequency and severity in accident years 2003 through 2006.
Approximately $16 million of favorable claim and allocated claim adjustment expense reserve
development was recorded in marine exposures, due primarily to decreased frequency in accident year
2006, and decreased severity in accident years 2005 and prior.
Approximately $16 million of unfavorable premium development was recorded related to the Company’s
participation in involuntary pools. This unfavorable development was partially offset by
approximately $9 million of favorable claim and allocated claim adjustment expense reserve
development.
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Table of Contents
Approximately $257 million of unfavorable claim and allocated claim adjustment expense reserve
development was recorded due to increased severity in workers’ compensation exposures, primarily on
large claims in accident years 2003 and prior, as a result of continued claim cost inflation in
older accident years, driven by increasing medical inflation and advances in medical care. This was
partially offset by approximately $12 million of favorable premium development.
Corporate & Other Non-Core
Approximately $9 million of unfavorable claim and allocated claim adjustment expense reserve
development was related to commutation activity, a portion of which was offset by a release of a
previously established allowance for uncollectible reinsurance.
Approximately $70 million of unfavorable claim and allocated claim adjustment expense reserve
development was recorded due to higher than anticipated litigation costs related to miscellaneous
chemical exposures, primarily in accident years 1997 and prior.
Note G. Legal Proceedings and Contingent Liabilities
Insurance Brokerage Antitrust Litigation
On August 1, 2005, CNAF and certain insurance subsidiaries were joined as defendants, along with
other insurers and brokers, in multidistrict litigation pending in the United States District Court
for the District of New Jersey,
In re Insurance Brokerage Antitrust Litigation
, Civil No.
04-5184 (FSH). The plaintiffs allege bid rigging and improprieties in the payment of contingent
commissions in connection with the sale of insurance that violated federal and state antitrust
laws, the federal Racketeer Influenced and Corrupt Organizations (RICO) Act and state common law.
After discovery, the District Court dismissed the federal antitrust claims and the RICO claims, and
declined to exercise supplemental jurisdiction over the state law claims. The plaintiffs have
appealed the dismissal of their complaint to the Third Circuit Court of Appeals. The parties have
filed their briefs on the appeal. Oral argument was held on April 21, 2009, and the Court took the
matter under advisement. The Company believes it has meritorious defenses to this action and
intends to defend the case vigorously.
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.
Asbestos and Environmental Pollution (A&E) Reserves
The Company is also a party to litigation and claims related to A&E cases arising in the ordinary
course of business. See Note F for further discussion.
Other Litigation
The Company is also a party to other litigation arising in the ordinary course of business. Based
on the facts and circumstances currently known, such other litigation will not, in the opinion of
management, materially affect the equity or results of operations of the Company.
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Note H. Reinsurance
The Company cedes insurance to reinsurers 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 its 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 the Company’s
retained amount varies by type of coverage. Reinsurance contracts are purchased to protect
specific lines of business such as property and workers’ compensation. Corporate catastrophe
reinsurance is also purchased for property and workers’ compensation exposure. Most reinsurance
contracts are purchased on an excess of loss basis. The Company also utilizes facultative
reinsurance in certain lines. In addition, the Company assumes reinsurance as a member of various
reinsurance pools and associations.
Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses, as
compared to deposit accounting, which requires cash flows to be reflected as assets and
liabilities. To qualify for reinsurance accounting, reinsurance agreements must include risk
transfer. To meet risk transfer requirements, a reinsurance contract must include both insurance
risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant
loss for the assuming entity.
The following table summarizes the amounts receivable from reinsurers at December 31, 2009 and
2008.
Components of Reinsurance Receivables
| December 31 | 2009 | 2008 | ||||||
| (In millions) | ||||||||
|
|
||||||||
|
Reinsurance receivables related to insurance reserves:
|
||||||||
|
Ceded claim and claim adjustment expenses
|
$ | 5,594 | $ | 6,288 | ||||
|
Ceded future policy benefits
|
859 | 903 | ||||||
|
Ceded policyholders’ funds
|
39 | 39 | ||||||
|
Reinsurance receivables related to paid losses
|
440 | 531 | ||||||
|
|
||||||||
|
Reinsurance receivables
|
6,932 | 7,761 | ||||||
|
Allowance for uncollectible reinsurance
|
(351 | ) | (366 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Reinsurance receivables, net of allowance for uncollectible reinsurance
|
$ | 6,581 | $ | 7,395 | ||||
|
|
||||||||
The Company has established an allowance for uncollectible reinsurance receivables. The
expense (release) for uncollectible reinsurance was $4 million, $(47) million and $1 million for
the years ended December 31, 2009, 2008 and 2007. Changes in the allowance for uncollectible
reinsurance receivables are presented as a component of Insurance claims and policyholders’
benefits on the Consolidated Statements of Operations.
The Company attempts to mitigate its credit risk related to reinsurance by entering into
reinsurance arrangements with reinsurers that have credit ratings above certain levels and by
obtaining collateral. The primary methods of obtaining collateral are through reinsurance trusts,
letters of credit and funds withheld balances. Such collateral was approximately $1.9 billion and
$2.1 billion at December 31, 2009 and 2008. On a more limited basis, the Company may enter into
reinsurance agreements with reinsurers that are not rated, primarily captive reinsurers.
The Company’s largest recoverables from a single reinsurer at December 31, 2009, including prepaid
reinsurance premiums, were approximately $1,350 million from subsidiaries of Swiss Re Group, $850
million from subsidiaries of Munich Re Group and $600 million from subsidiaries of the Hartford
Insurance Group.
114
Table of Contents
The effects of reinsurance on earned premiums and written premiums for the years ended December 31,
2009, 2008 and 2007 are shown in the following tables.
Components of Earned Premiums
| Assumed/ | ||||||||||||||||||||
| Direct | Assumed | Ceded | Net | Net % | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
2009 Earned Premiums
|
||||||||||||||||||||
|
Property and casualty
|
$ | 8,028 | $ | 67 | $ | 1,968 | $ | 6,127 | 1.1 | % | ||||||||||
|
Accident and health
|
550 | 51 | 7 | 594 | 8.6 | |||||||||||||||
|
Life
|
84 | - | 84 | - | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total earned premiums
|
$ | 8,662 | $ | 118 | $ | 2,059 | $ | 6,721 | 1.8 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2008 Earned Premiums
|
||||||||||||||||||||
|
Property and casualty
|
$ | 8,496 | $ | 164 | $ | 2,121 | $ | 6,539 | 2.5 | % | ||||||||||
|
Accident and health
|
593 | 46 | 28 | 611 | 7.5 | |||||||||||||||
|
Life
|
99 | - | 98 | 1 | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total earned premiums
|
$ | 9,188 | $ | 210 | $ | 2,247 | $ | 7,151 | 2.9 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2007 Earned Premiums
|
||||||||||||||||||||
|
Property and casualty
|
$ | 9,097 | $ | 118 | $ | 2,349 | $ | 6,866 | 1.7 | % | ||||||||||
|
Accident and health
|
660 | 76 | 119 | 617 | 12.3 | |||||||||||||||
|
Life
|
76 | - | 75 | 1 | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total earned premiums
|
$ | 9,833 | $ | 194 | $ | 2,543 | $ | 7,484 | 2.6 | % | ||||||||||
|
|
||||||||||||||||||||
|
Included in the direct and ceded earned premiums for the years ended December 31, 2009, 2008
and 2007 are $1,385 million, $1,326 million and $1,429 million related to business that is 100%
reinsured as a result of a significant captive program.
|
||||||||||||||||||||
|
Components of Written Premiums
|
||||||||||||||||||||
| Assumed/ | ||||||||||||||||||||
| Direct | Assumed | Ceded | Net | Net % | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
2009 Written Premiums
|
||||||||||||||||||||
|
Property and casualty
|
$ | 7,981 | $ | 66 | $ | 1,916 | $ | 6,131 | 1.1 | % | ||||||||||
|
Accident and health
|
539 | 50 | 6 | 583 | 8.6 | |||||||||||||||
|
Life
|
83 | - | 83 | - | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total written premiums
|
$ | 8,603 | $ | 116 | $ | 2,005 | $ | 6,714 | 1.7 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2008 Written Premiums
|
||||||||||||||||||||
|
Property and casualty
|
$ | 8,413 | $ | 182 | $ | 2,109 | $ | 6,486 | 2.8 | % | ||||||||||
|
Accident and health
|
572 | 51 | 18 | 605 | 8.4 | |||||||||||||||
|
Life
|
70 | - | 69 | 1 | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total written premiums
|
$ | 9,055 | $ | 233 | $ | 2,196 | $ | 7,092 | 3.3 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2007 Written Premiums
|
||||||||||||||||||||
|
Property and casualty
|
$ | 8,925 | $ | 123 | $ | 2,272 | $ | 6,776 | 1.8 | % | ||||||||||
|
Accident and health
|
646 | 75 | 113 | 608 | 12.3 | |||||||||||||||
|
Life
|
81 | - | 80 | 1 | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total written premiums
|
$ | 9,652 | $ | 198 | $ | 2,465 | $ | 7,385 | 2.7 | % | ||||||||||
|
|
||||||||||||||||||||
115
Table of Contents
Life and accident and health premiums are primarily from long duration contracts; property and
casualty premiums are primarily from short duration contracts.
Insurance claims and policyholders’ benefits reported on the Consolidated Statements of Operations
are net of reinsurance recoveries of $1,297 million, $1,781 million and $1,383 million for the
years ended December 31, 2009, 2008 and 2007, including $897 million, $893 million, and $542
million related to the significant captive program discussed above.
The impact of reinsurance on life insurance inforce at December 31, 2009, 2008 and 2007 is shown in
the following table.
Components of Life Insurance Inforce
| Direct | Assumed | Ceded | Net | |||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
2009
|
$ | 9,159 | $ | - | $ | 9,144 | $ | 15 | ||||||||
|
2008
|
$ | 10,805 | $ | - | $ | 10,790 | $ | 15 | ||||||||
|
2007
|
$ | 14,089 | $ | 1 | $ | 14,071 | $ | 19 | ||||||||
As of December 31, 2009 and 2008, the Company has ceded $1,409 million and $1,541 million of
claim and claim adjustment expense reserves, future policy benefits and policyholders’ funds as a
result of business operations sold in prior years. Subject to certain exceptions, the purchasers
assumed the credit risk of the sold business that was primarily reinsured to other carriers.
116
Table of Contents
Debt is composed of the following obligations.
| Debt | ||||||||
| December 31 | 2009 | 2008 | ||||||
| (In millions) | ||||||||
|
|
||||||||
|
Variable rate debt:
|
||||||||
|
Credit Facility – variable rate and term, due August 1, 2012
|
$ | 150 | $ | 250 | ||||
|
Debenture – CNA Surety, face amount of $31, due April 29, 2034
|
31 | 31 | ||||||
|
|
||||||||
|
Senior notes:
|
||||||||
|
6.000%, face amount of $400, due August 15, 2011
|
399 | 399 | ||||||
|
8.375%, face amount of $70, due August 15, 2012
|
69 | 69 | ||||||
|
5.850%, face amount of $549, due December 15, 2014
|
547 | 547 | ||||||
|
6.500%, face amount of $350, due August 15, 2016
|
347 | 348 | ||||||
|
6.950%, face amount of $150, due January 15, 2018
|
149 | 149 | ||||||
|
7.350%, face amount of $350, due November 15, 2019
|
347 | - | ||||||
|
Debenture, 7.250%, face amount of $243, due November 15, 2023
|
241 | 241 | ||||||
|
Other debt, 1.000%-6.530%, due through 2019
|
23 | 24 | ||||||
|
|
||||||||
|
|
||||||||
|
Total debt
|
$ | 2,303 | $ | 2,058 | ||||
|
|
||||||||
In November of 2009, the Company issued $350 million of 7.350% ten-year senior notes in a
public offering.
On August 1, 2007, the Company entered into a credit agreement with a syndicate of banks and other
lenders. The credit agreement established a $250 million senior unsecured revolving credit
facility which is intended to be used for general corporate purposes. Borrowings under the
revolving credit facility bear interest at the London Interbank Offered Rate (LIBOR) plus the
Company’s credit risk spread of 0.54%, which was equal to 0.79% at December 31, 2009.
Under the credit agreement, the Company is required to pay certain fees, including a facility fee
and a utilization fee, both of which would adjust automatically in the event of a change in the
Company’s financial ratings. The credit agreement includes covenants regarding maintenance of a
minimum consolidated net worth and a specified ratio of consolidated indebtedness to consolidated
total capitalization.
The Company’s remaining debt obligations contain customary covenants for investment grade insurers.
The Company is in compliance with all covenants as of December 31, 2009.
The combined aggregate maturities for debt at December 31, 2009 are presented in the following
table.
| Maturity of Debt | ||||
| (In millions) | ||||
|
|
||||
|
2010
|
$ | - | ||
|
2011
|
400 | |||
|
2012
|
220 | |||
|
2013
|
- | |||
|
2014
|
549 | |||
|
Thereafter
|
1,147 | |||
|
Less discount
|
(13 | ) | ||
|
|
||||
|
|
||||
|
Total
|
$ | 2,303 | ||
|
|
||||
117
Table of Contents
Note J. Benefit Plans
Pension and Postretirement Healthcare and Life Insurance Benefit Plans
CNA sponsors noncontributory pension plans, primarily through the CNA Retirement Plan, typically
covering full-time employees age 21 or over who have completed at least one year of service. In
2000, the CNA Retirement Plan was closed to new participants; instead, retirement benefits are
provided to these employees under the Company’s savings plans. While the terms of the pension
plans vary, benefits are generally based on years of credited service and the employee’s highest
60 consecutive months of compensation.
In 2000, approximately 60% of CCC’s eligible employees elected to forego earning additional
benefits in the 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. The 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.
CNA’s funding policy for defined benefit pension plans is to make contributions in accordance with
applicable governmental regulatory requirements with consideration of the funded status of the
plans.
CNA provides certain healthcare and life insurance benefits to eligible retired employees, their
covered dependents and their beneficiaries primarily through the CNA Retiree Health and Group
Benefits Plan. The funding for these plans is generally to pay covered expenses as they are
incurred.
118
Table of Contents
The following table provides a reconciliation of benefit obligations.
| Benefit Obligations and Accrued Benefit Costs | ||||||||||||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
Benefit obligation at January 1
|
$ | 2,529 | $ | 2,503 | $ | 150 | $ | 162 | ||||||||
|
Changes in benefit obligation:
|
||||||||||||||||
|
Service cost
|
17 | 20 | 1 | 1 | ||||||||||||
|
Interest cost
|
153 | 147 | 9 | 9 | ||||||||||||
|
Participants’ contributions
|
- | - | 7 | 7 | ||||||||||||
|
Plan amendments
|
- | 2 | - | - | ||||||||||||
|
Actuarial (gain) loss
|
153 | 27 | 5 | (10 | ) | |||||||||||
|
Benefits paid
|
(156 | ) | (149 | ) | (18 | ) | (19 | ) | ||||||||
|
Foreign currency translation and other
|
6 | (21 | ) | 1 | - | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Benefit obligations at December 31
|
2,702 | 2,529 | 155 | 150 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Fair value of plan assets at January 1
|
1,884 | 2,331 | - | - | ||||||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Actual return on plan assets
|
316 | (347 | ) | - | - | |||||||||||
|
Company contributions
|
67 | 71 | 11 | 12 | ||||||||||||
|
Participants’ contributions
|
- | - | 7 | 7 | ||||||||||||
|
Benefits paid
|
(156 | ) | (149 | ) | (18 | ) | (19 | ) | ||||||||
|
Foreign currency translation and other
|
6 | (22 | ) | - | - | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Fair value of plan assets at December 31
|
2,117 | 1,884 | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Funded status
|
$ | (585 | ) | $ | (645 | ) | $ | (155 | ) | $ | (150 | ) | ||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amounts recognized on the Consolidated Balance
Sheets at December 31:
|
||||||||||||||||
|
Other assets
|
$ | 2 | $ | 2 | $ | - | $ | - | ||||||||
|
Other liabilities
|
(587 | ) | (647 | ) | (155 | ) | (150 | ) | ||||||||
|
|
||||||||||||||||
|
Net amount recognized
|
$ | (585 | ) | $ | (645 | ) | $ | (155 | ) | $ | (150 | ) | ||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Amounts recognized in Accumulated other
comprehensive income,
not yet recognized in net periodic cost (benefit):
|
||||||||||||||||
|
Prior service credit
|
$ | (1 | ) | $ | (1 | ) | $ | (97 | ) | $ | (113 | ) | ||||
|
Net actuarial loss
|
748 | 792 | 32 | 27 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Net amount recognized
|
$ | 747 | $ | 791 | $ | (65 | ) | $ | (86 | ) | ||||||
|
|
||||||||||||||||
The accumulated benefit obligation for all defined benefit pension plans was $2,615 million
and $2,409 million at December 31, 2009 and 2008.
119
Table of Contents
The accumulated benefit obligation and fair value of plan assets for the pension and postretirement
plans with accumulated benefit obligations in excess of plan assets as of December 31, 2009 and
2008 are presented in the following table.
Pension and Postretirement Plans with Accumulated Benefit Obligation in Excess of Plan Assets
(In millions)
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| December 31 | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
|
||||||||||||||||
|
Accumulated benefit obligation
|
$ | 2,506 | $ | 2,324 | $ | 155 | $ | 150 | ||||||||
|
Fair value of plan assets
|
1,999 | 1,793 | - | - | ||||||||||||
The components of net periodic cost (benefit) are presented in the following table.
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Pension benefits
|
||||||||||||
|
Service cost
|
$ | 17 | $ | 20 | $ | 23 | ||||||
|
Interest cost on projected benefit obligation
|
153 | 147 | 145 | |||||||||
|
Expected return on plan assets
|
(145 | ) | (180 | ) | (174 | ) | ||||||
|
Prior service cost amortization
|
- | - | 2 | |||||||||
|
Actuarial loss amortization
|
25 | 4 | 11 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net periodic pension cost (benefit)
|
$ | 50 | $ | (9 | ) | $ | 7 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Postretirement benefits
|
||||||||||||
|
Service cost
|
$ | 1 | $ | 1 | $ | 2 | ||||||
|
Interest cost on projected benefit obligation
|
9 | 9 | 9 | |||||||||
|
Prior service cost amortization
|
(16 | ) | (16 | ) | (18 | ) | ||||||
|
Actuarial loss amortization
|
1 | 1 | 3 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net periodic postretirement benefit
|
$ | (5 | ) | $ | (5 | ) | $ | (4 | ) | |||
|
|
||||||||||||
The amounts recognized in Other comprehensive income are presented in the following table.
| Years ended December 31 | 2009 | 2008 | 2007 | ||||||||||
| (In millions) | |||||||||||||
|
|
|||||||||||||
|
Pension and postretirement benefits
|
|||||||||||||
|
Amounts arising during the period
|
$ | 13 | $ | (546 | ) | $ | 151 | ||||||
|
Reclassification adjustment relating to prior service cost
|
(16 | ) | (16 | ) | (16 | ) | |||||||
|
Reclassification adjustment relating to actuarial loss
|
26 | 5 | 14 | ||||||||||
|
|
|||||||||||||
|
|
|||||||||||||
|
Total increase (decrease) in Other comprehensive income
|
$ | 23 | $ | (557 | ) | $ | 149 | ||||||
|
|
|||||||||||||
The table below presents the estimated amounts to be recognized from Accumulated other
comprehensive income into net periodic cost (benefit) during 2010.
| Pension | Postretirement | |||||||
| (In millions) | Benefits | Benefits | ||||||
|
|
||||||||
|
Amortization of prior service cost
|
$ | - | $ | (15 | ) | |||
|
Amortization of actuarial loss
|
23 | 1 | ||||||
|
|
||||||||
|
|
||||||||
|
Total estimated amounts to be recognized
|
$ | 23 | $ | (14 | ) | |||
|
|
||||||||
120
Table of Contents
Actuarial assumptions used for the CNA Retirement Plan and CNA Retiree Health and Group
Benefits Plan to determine benefit obligations are set forth in the following table.
Actuarial Assumptions for Benefit Obligations
| December 31 | 2009 | 2008 | ||||||
|
|
||||||||
|
Pension benefits
|
||||||||
|
Discount rate
|
5.700 | % | 6.300 | % | ||||
|
Expected long term rate of return
|
8.000 | 8.000 | ||||||
|
Rate of compensation increases
|
5.030 | 5.830 | ||||||
|
|
||||||||
|
Postretirement benefits
|
||||||||
|
Discount rate
|
5.500 | % | 6.300 | % | ||||
Actuarial assumptions used for the CNA Retirement Plan and CNA Retiree Health and Group
Benefits Plan to determine net cost or benefit are set forth in the following table.
Actuarial Assumptions for Net Cost or Benefit
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Pension benefits
|
||||||||||||
|
Discount rate
|
6.300 | % | 6.000 | % | 5.750 | % | ||||||
|
Expected long term rate of return
|
8.000 | 8.000 | 8.000 | |||||||||
|
Rate of compensation increases
|
5.830 | 5.830 | 5.830 | |||||||||
|
|
||||||||||||
|
Postretirement benefits
|
||||||||||||
|
Discount rate
|
6.300 | % | 5.875 | % | 5.625 | % | ||||||
The expected long term rate of return is estimated annually based on factors including, but
not limited to, current and future financial market conditions, expected asset allocation,
diversification, risk premiums for each asset class, rebalancing the portfolio, funding strategies
and the expected forecast for inflation.
The CNA Retiree Health and Group Benefits Plan has limited its share of the health care trend rate
to a cost-of-living adjustment estimated to be 4% per year. For all participants, the plan subsidy
on health care costs will not increase by more than 4% per year. As a result, the assumed
healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation for
the CNA Retiree Health and Group Benefits Plan was 4% per year in 2009, 2008 and 2007.
The healthcare cost trend rate assumption has a significant effect on the amount of the benefit
obligation and periodic cost reported. An increase in the assumed healthcare cost trend rate of 1%
in each year would increase the Company’s accumulated postretirement benefit obligation by $4
million and would have no impact on the Company’s aggregate net periodic postretirement cost for
2009. A decrease in the assumed healthcare cost trend rate of 1% in each year would decrease the
Company’s accumulated postretirement benefit obligation as of December 31, 2009 by $7 million and
decrease the Company’s aggregate net periodic postretirement cost for 2009 by $1 million.
CNA employs a total return approach whereby a mix of equity and fixed maturity securities are used
to maximize the long term return of plan assets for a prudent level of risk and manage cash flows
according to plan requirements. The intent of this strategy is to minimize plan expenses
by outperforming plan liabilities over the long run. Risk tolerance is established through careful
consideration of the plan liabilities, plan funded status and corporate financial conditions. The
investment portfolio contains a diversified blend of fixed maturity, equity and short term
securities. Alternative investments, including limited partnerships, are used to enhance risk
adjusted long term returns while improving portfolio diversification. At December 31, 2009 the
Plan had committed approximately $57 million to future capital calls from various third-party
limited partnership investments in exchange for an ownership interest in the related partnerships.
Derivatives may be used to gain market exposure in an efficient and timely manner. Investment risk
is measured and monitored on an ongoing basis through annual liability measurements, periodic
asset/liability studies and quarterly investment portfolio reviews.
121
Table of Contents
Pension plan assets measured at fair value on a recurring basis are summarized below.
| Total assets at fair | ||||||||||||||||
| December 31, 2009 | Level 1 | Level 2 | Level 3 | value | ||||||||||||
| (In millions) | ||||||||||||||||
|
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Fixed maturity securities:
|
||||||||||||||||
|
Asset-backed securities
|
$ | - | $ | 208 | $ | 57 | $ | 265 | ||||||||
|
Corporate and other taxable bonds
|
17 | 352 | - | 369 | ||||||||||||
|
States, municipalities and political
subdivisions – tax-exempt securities
|
- | 10 | - | 10 | ||||||||||||
|
|
||||||||||||||||
|
Total fixed maturity securities
|
17 | 570 | 57 | 644 | ||||||||||||
|
|
||||||||||||||||
|
Equities
|
339 | 54 | 5 | 398 | ||||||||||||
|
Short term investments
|
202 | - | - | 202 | ||||||||||||
|
Limited partnerships
|
- | 466 | 396 | 862 | ||||||||||||
|
Derivatives
|
2 | - | - | 2 | ||||||||||||
|
|
||||||||||||||||
|
Investment contracts with insurance
company
|
- | - | 9 | 9 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 560 | $ | 1,090 | $ | 467 | $ | 2,117 | ||||||||
|
|
||||||||||||||||
Limited partnership investments consist primarily of hedge funds. The limited partnership
investments are recorded at fair value, which represents the plan’s share of the net asset value of
each partnership, as determined by the General Partner. Limited partnerships comprising 50% of the
total carrying value are reported on a current basis through December 31, 2009 with no reporting
lag, 45% are reported on a one month lag and the remainder are reported on more than a one month
lag. Level 2 includes limited partnership investments which can be redeemed at net asset value in
90 days or less. Level 3 includes limited partnership investments with withdrawal provisions
greater than 90 days, or for which withdrawals are not permitted. The classification of Level 2
limited partnership investments is based on updated accounting guidance effective December 31,
2009, which requires an evaluation of withdrawal provisions in the determination of a partnership’s
classification within the fair value hierarchy. Prior to the updated accounting guidance all
limited partnership investments were classified as Level 3 investments and the change resulted in a
transfer of $466 million on December 31, 2009.
The fair value of the guaranteed investment contracts is an estimate of the amount that would be
received in an orderly sale to a market participant at the measurement date. The amount the plan
would receive from the contract holder if the contracts were terminated is the primary input and is
unobservable. The guaranteed investment contracts are therefore classified as Level 3 investments.
For a discussion of the fair value levels and the valuation methodologies used to measure fixed
maturity securities, equities, derivatives and short term investments, see Note D.
122
Table of Contents
The table below presents a reconciliation for all pension plan assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the year ended December 31,
2009.
| Actual return | |||||||||||||||||||||||||
| Actual return | on assets sold | ||||||||||||||||||||||||
| on assets still | during the | ||||||||||||||||||||||||
| Balance at | held at | year ended | Purchases, | Balance at | |||||||||||||||||||||
| January 1, | December 31, | December 31, | sales, and | Net transfers in | December 31, | ||||||||||||||||||||
| Level 3 | 2009 | 2009 | 2009 | settlements | (out) of level 3 | 2009 | |||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Fixed maturity securities:
|
|||||||||||||||||||||||||
|
Asset-backed securities
|
$ | 54 | $ | - | $ | 9 | $ | (6 | ) | $ | - | $ | 57 | ||||||||||||
|
Equities
|
2 | - | - | 5 | (2 | ) | 5 | ||||||||||||||||||
|
Limited partnerships
|
628 | 169 | - | 65 | (466 | ) | 396 | ||||||||||||||||||
|
Investment contracts with
insurance company
|
8 | 1 | - | - | - | 9 | |||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Total
|
$ | 692 | $ | 170 | $ | 9 | $ | 64 | $ | (468 | ) | $ | 467 | ||||||||||||
|
|
|||||||||||||||||||||||||
The table below presents the estimated future minimum benefit payments to participants at
December 31, 2009.
Estimated Future Minimum Benefit Payments to Participants
| Pension | Postretirement | |||||||
| Benefits | Benefits | |||||||
| (In millions) | ||||||||
|
2010
|
$ | 170 | $ | 11 | ||||
|
2011
|
174 | 12 | ||||||
|
2012
|
176 | 12 | ||||||
|
2013
|
181 | 12 | ||||||
|
2014
|
185 | 12 | ||||||
|
2015-2019
|
983 | 61 | ||||||
In 2010, CNA expects to contribute $62 million to its pension plans and $11 million to its
postretirement healthcare and life insurance benefit plans.
Savings Plans
CNA sponsors savings plans, which are generally contributory plans that allow most employees to
contribute a maximum of 20% of their eligible compensation, subject to certain limitations
prescribed by the Internal Revenue Service. The Company contributes matching amounts to
participants, amounting to 70% of the first 6% (35% of the first 6% in the first year of
employment) of eligible compensation contributed by the employee. Employees vest in these
contributions ratably over five years.
The CNA Savings and Capital Accumulation Plan allows employees to make contributions to an
investment fund that is supported in part by an investment contract purchased from CAC. CAC will
not accept any further deposits under this contract. The contract value of the liability to the CNA
Savings and Capital Accumulation Plan is included in Separate account liabilities and
Policyholders’ funds on the Consolidated Balance Sheets. The contract value was $347 million and
$327 million at December 31, 2009 and 2008.
As noted above, during 2000, CCC employees were required to make a choice regarding their continued
participation in CNA’s defined benefit pension plan. Employees who elected to forego earning
additional benefits in the defined benefit pension plan and all employees hired by CCC on or after
January 1, 2000 receive a Company contribution of 3% or 5% of their eligible compensation,
depending on their age. 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 additional
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.
Employees vest in these contributions ratably over five years.
Benefit expense for the Company’s savings plans was $59 million, $54 million and $51 million for
the years ended December 31, 2009, 2008 and 2007.
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Table of Contents
Stock-Based Compensation
The CNAF Long Term Incentive Plan (the LTI Plan) authorizes the grant of stock-based compensation
to certain management personnel for up to 4 million shares of CNAF’s common stock. All CNAF
stock-based compensation vests ratably over the four-year service period following the grant. All
options and stock appreciation rights (SARs) granted have ten-year terms. The number of shares
available for the granting of stock-based compensation under the LTI Plan as of December 31, 2009
was approximately 0.8 million.
The Company recorded stock-based compensation expense related to the LTI plan of $3 million, $5
million and $3 million for the years ended December 31, 2009, 2008 and 2007. The related income
tax benefit recognized was $1 million, $2 million and $1 million. The compensation cost related to
nonvested awards not yet recognized was $6 million, and the weighted average period over which it
is expected to be recognized is 2.70 years at December 31, 2009.
Equity based compensation that is not fully vested prior to termination is generally forfeited upon
termination, except as otherwise provided by contractual obligations. In addition, any such
compensation that vested prior to termination is generally cancelled immediately, except in cases
of retirement, death or disability, and as otherwise provided by contractual obligations.
The following table presents activity for options and SARs under the LTI Plan in 2009. The numbers
presented for awards granted and awards cancelled include 88 thousand awards which were modified in
2009.
Options and SARs Plan Activity
| 2009 | ||||||||
| Number | Weight-Average | |||||||
| of Awards | Option Price per Award | |||||||
|
|
||||||||
|
Balance at January 1
|
1,763,550 | $ | 31.43 | |||||
|
Awards granted
|
526,100 | 16.31 | ||||||
|
Awards exercised
|
- | - | ||||||
|
Awards forfeited, cancelled or expired
|
(386,950 | ) | 28.95 | |||||
|
|
||||||||
|
|
||||||||
|
Balance at December 31
|
1,902,700 | $ | 27.76 | |||||
|
|
||||||||
For the options and SARs presented in the table above, the following table presents
information on those outstanding which are fully vested and expected to vest and, of those, which
are exercisable at December 31, 2009.
Options and SARs Plan Activity
| December 31, 2009 | Awards | Awards | ||||||
| outstanding | exercisable | |||||||
|
|
||||||||
|
|
||||||||
|
Number of shares
|
1,796,268 | 1,254,300 | ||||||
|
Weighted-average exercise prices
|
$ 28.33 | $ 30.63 | ||||||
|
Aggregated intrinsic value
|
$ 3 million | $ - | ||||||
|
Weighted-average remaining contractual term
|
4.64 years | 3.37 years | ||||||
The following table presents weighted-average grant-date fair value for awards granted, total
intrinsic value for awards exercised and total fair value for awards vested for the years ended
December 31, 2009, 2008 and 2007.
Options and SARs Plan Activity
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Weighted-average grant-date fair value
|
$ | 4.69 | $ | 5.45 | $ | 13.83 | ||||||
|
Total intrinsic value of awards exercised
|
$ | - | $ | 10 thousand | $ | 7 million | ||||||
|
Fair value of awards vested
|
$ | 4 million | $ | 3 million | $ | 2 million | ||||||
The fair value of granted options and SARs was estimated at the grant date using the
Black-Scholes option-pricing model. The Black-Scholes model incorporates a risk free rate of
return and various assumptions
124
Table of Contents
regarding the underlying common stock and the expected life of the securities granted. Different
interest rates and assumptions were used for each grant, as appropriate at that date. The
following table presents the significant assumptions used to estimate the fair value of granted
options and SARs for the years ended December 31, 2009, 2008 and 2007.
Options and SARs Plan Activity
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Weighted average expected life of the securities granted
|
4.84 years | 4.54 years | 6.25 years | |||||||||
|
Estimates of the underlying common stock’s volatility
|
39.95% | 24.82% | 20.75% | |||||||||
|
Expected dividend yield
|
0.0% | 1.4% | 0.0% | |||||||||
|
Risk free interest rate
|
2.0% | 2.8% | 4.7% | |||||||||
The following table presents activity for restricted stock and restricted stock units under
the LTI Plan in 2009.
Restricted Stock Activity
| 2009 | ||||||||
| Weighted- | ||||||||
| Average | ||||||||
| Number | Grant-date | |||||||
| of Awards | Fair value | |||||||
|
|
||||||||
|
Balance at January 1
|
6,665 | $ | 33.76 | |||||
|
Awards granted
|
338,624 | 13.43 | ||||||
|
Awards vested
|
(3,332 | ) | 33.76 | |||||
|
Awards forfeited, cancelled or expired
|
- | - | ||||||
|
|
||||||||
|
|
||||||||
|
Balance at December 31
|
341,957 | $ | 13.63 | |||||
|
|
||||||||
125
Table of Contents
Note K. Operating Leases, Commitments and Contingencies, and Guarantees
Operating Leases
The Company occupies office facilities under lease agreements that expire at various dates. In
addition, data processing, office and transportation equipment is leased under agreements that
expire at various dates. Most leases contain renewal options that provide for rent increases based
on prevailing market conditions. Lease expense for the years ended December 31, 2009, 2008 and
2007 was $51 million, $52 million and $52 million. Sublease revenues for the years ended
December 31, 2009, 2008 and 2007 were $4 million, $4 million and $4 million.
The table below presents the future minimum lease payments to be made under non-cancelable
operating leases along with future minimum sublease receipts to be received on owned and leased
properties at December 31, 2009.
Future Minimum Lease Payments and Sublease Receipts
| Future | Future | |||||||
| Minimum | Minimum | |||||||
| Lease | Sublease | |||||||
| Payments | Receipts | |||||||
| (In millions) | ||||||||
|
2010
|
$ | 39 | $ | 3 | ||||
|
2011
|
35 | 3 | ||||||
|
2012
|
31 | 3 | ||||||
|
2013
|
27 | 2 | ||||||
|
2014
|
15 | - | ||||||
|
Thereafter
|
26 | - | ||||||
|
|
||||||||
|
|
||||||||
|
Total
|
$ | 173 | $ | 11 | ||||
|
|
||||||||
Commitments and Contingencies
The Company holds an investment in a real estate joint venture. In the normal course of business,
the Company, on a joint and several basis with other unrelated insurance company shareholders, has
committed to continue funding the operating deficits of this joint venture. Additionally, the
Company 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 Company does not believe it is
likely that it will be required to do so. However, the maximum potential future lease payments at
December 31, 2009 that the Company could be required to pay under this guarantee are approximately
$129 million. If the Company were required to assume the entire lease obligation, the Company
would have the right to pursue reimbursement from the other shareholders and the right to all
sublease revenues.
The Company has entered into a limited number of guaranteed payment contracts, primarily relating
to software and telecommunication services, amounting to approximately $8 million at December 31,
2009. Estimated future minimum payments under these contracts are $5 million and $3 million for
the years ended December 31, 2010 and 2011.
Guarantees
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,
126
Table of Contents
2009, the aggregate amount of quantifiable indemnification agreements in effect for sales of
business entities, assets and third party loans was $819 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, 2009, the Company had outstanding unlimited
indemnifications in connection with the sales of certain of its business entities or assets that
included 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.
As of December 31, 2009 and 2008, the Company has recorded liabilities of approximately $16 million
and $22 million related to indemnification agreements and management believes that it is not likely
that any future indemnity claims will be significantly greater than the amounts recorded.
127
Table of Contents
Note L. Stockholders’ Equity and Statutory Accounting Practices
2008 Senior Preferred
In the fourth quarter of 2008, the Company issued, and Loews purchased, 12,500 shares of CNAF
non-voting cumulative senior preferred stock (2008 Senior Preferred) for $1.25 billion. In the
fourth quarter of 2009, the Company redeemed $250 million of the 2008 Senior Preferred at the issue
price plus accrued dividends, using a portion of the proceeds from the issuance of $350 million of
7.350% ten-year senior notes, leaving $1.0 billion of the 2008 Senior Preferred outstanding as of
December 31, 2009. Dividends of $122 million and $19 million on the 2008 Senior Preferred were
declared and paid for the years ended December 31, 2009 and 2008.
The terms of the 2008 Senior Preferred were approved by a special review committee of independent
members of CNAF’s Board of Directors. The principal terms of the 2008 Senior Preferred are as
follows:
| • |
The 2008 Senior Preferred is perpetual and is senior to CNAF’s common stock and any
future preferred 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 or any future preferred stock until
the 2008 Senior Preferred has been paid in full. Accordingly, the Company suspended
common stock dividend payments.
|
||
| • |
The 2008 Senior Preferred is not convertible into any other securities and may only be
redeemed upon the mutual agreement of the Company and Loews.
|
||
| • |
The 2008 Senior Preferred accrues cumulative dividends at an initial rate of 10% per
year. On the fifth anniversary of the issuance and every five years thereafter, the
dividend rate will reset to the higher of 10% or the then current 10-year U.S. Treasury
yield plus 700 basis points.
|
||
| • |
Dividends are payable quarterly and any dividends not paid when due will be compounded
quarterly.
|
CNAF used the majority of the proceeds from the 2008 Senior Preferred to increase the statutory
surplus of its principal insurance subsidiary, CCC, through the purchase of a $1.0 billion surplus
note of CCC. 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. Surplus notes are treated as capital under statutory accounting. All payments of interest
and principal on this note are subject to the prior approval of the Illinois Department of
Financial and Professional Regulation - Division of Insurance (the Department). The surplus note
of CCC has a term of 30 years and accrues interest at a rate of 10% per year. Interest on the note
is payable quarterly.
Additionally, in December 2008, CNAF contributed $500 million to CCC, consisting of cash of $2
million and short term investments of $498 million.
Common Stock Dividends
No common stock dividends were declared or paid in 2009. Dividends of $0.45 and $0.35 per common
share were declared and paid in 2008 and 2007.
Share Repurchases
CNA’s Board of Directors has approved a Share Repurchase Program to purchase, in the open market or
through privately negotiated transactions, its outstanding common stock, as Company management
deems appropriate. In the first quarter of 2008, the Company repurchased a total of 2,649,621
shares at an average price of $26.53 (including commission) per share. Under the terms of the 2008
Senior Preferred, common stock repurchases are prohibited as long as the 2008 Senior Preferred is
outstanding. No shares of common stock were purchased during 2009 or 2007.
Statutory Accounting Practices (Unaudited)
CNAF’s domestic insurance subsidiaries maintain their accounts in conformity with accounting
practices prescribed or permitted by insurance regulatory authorities, which vary in certain
respects from GAAP. In converting from statutory accounting principles to GAAP, the more
significant adjustments include deferral of policy acquisition costs and the inclusion of net
unrealized holding gains or losses in stockholders’ equity relating to certain fixed maturity
securities.
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Table of Contents
CNAF’s insurance subsidiaries are domiciled in various jurisdictions. These subsidiaries prepare
statutory financial statements in accordance with accounting practices prescribed or permitted by
the respective jurisdictions’ insurance regulators. Prescribed statutory accounting practices are
set forth in a variety of publications of the National Association of Insurance Commissioners
(NAIC) as well as state laws, regulations and general administrative rules.
At December 31, 2009, CCC follows a permitted practice related to the statutory provision for
reinsurance, or the uncollectible reinsurance reserve. This permitted practice allows CCC to
record an additional uncollectible reinsurance reserve amount through a different financial
statement line item than the prescribed statutory convention. This permitted practice had no
effect on CCC’s statutory surplus at December 31, 2009.
In December 2009, the NAIC modified the prescribed statutory accounting guidance allowing a greater
portion of deferred tax assets to be admitted. This newly prescribed guidance resulted in an
approximate $623 million increase in the combined statutory surplus of CCC and its subsidiaries at
December 31, 2009 as compared to the amount which would have resulted using the previously
prescribed accounting guidance. CCC had previously been granted a permitted practice for the
reporting periods ending December 31, 2008 through September 30, 2009. This permitted practice
allowed CCC to admit a greater portion of its deferred tax assets than what was allowed under the
prescribed accounting guidance. This permitted practice resulted in an approximate $700 million
increase in CCC’s statutory surplus at December 31, 2008.
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 subject to the insurance holding company laws of the State of Illinois, the
domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require
prior approval by the Illinois Department of Insurance (the Department), may be paid only from
earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of
December 31, 2009, CCC is in a positive earned surplus position, enabling CCC to pay approximately
$934 million of dividend payments during 2010 that would not be subject to the Department’s prior
approval. The actual level of dividends paid in any year is determined after an assessment of
available dividend capacity, holding company liquidity and cash needs as well as the impact the
dividends will have on the statutory surplus of the applicable insurance company.
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, 2009 and 2008, all of CNAF’s domestic
insurance subsidiaries exceeded the minimum risk-based capital requirements.
Subsidiaries with insurance operations outside the United States are also subject to regulation in
the countries in which they operate. We have operations in the United Kingdom, Canada and other
countries. Our foreign subsidiaries met or exceeded regulatory capital requirements.
129
Table of Contents
Combined statutory capital and surplus and net income (loss), determined in accordance with
accounting practices prescribed or permitted by insurance regulatory authorities for the Combined
Continental Casualty Companies and the life company, were as follows.
Statutory Information
| Statutory Capital and Surplus | Statutory Net Income (Loss) | |||||||||||||||||||
| December 31 | Years Ended December 31 | |||||||||||||||||||
| 2009 (b) | 2008 | 2009 (b) | 2008 | 2007 | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Combined Continental
Casualty
Companies (a) |
$ | 9,338 | $ | 7,819 | $ | 17 | $ | (172 | ) | $ | 485 | |||||||||
|
Life company
|
448 | 487 | (65 | ) | (51 | ) | 27 | |||||||||||||
| (a) |
|
Represents the combined statutory surplus of CCC and its subsidiaries, including the Life
company.
|
|
|
||
| (b) |
|
Preliminary.
|
130
Table of Contents
Note M. Accumulated Other Comprehensive Income (Loss)
The following table displays the components of AOCI included in the Consolidated Balance Sheets.
Accumulated Other Comprehensive Income (Loss)
| December 31 | 2009 | 2008 | ||||||||||||||
| (In millions) | ||||||||||||||||
| Tax | After-Tax | Tax | After-Tax | |||||||||||||
|
Cumulative foreign currency translation adjustment
|
$ | - | $ | 87 | $ | - | $ | (30 | ) | |||||||
|
Net pension and postretirement benefit plans
|
238 | (444 | ) | 246 | (459 | ) | ||||||||||
|
Net
unrealized gains (losses) on investments with OTTI losses
|
86 | (159 | ) | - | - | |||||||||||
|
Net unrealized gains (losses) on other investments
|
(76 | ) | 198 | 1,918 | (3,454 | ) | ||||||||||
|
|
||||||||||||||||
|
Accumulated other comprehensive (income) loss
attributable to noncontrolling interests
|
- | (7 | ) | - | 19 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Accumulated other comprehensive loss
|
$ | 248 | $ | (325 | ) | $ | 2,164 | $ | (3,924 | ) | ||||||
|
|
||||||||||||||||
The amount of net unrealized losses on available-for-sale securities with OTTI losses
reclassified out of AOCI and recognized in earnings was $(146) million pretax with related tax
benefit of $51 million for the year ended December 31, 2009. The amount of net unrealized gains
(losses) on other available-for-sale securities reclassified out of AOCI and recognized in earnings
was $(768) million, $(46) million, and $246 million pretax for the years ended December 31, 2009,
2008, and 2007, with related tax (expense) benefit of $269 million, $16 million and $(87) million.
131
Table of Contents
Note N. Business Segments
As a result of the realignment of management responsibilities, the Company revised its property and
casualty segments in the fourth quarter of 2009. There was no change in the Company’s Life & Group
Non-Core and Corporate & Other Non-Core segments. Prior period segment disclosures have been
conformed to the current year presentation. The new segment structure reflects the way management
currently reviews results and makes business decisions.
The Company’s core property and casualty commercial insurance operations are reported in two
business segments: CNA Specialty and CNA Commercial. CNA Specialty provides a broad array of
professional, financial and specialty property and casualty products and services, primarily
through insurance brokers and managing general underwriters. CNA Commercial includes property and
casualty coverages sold to small businesses and middle market entities and organizations primarily
through an independent agency distribution system. CNA Commercial also includes commercial
insurance and risk management products sold to large corporations primarily through insurance
brokers. Previously, the Company’s international operations were treated as a separate business
unit within CNA Specialty. The products sold through the Company’s international operations are
now reflected within CNA Specialty and CNA Commercial in a manner that aligns with the products
within each segment. Additionally, the Company’s excess and surplus lines, which were previously
included in CNA Specialty, are now included in CNA Commercial, as part of CNA Select Risk.
The Company’s non-core operations are managed in two segments: Life & Group Non-Core and Corporate
& Other Non-Core. Life & Group Non-Core primarily includes the results of the life and group lines
of business that are in run-off. Corporate & Other Non-Core primarily includes certain corporate
expenses, including interest on corporate debt, and the results of certain property and casualty
business primarily in run-off, including CNA Re. This segment also includes the results related to
the centralized adjusting and settlement of A&E.
The accounting policies of the segments are the same as those described in Note A. The Company
manages most of its assets on a legal entity basis, while segment operations are conducted across
legal entities. As such, only insurance and reinsurance receivables, insurance reserves and
deferred acquisition costs are readily identifiable by individual segment. Distinct investment
portfolios are not maintained for each segment; accordingly, allocation of assets to each segment
is not performed. Therefore, net investment income and realized investment gains or losses are
allocated primarily based on each segment’s net carried insurance reserves, as adjusted. All
significant intrasegment income and expense has been eliminated. Income taxes have been allocated
on the basis of the taxable income of the segments.
Approximately 7.0%, 7.4% and 6.9% of the Company’s direct written premiums were derived from
outside the United States for the years ended December 31, 2009, 2008 and 2007. Direct written
premiums from any individual foreign country were not significant.
In the following tables, certain financial measures are presented to provide information used by
management to monitor the Company’s operating performance. Management utilizes these financial
measures to monitor the Company’s insurance operations and investment portfolio. Net operating
income, which is derived from certain income statement amounts, is used by management to monitor
performance of the Company’s insurance operations. The Company’s investment portfolio is monitored
through analysis of various quantitative and qualitative factors and certain decisions related to
the sale or impairment of investments that produce realized gains and losses.
Net operating income (loss) is calculated by excluding from net income (loss) attributable to CNA
the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from
discontinued operations and 3) any cumulative effects of changes in accounting guidance. The
calculation of net operating income excludes net realized investment gains or losses because net
realized investment gains or losses are largely discretionary, except for losses related to OTTI,
and are generally driven by economic factors that are not necessarily consistent with key drivers
of underwriting performance, and are therefore not considered an indication of trends in insurance
operations.
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.
132
Table of Contents
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.
The significant components of the Company’s continuing operations and selected balance sheet items
are presented in the following tables.
133
Table of Contents
| CNA | CNA | Life & Group | Corporate & Other | |||||||||||||||||||||
| Year ended December 31, 2009 | Specialty | Commercial | Non-Core | Non-Core | Eliminations | Total | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net written premiums (a)
|
$ | 2,684 | $ | 3,448 | $ | 583 | $ | 1 | $ | (3 | ) | $ | 6,713 | |||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Net earned premiums
|
$ | 2,697 | $ | 3,432 | $ | 595 | $ | - | $ | (3 | ) | $ | 6,721 | |||||||||||
|
Net investment income
|
526 | 922 | 664 | 208 | - | 2,320 | ||||||||||||||||||
|
Other revenues
|
206 | 61 | 11 | 10 | - | 288 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total operating revenues
|
3,429 | 4,415 | 1,270 | 218 | (3 | ) | 9,329 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Claims, benefits and expenses
|
||||||||||||||||||||||||
|
Net incurred claims and benefits
|
1,536 | 2,388 | 1,084 | 259 | - | 5,267 | ||||||||||||||||||
|
Policyholders’ dividends
|
9 | 9 | 5 | - | - | 23 | ||||||||||||||||||
|
Amortization of deferred acquisition costs
|
624 | 775 | 18 | - | - | 1,417 | ||||||||||||||||||
|
Other insurance related expenses
|
163 | 435 | 183 | 3 | (3 | ) | 781 | |||||||||||||||||
|
Other expenses
|
179 | 77 | 69 | 119 | - | 444 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total claims, benefits and expenses
|
2,511 | 3,684 | 1,359 | 381 | (3 | ) | 7,932 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss) from continuing operations
before income tax
|
918 | 731 | (89 | ) | (163 | ) | - | 1,397 | ||||||||||||||||
|
Income tax (expense) benefit on operating income (loss)
|
(282 | ) | (208 | ) | 73 | 64 | - | (353 | ) | |||||||||||||||
|
Net operating income, after-tax, attributable to
noncontrolling interests
|
(45 | ) | (17 | ) | - | - | - | (62 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net operating income (loss) from continuing operations
attributable to CNA
|
591 | 506 | (16 | ) | (99 | ) | - | 982 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net realized investment losses, net of participating
policyholders’ interests
|
(186 | ) | (354 | ) | (235 | ) | (82 | ) | - | (857 | ) | |||||||||||||
|
Income tax benefit on net realized investment losses
|
64 | 121 | 82 | 29 | - | 296 | ||||||||||||||||||
|
Net realized investment (gains) losses, after-tax,
attributable to noncontrolling interests
|
(1 | ) | 1 | - | - | - | - | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net realized investment losses attributable to CNA
|
(123 | ) | (232 | ) | (153 | ) | (53 | ) | - | (561 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
attributable to CNA
|
$ | 468 | $ | 274 | $ | (169 | ) | $ | (152 | ) | $ | - | $ | 421 | ||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| (a) Net written premiums relate to business in property and casualty companies only. | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||
|
(In millions)
|
||||||||||||||||||||||||
|
Reinsurance receivables
|
$ | 1,077 | $ | 2,234 | $ | 1,744 | $ | 1,877 | $ | - | $ | 6,932 | ||||||||||||
|
Insurance receivables
|
$ | 613 | $ | 1,234 | $ | 9 | $ | 2 | $ | - | $ | 1,858 | ||||||||||||
|
Deferred acquisition costs
|
$ | 318 | $ | 336 | $ | 454 | $ | - | $ | - | $ | 1,108 | ||||||||||||
|
Insurance reserves
|
||||||||||||||||||||||||
|
Claim and claim adjustment expenses
|
$ | 6,922 | $ | 13,005 | $ | 2,883 | $ | 4,006 | $ | - | $ | 26,816 | ||||||||||||
|
Unearned premiums
|
1,528 | 1,603 | 140 | 3 | - | 3,274 | ||||||||||||||||||
|
Future policy benefits
|
- | - | 7,981 | - | - | 7,981 | ||||||||||||||||||
|
Policyholders’ funds
|
11 | 11 | 170 | - | - | 192 | ||||||||||||||||||
134
Table of Contents
| CNA | CNA | Life & Group | Corporate & Other | |||||||||||||||||||||
| Year ended December 31, 2008 | Specialty | Commercial | Non-Core | Non-Core | Eliminations | Total | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net written premiums (a)
|
$ | 2,719 | $ | 3,770 | $ | 604 | $ | 1 | $ | (4 | ) | $ | 7,090 | |||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Net earned premiums
|
$ | 2,755 | $ | 3,787 | $ | 612 | $ | 1 | $ | (4 | ) | $ | 7,151 | |||||||||||
|
Net investment income
|
354 | 603 | 484 | 178 | - | 1,619 | ||||||||||||||||||
|
Other revenues
|
219 | 65 | 28 | 14 | - | 326 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total operating revenues
|
3,328 | 4,455 | 1,124 | 193 | (4 | ) | 9,096 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Claims, benefits and expenses
|
||||||||||||||||||||||||
|
Net incurred claims and benefits
|
1,700 | 2,766 | 1,104 | 133 | - | 5,703 | ||||||||||||||||||
|
Policyholders’ dividends
|
13 | 1 | 6 | - | - | 20 | ||||||||||||||||||
|
Amortization of deferred acquisition costs
|
618 | 836 | 13 | - | - | 1,467 | ||||||||||||||||||
|
Other insurance related expenses
|
137 | 343 | 201 | 17 | (4 | ) | 694 | |||||||||||||||||
|
Other expenses
|
198 | 105 | 24 | 150 | - | 477 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total claims, benefits and expenses
|
2,666 | 4,051 | 1,348 | 300 | (4 | ) | 8,361 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss) from continuing operations
before income tax
|
662 | 404 | (224 | ) | (107 | ) | - | 735 | ||||||||||||||||
|
Income tax (expense) benefit on operating income (loss)
|
(205 | ) | (101 | ) | 116 | 45 | - | (145 | ) | |||||||||||||||
|
Net operating income, after-tax, attributable to
noncontrolling interests
|
(43 | ) | (14 | ) | - | - | - | (57 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net operating income (loss) from continuing operations
attributable to CNA
|
414 | 289 | (108 | ) | (62 | ) | - | 533 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net realized investment losses, net of participating
policyholders’ interests
|
(257 | ) | (518 | ) | (363 | ) | (159 | ) | - | (1,297 | ) | |||||||||||||
|
Income tax benefit on net realized investment losses
|
90 | 183 | 127 | 56 | - | 456 | ||||||||||||||||||
|
Net realized investment (gains) losses, after-tax,
attributable to noncontrolling interests
|
- | - | - | - | - | - | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net realized investment losses attributable to CNA
|
(167 | ) | (335 | ) | (236 | ) | (103 | ) | - | (841 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
attributable to CNA
|
$ | 247 | $ | (46 | ) | $ | (344 | ) | $ | (165 | ) | $ | - | $ | (308 | ) | ||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| (a) Net written premiums relate to business in property and casualty companies only. | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008
|
||||||||||||||||||||||||
|
(In millions)
|
||||||||||||||||||||||||
|
Reinsurance receivables
|
$ | 1,234 | $ | 2,528 | $ | 1,907 | $ | 2,092 | $ | - | $ | 7,761 | ||||||||||||
|
Insurance receivables
|
$ | 603 | $ | 1,426 | $ | 6 | $ | 4 | $ | - | $ | 2,039 | ||||||||||||
|
Deferred acquisition costs
|
$ | 308 | $ | 345 | $ | 472 | $ | - | $ | - | $ | 1,125 | ||||||||||||
|
Insurance reserves
|
||||||||||||||||||||||||
|
Claim and claim adjustment expenses
|
$ | 6,721 | $ | 13,609 | $ | 2,862 | $ | 4,401 | $ | - | $ | 27,593 | ||||||||||||
|
Unearned premiums
|
1,552 | 1,697 | 152 | 5 | - | 3,406 | ||||||||||||||||||
|
Future policy benefits
|
- | - | 7,529 | - | - | 7,529 | ||||||||||||||||||
|
Policyholders’ funds
|
9 | 15 | 219 | - | - | 243 | ||||||||||||||||||
135
Table of Contents
| CNA | CNA | Life & Group | Corporate & Other | |||||||||||||||||||||
| Year ended December 31, 2007 | Specialty | Commercial | Non-Core | Non-Core | Eliminations | Total | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net written premiums (a)
|
$ | 2,766 | $ | 4,007 | $ | 607 | $ | 6 | $ | (4 | ) | $ | 7,382 | |||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Net earned premiums
|
$ | 2,759 | $ | 4,104 | $ | 618 | $ | 7 | $ | (4 | ) | $ | 7,484 | |||||||||||
|
Net investment income
|
493 | 1,006 | 622 | 312 | - | 2,433 | ||||||||||||||||||
|
Other revenues
|
186 | 49 | 36 | 8 | - | 279 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total operating revenues
|
3,438 | 5,159 | 1,276 | 327 | (4 | ) | 10,196 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Claims, benefits and expenses
|
||||||||||||||||||||||||
|
Net incurred claims and benefits
|
1,725 | 2,741 | 1,312 | 217 | - | 5,995 | ||||||||||||||||||
|
Policyholders’ dividends
|
6 | 7 | 1 | - | - | 14 | ||||||||||||||||||
|
Amortization of deferred acquisition costs
|
600 | 905 | 15 | - | - | 1,520 | ||||||||||||||||||
|
Other insurance related expenses
|
112 | 413 | 199 | 13 | (4 | ) | 733 | |||||||||||||||||
|
Other expenses
|
168 | 60 | 43 | 130 | - | 401 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total claims, benefits and expenses
|
2,611 | 4,126 | 1,570 | 360 | (4 | ) | 8,663 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss) from continuing operations
before income tax
|
827 | 1,033 | (294 | ) | (33 | ) | - | 1,533 | ||||||||||||||||
|
Income tax (expense) benefit on operating income (loss)
|
(268 | ) | (324 | ) | 135 | 32 | - | (425 | ) | |||||||||||||||
|
Net operating income, after-tax, attributable to
noncontrolling interests
|
(35 | ) | (12 | ) | - | (1 | ) | - | (48 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net operating income (loss) from continuing operations
attributable to CNA
|
524 | 697 | (159 | ) | (2 | ) | - | 1,060 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net realized investment losses, net of participating
policyholders’ interests
|
(70 | ) | (160 | ) | (56 | ) | (25 | ) | - | (311 | ) | |||||||||||||
|
Income tax benefit on net realized investment losses
|
25 | 55 | 20 | 8 | - | 108 | ||||||||||||||||||
|
Net realized investment (gains) losses, after-tax,
attributable to noncontrolling interests
|
- | - | - | - | - | - | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net realized investment losses attributable to CNA
|
(45 | ) | (105 | ) | (36 | ) | (17 | ) | - | (203 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
attributable to CNA
|
$ | 479 | $ | 592 | $ | (195 | ) | $ | (19 | ) | $ | - | $ | 857 | ||||||||||
|
|
||||||||||||||||||||||||
| (a) | Net written premiums relate to business in property and casualty companies only. |
136
Table of Contents
The following table provides revenue by line of business for each reportable segment.
Revenues are comprised of operating revenues and realized investment gains and losses, net of
participating policyholders’ interests.
| Revenues by Line of Business | ||||||||||||
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
CNA Specialty
|
||||||||||||
|
Professional & Management Liability
|
$ | 2,339 | $ | 2,140 | $ | 2,462 | ||||||
|
International
|
171 | 163 | 145 | |||||||||
|
Surety
|
474 | 479 | 468 | |||||||||
|
Warranty and Alternative Risks
|
259 | 289 | 293 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
CNA Specialty revenues
|
3,243 | 3,071 | 3,368 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
CNA Commercial
|
||||||||||||
|
Commercial Insurance
|
2,685 | 2,520 | 3,464 | |||||||||
|
Business Insurance
|
549 | 573 | 628 | |||||||||
|
International
|
617 | 665 | 637 | |||||||||
|
CNA Select Risk
|
210 | 179 | 270 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
CNA Commercial revenues
|
4,061 | 3,937 | 4,999 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Life & Group Non-Core
|
||||||||||||
|
Life & Annuity
|
211 | 40 | 257 | |||||||||
|
Health
|
811 | 688 | 911 | |||||||||
|
Other
|
13 | 33 | 52 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Life & Group Non-Core revenues
|
1,035 | 761 | 1,220 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Corporate & Other Non-Core
|
||||||||||||
|
CNA Re
|
39 | 14 | 119 | |||||||||
|
Other
|
97 | 20 | 183 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Corporate & Other Non-Core revenues
|
136 | 34 | 302 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Eliminations
|
(3 | ) | (4 | ) | (4 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total revenues
|
$ | 8,472 | $ | 7,799 | $ | 9,885 | ||||||
|
|
||||||||||||
137
Table of Contents
Note O. Discontinued Operations
The Company has discontinued operations, which consist of run-off insurance and reinsurance
operations acquired in its merger with The Continental Corporation in 1995. As of December 31,
2009, the remaining run-off business is administered by Continental Reinsurance Corporation
International, Ltd., a wholly-owned Bermuda subsidiary. The business consists of facultative
property and casualty, treaty excess casualty and treaty pro-rata reinsurance with underlying
exposure to a diverse, multi-line domestic and international book of business encompassing
property, casualty and marine liabilities.
Results of the discontinued operations were as follows:
| Discontinued Operations | ||||||||||||
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Revenues:
|
||||||||||||
|
Net investment income
|
$ | 6 | $ | 8 | $ | 13 | ||||||
|
Realized investment gains (losses) and other
|
- | 2 | 6 | |||||||||
|
|
||||||||||||
|
Total revenues
|
6 | 10 | 19 | |||||||||
|
Insurance related expenses
|
8 | 10 | 25 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(2 | ) | - | (6 | ) | |||||||
|
Income tax (expense) benefit
|
- | 9 | - | |||||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations, net of tax
|
$ | (2 | ) | $ | 9 | $ | (6 | ) | ||||
|
|
||||||||||||
On May 4, 2007, the Company sold Continental Management Services Limited (CMS), its United
Kingdom discontinued operations subsidiary. During 2008, the Company recognized a change in
estimate of the tax benefit related to the CMS sale.
Net liabilities of discontinued operations, included in Other liabilities on the Consolidated
Balance Sheets, were as follows.
| Discontinued Operations | ||||||||
| December 31 | 2009 | 2008 | ||||||
| (In millions) | ||||||||
|
|
||||||||
|
Assets:
|
||||||||
|
Investments
|
$ | 141 | $ | 157 | ||||
|
Reinsurance receivables
|
4 | 6 | ||||||
|
Cash
|
- | - | ||||||
|
Other assets
|
2 | 1 | ||||||
|
|
||||||||
|
Total assets
|
147 | 164 | ||||||
|
|
||||||||
|
Liabilities:
|
||||||||
|
Insurance reserves
|
140 | 162 | ||||||
|
Other liabilities
|
8 | 8 | ||||||
|
|
||||||||
|
Total liabilities
|
148 | 170 | ||||||
|
|
||||||||
|
|
||||||||
|
Net liabilities of discontinued operations
|
$ | (1 | ) | $ | (6 | ) | ||
|
|
||||||||
At December 31, 2009 and 2008, the insurance reserves are net of discount of $56 million and
$75 million. The net income (loss) from discontinued operations reported above primarily
represents the net investment income, realized investment gains and losses, foreign currency gains
and losses, effects of the accretion of the loss reserve discount and re-estimation of the ultimate
claim and claim adjustment expense of the discontinued operations.
138
Table of Contents
Note P. Quarterly Financial Data (Unaudited)
The following tables set forth unaudited quarterly financial data for the years ended December 31,
2009 and 2008.
| Quarterly Financial Data | Full | |||||||||||||||||||
| First | Second | Third | Fourth | Year | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Revenues
|
$ | 1,638 | $ | 2,096 | $ | 2,340 | $ | 2,398 | $ | 8,472 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing operations,
net of tax
|
(185 | ) | 120 | 278 | 270 | 483 | ||||||||||||||
|
Loss from discontinued operations, net of tax
|
- | (1 | ) | (1 | ) | - | (2 | ) | ||||||||||||
|
Net income attributable to noncontrolling
interests, net of tax
|
(10 | ) | (14 | ) | (14 | ) | (24 | ) | (62 | ) | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss) attributable to CNA
|
$ | (195 | ) | $ | 105 | $ | 263 | $ | 246 | $ | 419 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic and Diluted Earnings (Loss) Per Share
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing operations
attributable to CNA common stockholders
|
$ | (0.84 | ) | $ | 0.28 | $ | 0.86 | $ | 0.81 | $ | 1.11 | |||||||||
|
Loss from discontinued operations
attributable to CNA common stockholders
|
- | (0.01 | ) | - | - | (0.01 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic and diluted earnings (loss) per share
attributable to CNA common stockholders
|
$ | (0.84 | ) | $ | 0.27 | $ | 0.86 | $ | 0.81 | $ | 1.10 | |||||||||
|
|
||||||||||||||||||||
| Quarterly Financial Data | Full | |||||||||||||||||||
| First | Second | Third | Fourth | Year | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
2008
|
||||||||||||||||||||
|
Revenues
|
$ | 2,282 | $ | 2,321 | $ | 1,659 | $ | 1,537 | $ | 7,799 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing
operations, net of tax
|
200 | 191 | (324 | ) | (318 | ) | (251 | ) | ||||||||||||
|
Income (loss) from discontinued
operations, net of tax
|
(1 | ) | 2 | 9 | (1 | ) | 9 | |||||||||||||
|
Net income attributable to
noncontrolling interests, net of tax
|
(12 | ) | (12 | ) | (16 | ) | (17 | ) | (57 | ) | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss) attributable to CNA
|
$ | 187 | $ | 181 | $ | (331 | ) | $ | (336 | ) | $ | (299 | ) | |||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic and Diluted Earnings (Loss) Per
Share
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing
operations attributable to CNA common
stockholders
|
$ | 0.70 | $ | 0.66 | $ | (1.26 | ) | $ | (1.31 | ) | $ | (1.21 | ) | |||||||
|
Income (loss) from discontinued
operations attributable to CNA common
stockholders
|
(0.01 | ) | 0.01 | 0.03 | - | 0.03 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Basic and diluted earnings (loss) per
share attributable to CNA common
stockholders
|
$ | 0.69 | $ | 0.67 | $ | (1.23 | ) | $ | (1.31 | ) | $ | (1.18 | ) | |||||||
|
|
||||||||||||||||||||
During the fourth quarter of 2009, the Company realized a pretax investment gain of $370
million related to the sale of its holdings of Verisk Analytics Inc. Additionally, pretax OTTI
losses of $195 million were recognized in earnings primarily in the asset-backed bonds, tax-exempt
and corporate and other taxable bonds sectors.
139
Table of Contents
During the fourth quarter of 2008, the Company recorded pretax OTTI losses of $644 million
primarily in the corporate and other taxable bonds and asset-backed bonds sectors and pretax losses
of $309 million related to limited partnerships.
Note Q. Related Party Transactions
The Company reimburses Loews, or pays directly, for management fees, travel and related expenses
and expenses of investment facilities and services provided to the Company. The amounts reimbursed
or paid by the Company were $33 million, $35 million and $27 million for the years ended December
31, 2009, 2008 and 2007. The CNA Tax Group is included on the consolidated federal income tax
return of Loews and its eligible subsidiaries. See Note E for a detailed description of the income
tax agreement with Loews. In addition, the Company writes, at standard rates, a limited amount of
insurance for Loews and its subsidiaries. The earned premiums for the year ended December 31,
2009, 2008 and 2007 were $2 million, $3 million and $3 million.
In the fourth quarter of 2008, the Company issued and Loews purchased $1.25 billion of CNAF
non-voting cumulative preferred stock, which was approved by a special review committee of
independent members of CNAF’s Board of Directors. In the fourth quarter of 2009, the Company
redeemed $250 million of the 2008 Senior Preferred. See Note L for further details.
CNA previously sponsored a stock ownership plan whereby the Company financed the purchase of
Company common stock by certain former 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 maturing
through August of 2012, and are secured by the stock purchased. A number of the loans that came
due in 2009 were reaffirmed and extended in exchange for partial repayments and grants of security
interests in additional assets. The carrying value of the loans as of December 31, 2009 exceeds the
fair value of the related common stock collateral by $7 million.
140
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
CNA Financial Corporation
Chicago, Illinois
CNA Financial Corporation
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of CNA Financial Corporation (an
affiliate of Loews Corporation) and subsidiaries (the “Company”) as of December 31, 2009 and 2008,
and the related consolidated statements of operations, comprehensive income (loss), stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2009. Our
audits also included the financial statement schedules listed in the Index at Item 15. We also
have audited the Company’s internal control over financial reporting as of December 31, 2009, based
on criteria established in
Internal Control - Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
these financial statements and financial statement schedules, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these financial statements and
financial statement schedules and an opinion on the Company’s internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009 and 2008, and the
results of their operations and
141
Table of Contents
their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2009,
based on the criteria established in
Internal Control - Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note A to the consolidated financial statements, the Company changed its accounting
for the recognition and presentation of other-than-temporary impairments in 2009.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 23, 2010
Chicago, Illinois
February 23, 2010
142
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CNA Financial Corporation (CNAF or the Company) is responsible for establishing
and maintaining adequate internal control over financial reporting. CNAF’s internal control system
was designed to provide reasonable assurance to the Company’s management, its Audit Committee and
Board of Directors regarding the preparation and fair presentation of published financial
statements.
There are inherent limitations to the effectiveness of any internal control or system of control,
however well designed, including the possibility of human error and the possible circumvention or
overriding of such controls or systems. Moreover, because of changing conditions the reliability
of internal controls may vary over time. As a result even effective internal controls can provide
no more than reasonable assurance with respect to the accuracy and completeness of financial
statements and their process of preparation.
CNAF management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. In making this assessment, it has used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
– Integrated Framework. Based on those criteria and our assessment we believe that, as of December
31, 2009, the Company’s internal control over financial reporting was effective.
CNAF’s independent public accountant, Deloitte & Touche LLP, has issued an audit report on the
Company’s internal control over financial reporting. This report appears on page 141.
CNA Financial Corporation
Chicago, Illinois
February 23, 2010
Chicago, Illinois
February 23, 2010
143
Table of Contents
None.
As of December 31, 2009, the Company’s management, including the Company’s Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on
this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and
procedures are effective.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and the implementing rules of the
Securities and Exchange Commission, the Company included a report of management’s assessment of the
design and effectiveness of its internal controls as part of this Annual Report on Form 10-K for
the fiscal year ended December 31, 2009. Management’s report and the independent registered public
accounting firm’s attestation report are included in Item 8 under the captions entitled
“Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent
Registered Public Accounting Firm” and are incorporated herein by reference.
There has been no change in the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2009
that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
None.
144
Table of Contents
EXECUTIVE OFFICERS OF THE REGISTRANT
| FIRST | ||||||||
| BECAME | ||||||||
| POSITION AND | EXECUTIVE | |||||||
| OFFICES HELD WITH | OFFICER OF | PRINCIPAL OCCUPATION DURING PAST FIVE | ||||||
| NAME | REGISTRANT | AGE | CNA | YEARS | ||||
|
|
||||||||
| Thomas F. Motamed |
Chief Executive Officer, CNA Financial Corporation
|
61 | 2009 |
Chief Executive Officer of CNA Financial Corporation since January 1, 2009. From December 2002 to June 2008, Vice Chairman and Chief Operating Officer of The Chubb Corporation and President and Chief Operating Officer of Chubb & Son.
|
||||
|
|
||||||||
| D. Craig Mense |
Executive Vice President & Chief Financial Officer, CNA Financial Corporation
|
58 | 2004 |
Executive Vice President and Chief Financial Officer of CNA Financial Corporation.
|
||||
|
|
||||||||
| George R. Fay |
Executive Vice President, Worldwide Property & Casualty Claim of the CNA insurance companies
|
61 | 2010 |
Executive Vice President, Worldwide Property & Casualty Claim of the CNA insurance companies since July 2006. From July 1974 to July 2006, held various positions at The Chubb Corporation including Chief Services Officer.
|
||||
|
|
||||||||
| Larry A. Haefner |
Executive Vice President & Chief Actuary of the CNA insurance companies
|
53 | 2008 |
Executive Vice President & Chief Actuary of the CNA insurance companies since April 2008. From October 2004 to April 2008, Vice President & Chief Actuary, Middle Market Business of The Travelers Insurance Companies.
|
||||
|
|
||||||||
| Jonathan D. Kantor |
Executive Vice President, General Counsel and Secretary, CNA Financial Corporation
|
54 | 1997 |
Executive Vice President, General Counsel and Secretary of CNA Financial Corporation.
|
||||
|
|
||||||||
| Robert A. Lindemann |
President and Chief Operating Officer, CNA Commercial of the CNA insurance companies
|
56 | 2010 |
President and Chief Operating Officer, CNA Commercial of the CNA insurance companies since August 2009. From September 2004 to August 2009, Chief Operating Officer, Commercial Markets and President, Middle Markets of Zurich Financial Services North America.
|
||||
|
|
||||||||
| Thomas Pontarelli |
Executive Vice President & Chief Administration Officer of the CNA insurance companies
|
60 | 2009 |
Executive Vice President & Chief Administration Officer of the CNA insurance companies.
|
||||
|
|
||||||||
| Timothy J. Szerlong |
President, Worldwide Field Operations of the CNA insurance companies
|
57 | 2010 |
President, Worldwide Field Operations of the CNA insurance companies since September 2009. From June 1974 to August 2009, held various positions at The Chubb Corporation including Senior Vice President and Eastern U.S. Field Operations Officer.
|
||||
|
|
||||||||
| Peter W. Wilson |
President and Chief Operating Officer, CNA Specialty of the CNA insurance companies
|
50 | 2009 |
President and Chief Operating Officer, CNA Specialty of the CNA insurance companies since April 2009. From March 2002 to April 2009, Executive Vice President, Global Specialty Lines of the CNA insurance companies.
|
||||
Officers are elected and hold office until their successors are elected and qualified, and are
subject to removal by the Board of Directors.
145
Table of Contents
Additional information required in Item 10, Part III has been omitted as the Registrant intends to
file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year.
Information required in Item 11, Part III has been omitted as the Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the close of its fiscal year.
Equity Compensation Plan
The table below provides the securities authorized for issuance under equity compensation plans.
Executive Compensation Information
December 31, 2009
| 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
|
2,244,657 | $ | 25.61 | 841,594 | ||||||||
|
Equity compensation plans not approved by security holders
|
- | - | - | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
2,244,657 | $ | 25.61 | 841,594 | ||||||||
|
|
||||||||||||
Additional information required in Item 12, Part III has been omitted as the Registrant intends to
file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year.
Information required in Item 13, Part III has been omitted as the Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the close of its fiscal year.
Information required in Item 14, Part III has been omitted as the Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the close of its fiscal year.
146
Table of Contents
| Page | ||||||||||
| (a) | 1 | FINANCIAL STATEMENTS: | Number | |||||||
|
|
||||||||||
|
|
||||||||||
| Statements of Operations – Years Ended December 31, 2009, 2008, and 2007 | 61 | |||||||||
| Statements of Comprehensive Income (Loss) – Years Ended December 31, 2009, 2008 and 2007 | 63 | |||||||||
| Balance Sheets – December 31, 2009 and 2008 | 64 | |||||||||
| Statements of Cash Flows – Years Ended December 31, 2009, 2008 and 2007 | 65 | |||||||||
| Statements of Stockholders’ Equity – Years Ended December 31, 2009, 2008 and 2007 | 67 | |||||||||
| Notes to Consolidated Financial Statements | 68 | |||||||||
| Report of Independent Registered Public Accounting Firm | 141 | |||||||||
|
|
||||||||||
| (a) | 2 | FINANCIAL STATEMENT SCHEDULES: | ||||||||
|
|
||||||||||
|
|
||||||||||
| Schedule I |
Summary of Investments
|
152 | ||||||||
| Schedule II |
Condensed Financial Information of Registrant (Parent Company)
|
153 | ||||||||
| Schedule III |
Supplementary Insurance Information
|
158 | ||||||||
| Schedule IV |
Reinsurance
|
159 | ||||||||
| Schedule V |
Valuation and Qualifying Accounts
|
159 | ||||||||
| Schedule VI |
Supplemental Information Concerning Property and Casualty Insurance Operations
|
159 | ||||||||
|
|
||||||||||
|
|
||||||||||
| (a) | 3 | EXHIBITS: |
|
|||||||
| Exhibit | ||||||||
| Description of Exhibit | Number | |||||||
| (3) | Articles of incorporation and by-laws: | |||||||
| Certificate of Incorporation of CNA Financial Corporation, as amended May 6, 1987 (Exhibit 3.1 to Form S-8 filed October 9, 1998 incorporated herein by reference) | 3.1 | |||||||
|
|
||||||||
| Certificate of Amendment of Certificate of Incorporation, dated May 14, 1998 (Exhibit 3.1a to 2006 Form 10-K incorporated herein by reference) | 3.1.1 | |||||||
|
|
||||||||
| Certificate of Amendment of Certificate of Incorporation, dated May 10, 1999 (Exhibit 3.1 to 1999 Form 10-K incorporated herein by reference) | 3.1.2 | |||||||
|
|
||||||||
| By-Laws of CNA Financial Corporation, as amended October 24, 2007 (Exhibit 3ii.1 to Form 8-K filed October 29, 2007 incorporated herein by reference) | 3.2 | |||||||
|
|
||||||||
| (4) | Instruments defining the rights of security holders, including indentures:* | |||||||
|
|
||||||||
|
|
||||||||
| Certificate of Designation, as filed with the Secretary of State of the State of Delaware on November 7, 2008, relating to the 2008 Senior Preferred Stock, no par value, of CNA Financial Corporation (Exhibit 3.1 to Form 8-K filed November 12, 2008 incorporated herein by reference) | 4.1 | |||||||
|
|
||||||||
| 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) | 4.2 | |||||||
147
Table of Contents
| (10) | Material contracts: | |||||||
|
|
||||||||
| Credit Agreement among CNA Financial Corporation, J.P. Morgan Securities Inc., Citibank N.A., Bank of America, N.A., JPMorgan Chase Bank N.A., Wachovia Bank, N.A. and other lenders named therein, dated August 1, 2007 (Exhibit 99.1 to August 1, 2007 Form 8-K incorporated herein by reference) | 10.1 | |||||||
|
|
||||||||
| Federal Income Tax Allocation Agreement, dated February 29, 1980 between CNA Financial Corporation and Loews Corporation (Exhibit 10.2 to 1987 Form 10-K incorporated herein by reference) | 10.2 | |||||||
|
|
||||||||
| Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation and the Participating Subsidiaries (Exhibit 10.3 to 2007 Form 10-K incorporated herein by reference) | 10.3 | |||||||
|
|
||||||||
| Amendment to Investment Facilities and Services Agreement, dated January 1, 2007, by and among Loews/CNA Holdings, Inc. and CNA Financial Corporation (Exhibit 10.3.1 to 2007 Form 10-K incorporated herein by reference) | 10.3.1 | |||||||
|
|
||||||||
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and American Casualty Company of Reading, Pennsylvania (Exhibit 10.3.2 to 2007 Form 10-K incorporated herein by reference) | 10.3.2 | |||||||
|
|
||||||||
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and Columbia Casualty Company (Exhibit 10.3.3 to 2007 Form 10-K incorporated herein by reference) | 10.3.3 | |||||||
|
|
||||||||
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and Continental Assurance Company (Exhibit 10.3.4 to 2007 Form 10-K incorporated herein by reference) | 10.3.4 | |||||||
|
|
||||||||
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and Continental Casualty Company (Exhibit 10.3.5 to 2007 Form 10-K incorporated herein by reference) | 10.3.5 | |||||||
|
|
||||||||
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and National Fire Insurance Company of Hartford (Exhibit 10.3.6 to 2007 Form 10-K incorporated herein by reference) | 10.3.6 | |||||||
|
|
||||||||
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and The Continental Insurance Company (Exhibit 10.3.7 to 2007 Form 10-K incorporated herein by reference) | 10.3.7 | |||||||
|
|
||||||||
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and The Continental Insurance Company of New Jersey (Exhibit 10.3.8 to 2007 Form 10-K incorporated herein by reference) | 10.3.8 | |||||||
148
Table of Contents
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and Transportation Insurance Company (Exhibit 10.3.9 to 2007 Form 10-K incorporated herein by reference) | 10.3.9 | |||||||
|
|
||||||||
| Acknowledgement to Investment Facilities and Services Agreement, dated January 1, 2006, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and Valley Forge Insurance Company (Exhibit 10.3.10 to 2007 Form 10-K incorporated herein by reference) | 10.3.10 | |||||||
|
|
||||||||
| Acknowledgment to Investment Facilities and Services Agreement, dated January 1, 2008, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and Continental Reinsurance Corporation International Limited (Exhibit 10.5 to March 31, 2008 Form 10-Q incorporated herein by reference) | 10.3.11 | |||||||
|
|
||||||||
| Acknowledgment to Investment Facilities and Services Agreement, dated January 1, 2008, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and North Rock Insurance Company Limited (Exhibit 10.6 to March 31, 2008 Form 10-Q incorporated herein by reference) | 10.3.12 | |||||||
|
|
||||||||
| Acknowledgment to Investment Facilities and Services Agreement, dated January 1, 2008, by and among Loews/CNA Holdings, Inc., CNA Financial Corporation, and CNA National Warranty Corporation (Exhibit 10.7 to March 31, 2008 Form 10-Q incorporated herein by reference) | 10.3.13 | |||||||
|
|
||||||||
| Amended and Restated Surplus Note, dated as of December 11, 2008, from Continental Casualty Company to CNA Financial Corporation (Exhibit 10.4 to 2008 Form 10-K incorporated herein by reference) | 10.4 | |||||||
|
|
||||||||
| 2008 Senior Preferred Stock Redemption Agreement, dated November 10, 2009, by and between CNA Financial Corporation and Loews Corporation (Exhibit 10.2 to Form 8-K filed November 13, 2009 incorporated herein by reference) | 10.5 | |||||||
|
|
||||||||
| 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)) | 10.6 | |||||||
|
|
||||||||
| CNA Financial Corporation 2000 Long Term Incentive Plan, dated August 4, 1999 (Exhibit 4.1 to Form S-8 filed August 4, 1999, incorporated herein by reference) | 10.7 | |||||||
|
|
||||||||
| CNA Supplemental Executive Retirement Plan, restated as of January 1, 2009 (Exhibit 10.7 to 2008 Form 10-K incorporated herein by reference) | 10.8 | |||||||
|
|
||||||||
| First Amendment to the CNA Supplemental Executive Retirement Plan, dated December 23, 2009 | 10.8.1 | |||||||
|
|
||||||||
| CNA Supplemental Executive Savings and Capital Accumulation Plan, restated as of January 1, 2009 (Exhibit 10.8 to 2008 Form 10-K incorporated herein by reference) | 10.9 | |||||||
149
Table of Contents
| 2009 Incentive Compensation Awards to Executive Officers (Exhibit 10.9 to 2008 Form 10-K incorporated herein by reference) | 10.10 | |||||||
|
|
||||||||
| Award Letter and Award Terms to Thomas F. Motamed for Stock Appreciation Rights and Restricted Stock Units (Exhibit 10.10 to 2008 Form 10-K incorporated herein by reference) | 10.11 | |||||||
|
|
||||||||
| 2008 Incentive Compensation Awards to Executive Officers (Exhibit 10.9 to 2007 Form 10-K incorporated herein by reference) | 10.12 | |||||||
|
|
||||||||
| Form of Award Letter to Executive Officers for the Long-Term Incentive Cash Plan for the 2005-2007 Long-Term Incentive Cash Plan Cycle (Exhibit 10.1 to March 31, 2008 Form 10-Q incorporated herein by reference) | 10.12.1 | |||||||
|
|
||||||||
| Form of Award Letter to Executive Officers, along with Form of Award Terms, for the Long-Term Incentive Cash Plan for the 2008-2010 Long-Term Incentive Cash Plan Cycle (Exhibit 10.2 to March 31, 2008 Form 10-Q incorporated herein by reference) | 10.12.2 | |||||||
|
|
||||||||
| 2007 Incentive Compensation Awards to Executive Officers (Exhibit 10.23 to March 31, 2007 Form 10-Q incorporated herein by reference) | 10.13 | |||||||
|
|
||||||||
| 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) | 10.13.1 | |||||||
|
|
||||||||
| 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) | 10.13.2 | |||||||
|
|
||||||||
| Employment Agreement, dated May 22, 2008, by and between CNA Financial Corporation and Thomas F. Motamed (Exhibit 10.1 to June 30, 2008 Form 10-Q incorporated herein by reference) | 10.14 | |||||||
|
|
||||||||
| First Amendment to Employment Agreement, dated October 24, 2008, by and between CNA Financial Corporation and Thomas F. Motamed (Exhibit 10.6 to September 30, 2008 Form 10-Q incorporated herein by reference) | 10.14.1 | |||||||
|
|
||||||||
| Employment Agreement between Continental Casualty Company and D. Craig Mense, dated August 1, 2007 (Exhibit 10.1 to September 30, 2007 Form 10-Q incorporated herein by reference) | 10.15 | |||||||
|
|
||||||||
| Amendment to Employment Agreement, dated July 1, 2008, by and between Continental Casualty Company and D. Craig Mense (Exhibit 10.4 to September 30, 2008 Form 10-Q incorporated herein by reference) | 10.15.1 | |||||||
|
|
||||||||
| Employment Agreement, dated April 1, 2008, by and between Continental Casualty Company and Jonathan D. Kantor (Exhibit 10.2 to September 30, 2008 Form 10-Q incorporated herein by reference) | 10.16 | |||||||
150
Table of Contents
| Letter Agreement, dated June 18, 2007, by and between Continental Casualty Company and Thomas Pontarelli | 10.17 | |||||||
|
|
||||||||
| Letter Agreement, dated August 8, 2008, by and between Continental Casualty Company and Thomas Pontarelli | 10.17.1 | |||||||
|
|
||||||||
| Letter Agreement, dated December 9, 2009, by and between Continental Casualty Company and Thomas Pontarelli | 10.17.2 | |||||||
|
|
||||||||
| Employment Agreement, dated August 24, 2006, by and between Continental Casualty Company and Peter W. Wilson | 10.18 | |||||||
|
|
||||||||
| Amendment to Employment Agreement, dated September 19, 2008, by and between Continental Casualty Company and Peter W. Wilson | 10.18.1 | |||||||
|
|
||||||||
| Subsidiaries of the Registrant | 21.1 | |||||||
|
|
||||||||
| Consent of Independent Registered Public Accounting Firm | 23.1 | |||||||
|
|
||||||||
| Certification of Chief Executive Officer | 31.1 | |||||||
|
|
||||||||
| Certification of Chief Financial Officer | 31.2 | |||||||
|
|
||||||||
| 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 | |||||||
|
|
||||||||
| *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. | ||||||||
|
|
||||||||
|
|
||||||||
| (b) | Exhibits: | |||||||
|
|
||||||||
|
None.
|
||||||||
|
|
||||||||
| (c) | Condensed Financial Information of Unconsolidated Subsidiaries: | |||||||
|
|
||||||||
| None. | ||||||||
Except for Exhibits 10.8.1, 10.17, 10.17.1, 10.17.2, 10.18, 10.18.1, 21.1, 23.1, 31.1, 31.2, 32.1,
and 32.2, the above exhibits are not included in this Form 10-K, but are on file with the
Securities and Exchange Commission.
151
Table of Contents
SCHEDULE I. SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES
Incorporated herein by reference from Note B of the Consolidated Financial Statements included
under Item 8.
152
Table of Contents
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
CNA Financial Corporation
Statements of Operations
Statements of Operations
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Revenues
|
||||||||||||
|
Net investment income
|
$ | 3 | $ | 16 | $ | 20 | ||||||
|
Realized investment gains (losses)
|
8 | (19 | ) | (6 | ) | |||||||
|
Other income
|
101 | 15 | - | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total revenues
|
112 | 12 | 14 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Expenses
|
||||||||||||
|
Administrative and general
|
2 | 9 | 3 | |||||||||
|
Interest
|
116 | 123 | 131 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total expenses
|
118 | 132 | 134 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Loss from operations before income taxes and equity in
net income (loss) of subsidiaries
|
(6 | ) | (120 | ) | (120 | ) | ||||||
|
Income tax benefit
|
2 | 42 | 42 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Loss before equity in net income (loss) of subsidiaries
|
(4 | ) | (78 | ) | (78 | ) | ||||||
|
Equity in net income (loss) of subsidiaries
|
423 | (221 | ) | 929 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income (loss)
|
$ | 419 | $ | (299 | ) | $ | 851 | |||||
|
|
||||||||||||
See accompanying Notes to Condensed Financial Information.
153
Table of Contents
CNA Financial Corporation
Balance Sheets
Balance Sheets
| December 31 | 2009 | 2008 | ||||||
| (In millions, except share data) | ||||||||
|
|
||||||||
|
Assets
|
||||||||
|
Investment in subsidiaries
|
$ | 11,433 | $ | 7,282 | ||||
|
Fixed maturity securities available-for-sale, at fair value (amortized cost of $4 and $5)
|
4 | 5 | ||||||
|
Equity securities available-for-sale, at fair value (cost of $1 and $1)
|
1 | 1 | ||||||
|
Other invested assets, including derivative financial instruments of $0 and $3
|
- | 3 | ||||||
|
Short term investments
|
395 | 539 | ||||||
|
Receivables for securities sold and collateral
|
- | 16 | ||||||
|
Federal income taxes recoverable
|
24 | 6 | ||||||
|
Amounts due from affiliates
|
10 | 6 | ||||||
|
Surplus note due from affiliate
|
1,000 | 1,000 | ||||||
|
Other assets
|
9 | 14 | ||||||
|
|
||||||||
|
|
||||||||
|
Total assets
|
$ | 12,876 | $ | 8,872 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and equity
|
||||||||
|
Liabilities:
|
||||||||
|
Long term debt
|
2,183 | 1,937 | ||||||
|
Other liabilities, including derivative financial instruments of $0 and $31
|
33 | 58 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities
|
2,216 | 1,995 | ||||||
|
|
||||||||
|
|
||||||||
|
Equity:
|
||||||||
|
Preferred stock (12,500,000 shares authorized)
2008 Senior Preferred (no par value; $100,000 stated value; 10,000 and 12,500 shares issued and outstanding held by Loews Corporation) |
1,000 | 1,250 | ||||||
|
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares
issued; and 269,026,759 and 269,024,408 shares outstanding)
|
683 | 683 | ||||||
|
Additional paid-in capital
|
2,177 | 2,174 | ||||||
|
Retained earnings
|
7,264 | 6,845 | ||||||
|
Accumulated other comprehensive loss
|
(325 | ) | (3,924 | ) | ||||
|
Treasury stock (4,013,484 and 4,015,835 shares), at cost
|
(109 | ) | (109 | ) | ||||
|
Notes receivable for the issuance of common stock
|
(30 | ) | (42 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Total equity
|
10,660 | 6,877 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 12,876 | $ | 8,872 | ||||
|
|
||||||||
See accompanying Notes to Condensed Financial Information.
154
Table of Contents
CNA Financial Corporation
Statements of Cash Flows
Statements of Cash Flows
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income (loss)
|
$ | 419 | $ | (299 | ) | $ | 851 | |||||
|
Adjustments to reconcile net income (loss) to net cash flows provided (used) by
operating activities:
|
||||||||||||
|
(Income) loss of subsidiaries
|
(423 | ) | 221 | (929 | ) | |||||||
|
Dividends received from subsidiaries
|
- | 697 | 270 | |||||||||
|
Realized investment (gains) losses
|
(8 | ) | 19 | 6 | ||||||||
|
Other, net
|
(21 | ) | 81 | (54 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total adjustments
|
(452 | ) | 1,018 | (707 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net cash flows provided (used) by operating activities
|
(33 | ) | 719 | 144 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Proceeds from fixed maturity securities
|
12 | 1 | 3 | |||||||||
|
Change in short term investments
|
145 | (666 | ) | (63 | ) | |||||||
|
Capital contributions to subsidiaries
|
(3 | ) | (2 | ) | (1 | ) | ||||||
|
Return of capital from subsidiaries
|
- | - | 1 | |||||||||
|
Purchase of surplus note from affiliate
|
- | (1,000 | ) | - | ||||||||
|
Other, net
|
(12 | ) | (3 | ) | (18 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net cash flows provided (used) by investing activities
|
142 | (1,670 | ) | (78 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Dividends paid to Loews for 2008 Senior Preferred
|
(122 | ) | (19 | ) | - | |||||||
|
Dividends paid to common stockholders
|
- | (122 | ) | (95 | ) | |||||||
|
Proceeds from the issuance of long term debt
|
350 | 250 | - | |||||||||
|
Principal payments on debt
|
(100 | ) | (350 | ) | - | |||||||
|
Payment to redeem 2008 Senior Preferred
|
(250 | ) | - | - | ||||||||
|
Proceeds from issuance of 2008 Senior Preferred
|
- | 1,250 | - | |||||||||
|
Stock options exercised
|
1 | 1 | 18 | |||||||||
|
Purchase of treasury stock
|
- | (70 | ) | - | ||||||||
|
Other, net
|
12 | 11 | 11 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net cash flows provided (used) by financing activities
|
(109 | ) | 951 | (66 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net change in cash
|
- | - | - | |||||||||
|
Cash, beginning of year
|
- | - | - | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash, end of year
|
$ | - | $ | - | $ | - | ||||||
|
|
||||||||||||
See accompanying Notes to Condensed Financial Information.
155
Table of Contents
Notes to Condensed Financial Information
A. Basis of Presentation
The condensed financial information of CNA Financial Corporation (CNAF or the Parent Company)
should be read in conjunction with the Consolidated Financial Statements and Notes thereto included
in Part II, Item 8 of this Form 10-K. CNAF’s subsidiaries are accounted for using the equity
method of accounting. Equity in net income (loss) of these affiliates is presented on the
Condensed Statements of Operations as Equity in net income (loss) of subsidiaries. Loews
Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of December
31, 2009.
B. Debt
Debt is composed of the following obligations.
Debt
| December 31 | 2009 | 2008 | ||||||
| (In millions) | ||||||||
|
|
||||||||
|
Variable rate debt:
|
||||||||
|
Credit Facility – variable rate and term, due August 1, 2012
|
$ | 150 | $ | 250 | ||||
|
|
||||||||
|
Senior notes:
|
||||||||
|
6.000%, face amount of $400, due August 15, 2011
|
399 | 399 | ||||||
|
5.850%, face amount of $549, due December 15, 2014
|
547 | 547 | ||||||
|
6.500%, face amount of $350, due August 15, 2016
|
347 | 348 | ||||||
|
6.950%, face amount of $150, due January 15, 2018
|
149 | 149 | ||||||
|
7.350%, face amount of $350, due November 15, 2019
|
347 | - | ||||||
|
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
|
$ | 2,183 | $ | 1,937 | ||||
|
|
||||||||
In November of 2009, CNAF issued $350 million of 7.350% ten-year senior notes in a public
offering.
On August 1, 2007, CNAF entered into a credit agreement with a syndicate of banks and other
lenders. The credit agreement established a $250 million senior unsecured revolving credit
facility which is intended to be used for general corporate purposes. Borrowings under the
revolving credit facility bear interest at the London Interbank Offered Rate (LIBOR) plus CNAF’s
credit risk spread of 0.54%, which was equal to 0.79% at December 31, 2009.
Under the credit agreement, CNAF is required to pay certain fees, including a facility fee and a
utilization fee, both of which would adjust automatically in the event of a change in CNAF’s
financial ratings. The credit agreement includes covenants regarding maintenance of a minimum
consolidated net worth and a specified ratio of consolidated indebtedness to consolidated total
capitalization.
CNAF’s remaining debt obligations contain customary covenants for investment grade insurers. CNAF
is in compliance with all covenants as of December 31, 2009.
C. Commitments, Contingencies and Guarantees
In the normal course of business, CNAF guarantees the indebtedness of certain of its subsidiaries
to the debt maturity or payoff, whichever comes first. These guarantees arise in the normal course
of business and are given to induce a lender to enter into an agreement with CNAF’s subsidiaries.
CNAF would be required to remit prompt and complete payment when due, should the primary obligor
default. The maximum potential amount of future payments that CNAF could be required to pay under
these guarantees are approximately $21 million at December 31, 2009. The Parent Company does not
believe that a payable is likely under these guarantees.
156
Table of Contents
In the course of selling business entities and assets to third parties, CNAF 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, 2009, the aggregate amount
of quantifiable indemnification agreements in effect for sales of business entities and assets was
$259 million.
In addition, CNAF 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, 2009, CNAF had outstanding unlimited indemnifications in
connection with the sales of certain of its business entities or assets that included 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.
As of December 31, 2009 and 2008, CNAF has recorded liabilities of approximately $9 million related
to indemnification agreements and management believes that it is not likely that any future
indemnity claims will be significantly greater than the amounts recorded.
In the normal course of business, CNAF has provided guarantees to holders of structured settlement
annuities (SSA) provided by certain of its subsidiaries, which expire through 2120. CNAF would be
required to remit SSA payments due to claimants if the primary obligor failed to perform on these
contracts. The maximum potential amount of future payments that CNAF could be required to pay
under these guarantees are approximately $1.8 billion at December 31, 2009. The Company does not
believe that a payment is likely under these guarantees.
157
Table of Contents
SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION
Incorporated herein by reference from Note N of the Consolidated Financial Statements included
under Item 8.
158
Table of Contents
SCHEDULE IV. REINSURANCE
Incorporated herein by reference from Note H of the Consolidated Financial Statements included
under Item 8.
SCHEDULE V. VALUATION AND QUALIFYING ACCOUNTS
| Balance at | Charged to | Charged to | ||||||||||||||||||
| Beginning | Costs and | Other | Balance at | |||||||||||||||||
| of Period | Expenses | Accounts (a) | Deductions | End of Period | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||||||
|
Deducted from assets:
|
||||||||||||||||||||
|
Allowance for doubtful accounts:
|
||||||||||||||||||||
|
Insurance and reinsurance
receivables
|
$ | 587 | $ | 4 | $ | (1 | ) | $ | (37 | ) | $ | 553 | ||||||||
|
|
||||||||||||||||||||
|
Valuation allowance:
|
||||||||||||||||||||
|
Deferred income taxes
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Year ended December 31, 2008
|
||||||||||||||||||||
|
Deducted from assets:
|
||||||||||||||||||||
|
Allowance for doubtful accounts:
|
||||||||||||||||||||
|
Insurance and reinsurance
receivables
|
$ | 773 | $ | (37 | ) | $ | (4 | ) | $ | (145 | ) | $ | 587 | |||||||
|
|
||||||||||||||||||||
|
Valuation allowance:
|
||||||||||||||||||||
|
Deferred income taxes
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Year ended December 31, 2007
|
||||||||||||||||||||
|
Deducted from assets:
|
||||||||||||||||||||
|
Allowance for doubtful accounts:
|
||||||||||||||||||||
|
Insurance and reinsurance
receivables
|
$ | 837 | $ | 12 | $ | 2 | $ | (78 | ) | $ | 773 | |||||||||
|
|
||||||||||||||||||||
|
Valuation allowance:
|
||||||||||||||||||||
|
Deferred income taxes
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
|
||||||||||||||||||||
| (a) | Amount includes effects of foreign currency translation. |
SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY
INSURANCE OPERATIONS
| Consolidated Property and Casualty Operations | ||||||||||||
| As of and for the years ended December 31 | 2009 | 2008 | 2007 | |||||||||
| (In millions) | ||||||||||||
|
|
||||||||||||
|
Deferred acquisition costs
|
$ | 1,108 | $ | 1,125 | ||||||||
|
|
||||||||||||
|
Reserves for unpaid claim and claim adjustment expenses
|
26,712 | 27,475 | ||||||||||
|
|
||||||||||||
|
Discount deducted from claim and claim adjustment expense reserves
above
(based on interest rates ranging from 3.0% to 7.5%) |
1,595 | 1,620 | ||||||||||
|
|
||||||||||||
|
Unearned premiums
|
3,274 | 3,406 | ||||||||||
|
|
||||||||||||
|
Net written premiums
|
6,713 | 7,090 | 7,382 | |||||||||
|
|
||||||||||||
|
Net earned premiums
|
6,720 | 7,149 | 7,481 | |||||||||
|
|
||||||||||||
|
Net investment income
|
2,110 | 1,547 | 2,180 | |||||||||
|
|
||||||||||||
|
Incurred claim and claim adjustment expenses related to current year
|
4,788 | 5,189 | 4,937 | |||||||||
|
|
||||||||||||
|
Incurred claim and claim adjustment expenses related to prior years
|
(241 | ) | (7 | ) | 220 | |||||||
|
|
||||||||||||
|
Amortization of deferred acquisition costs
|
1,417 | 1,467 | 1,520 | |||||||||
|
|
||||||||||||
|
Paid claim and claim adjustment expenses
|
4,841 | 5,327 | 5,282 | |||||||||
159
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| CNA Financial Corporation | ||||
|
Dated: February 23, 2010
|
By | /s/ Thomas F. Motamed | ||
|
|
||||
|
|
Thomas F. Motamed | |||
|
|
Chief Executive Officer | |||
|
|
(Principal Executive Officer) | |||
|
|
By | /s/ D. Craig Mense | ||
|
|
||||
|
|
D. Craig Mense | |||
|
|
Executive Vice President and | |||
|
|
Chief Financial Officer | |||
|
|
(Principal Financial & Accounting Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the date
indicated.
|
Dated: February 23, 2010
|
By | /s/ Thomas F. Motamed | ||
|
|
||||
|
|
(Thomas F. Motamed, Chief Executive Officer | |||
|
|
and Chairman of the Board of Directors) | |||
|
|
||||
|
Dated: February 23, 2010
|
By | /s/ Paul J. Liska | ||
|
|
||||
|
|
(Paul J. Liska, Director) | |||
|
|
||||
|
Dated: February 23, 2010
|
By | /s/ Jose O. Montemayor | ||
|
|
||||
|
|
(Jose O. Montemayor, Director) | |||
|
|
||||
|
Dated: February 23, 2010
|
By | /s/ Don M. Randel | ||
|
|
||||
|
|
(Don M. Randel, Director) | |||
|
|
||||
|
Dated: February 23, 2010
|
By | /s/ Joseph Rosenberg | ||
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|
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(Joseph Rosenberg, Director) | |||
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Dated: February 23, 2010
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By | /s/ Andrew H. Tisch | ||
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(Andrew H. Tisch, Director) | |||
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Dated: February 23, 2010
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By | /s/ James S. Tisch | ||
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(James S. Tisch, Director) | |||
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Dated: February 23, 2010
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By | /s/ Marvin Zonis | ||
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(Marvin Zonis, Director) |
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules