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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000891554-01-501431.txt : 20010319
<SEC-HEADER>0000891554-01-501431.hdr.sgml : 20010319
ACCESSION NUMBER: 0000891554-01-501431
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010316
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CNA FINANCIAL CORP
CENTRAL INDEX KEY: 0000021175
STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331]
IRS NUMBER: 366169860
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-05823
FILM NUMBER: 1570752
BUSINESS ADDRESS:
STREET 1: CNA PLZ
STREET 2: 235
CITY: CHICAGO
STATE: IL
ZIP: 60685
BUSINESS PHONE: 3128225000
MAIL ADDRESS:
STREET 1: CNA PLAZA
STREET 2: 235
CITY: CHICAGO
STATE: IL
ZIP: 60685
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d25096_10k.txt
<DESCRIPTION>FORM 10-K
<TEXT>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2000 Commission File Number 1-5823
---------------------
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-6169860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA Plaza
Chicago, Illinois 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock New York Stock Exchange
with a par value Chicago Stock Exchange
of $2.50 per share Pacific Exchange
---------------------
Securities registered pursuant to Section 12(g) of the Act:
None
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 2001, 183,264,248 shares of common stock were outstanding
and the aggregate market value of the common stock of CNA Financial Corporation
held by non-affiliates was approximately $892 million.
DOCUMENTS INCORPORATED
BY REFERENCE:
Portions of the CNA Financial Corporation 2000 Annual Report to
Shareholders are incorporated by reference into Parts I and II of this Report.
Portions of the CNA Financial Corporation Proxy Statement prepared for the
2001 annual meeting of shareholders, pursuant to Regulation 14A, are
incorporated by reference into Part III of this Report.
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
CNA FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10K
FOR THE YEAR ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
Item Page
Number PART I Number
- ------ ------
1. Business............................................................ 3
2. Properties.......................................................... 10
3. Legal Proceedings................................................... 11
4. Submission of Matters to a Vote of Security Holders................. 11
PART II
5. Market for the Registrant's Common Stock and Related Stockholder
Matters........................................................... 11
6. Selected Financial Data............................................. 11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 11
7A. Quantitative and Qualitative Disclosures about Market Risk.......... 11
8. Financial Statements and Supplementary Data......................... 11
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 11
PART III
10. Directors and Executive Officers of the Registrant.................. 12
11. Executive Compensation.............................................. 12
12. Security Ownership of Certain Beneficial Owners and Management...... 12
13. Certain Relationships and Related Transactions...................... 13
PART IV
14. Financial Statements, Schedules, Exhibits and Reports on Form 8-K... 14
<PAGE>
PART I
ITEM 1. BUSINESS
CNA Financial Corporation (CNAF or the Company) was incorporated in 1967
and is an insurance holding company whose primary subsidiaries consist of
property-casualty and life insurance companies. Collectively CNAF and its
subsidiaries are referred to as CNA. CNA's property-casualty insurance
operations are conducted by Continental Casualty Company (CCC), incorporated in
1897, and its affiliates, and The Continental Insurance Company (CIC), organized
in 1853, and its affiliates. Life insurance operations are conducted by
Continental Assurance Company (CAC), incorporated in 1911, and its affiliates.
CIC became an affiliate of the Company in 1995 as a result of the acquisition of
The Continental Corporation (Continental). The principal business of Continental
is the ownership of a group of property and casualty insurance companies. CNA
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. Insurance products
include property and casualty coverages; life, accident and health insurance;
and retirement products and annuities. CNA services include risk management,
information services, healthcare management, claims administration and employee
leasing/payroll processing. CNA products are marketed through agents, brokers,
managing general agents and direct sales. CNA's principal market is the United
States with a continued focus on expanding globally to serve those with growing
worldwide interests, as well as adding value in international market niches.
CNA conducts its operations through seven operating segments: Agency Market
Operations, Specialty Operations, CNA Re, Global Operations, Risk Management,
Group Operations and Life Operations. These operating segments reflect the way
CNA distributes its products to the marketplace, manages operations and makes
business decisions. In addition to these seven segments, certain other
activities are reported in a Corporate and Other segment. Discussions of each
segment including the products offered, the customers served and the
distribution channels used is set forth in the Management's Discussion and
Analysis section of the 2000 Annual Report to Shareholders, incorporated by
reference in Item 7, herein.
Competition
Due to market pressures, the insurance and reinsurance environment remains
intensely competitive. Excess underwriting capacity continues to depress prices
in the reinsurance market; however, the commercial property-casualty market is
beginning to experience significant rate increases. CNA competes with a large
number of stock and mutual insurance and reinsurance companies and other
entities for both producers and customers, and must continuously allocate
resources to refine and improve its insurance and reinsurance products and
services.
There are approximately 3,320 individual companies that sell
property-casualty insurance in the United States. CNAF's consolidated
property-casualty subsidiaries ranked as the 8th largest property-casualty
insurance organization in the United States based upon 1999 statutory net
written premiums. CNAF's reinsurance operations ranked as the 19th largest
reinsurance organization in the world, based upon 1999 gross written premiums.
There are approximately 1,470 companies selling life insurance in the
United States. CAC is ranked as the 36th largest life insurance organization
based on 1999 consolidated statutory premium volume.
Dividends by Insurance Subsidiaries
The payment of dividends to CNAF by its insurance subsidiaries without
prior approval of the affiliates' domiciliary state insurance commissioners is
limited by formula. This formula varies by state. The formula used by the
majority of the states provides that the greater of 10% of prior year statutory
surplus or prior year statutory net income, less the aggregate of all dividends
paid during the 12 months prior to date of payment, is available to be paid as a
dividend to the parent company. In addition, by agreement with the New Hampshire
3
<PAGE>
Insurance Department, as well as certain other state insurance departments,
dividend paying capacity for the Continental Insurance Company Pool is
restricted to internal and external debt service requirements through September
2003 up to a maximum of $85 million annually, without the prior approval of the
New Hampshire Insurance Department. As of December 31, 2000, approximately $881
million of dividend payments would not be subject to insurance department prior
approval. However, all dividends must be reported to the domiciliary insurance
department prior to declaration and payment.
Regulation
The insurance industry is subject to comprehensive and detailed regulation
and supervision throughout the United States. Each state has established
supervisory agencies with broad administrative powers relative to licensing
insurers and agents, approving policy forms, establishing reserve requirements,
fixing minimum interest rates for accumulation of surrender values and maximum
interest rates of policy loans, prescribing the form and content of statutory
financial reports and regulating solvency and the type and amount of investments
permitted. Such regulatory powers also extend to premium rate regulations, which
require that rates not be excessive, inadequate or unfairly discriminatory. In
addition to regulation of dividends by insurance subsidiaries discussed above,
intercompany transfers of assets may be subject to prior notice or approval by
the state insurance regulator, depending on the size of such transfers and
payments in relation to the financial position of the insurance affiliates
making the transfer.
Insurers are also required by the states to provide coverage to insureds
who would not otherwise be considered eligible by the insurers. Each state
dictates the types of insurance and the level of coverage that must be provided
to such involuntary risks. CNA's share of these involuntary risks is mandatory
and generally a function of its respective share of the voluntary market by line
of insurance in each state.
Reform of the U.S. tort liability system is another issue facing the
insurance industry. Over the last decade, many states have passed some type of
reform, but more recently, a number of state courts have modified or overturned
these reforms. Additionally, new causes of action and theories of damages
continue to be proposed in state court actions or by legislatures. Continued
unpredictability in the law means that insurance underwriting and rating is
expected 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 business in a variety of ways. These
initiatives and legislation include tort reform proposals; proposals to overhaul
the Superfund hazardous waste removal and liability statute; additional
financial services modernization legislation, which could include provisions to
have an alternate federal system of regulation for insurance companies; and
various tax proposals affecting insurance companies.
The National Association of Insurance Commissioners (NAIC) has adopted risk
based capital (RBC) requirements for both life insurance companies and
property-casualty insurance companies. The requirements are to be utilized by
state insurance departments as a minimum capital requirement identifying
companies that merit further regulatory action. The formulas were not developed
to differentiate adequately capitalized companies that operate with capital
levels higher than the RBC requirements. Therefore, it is inappropriate and
inadvisable to use the formula to rate or rank insurers. At December 31, 2000
and 1999, all of the Company's life and property-casualty companies had adjusted
capital in excess of amounts requiring any regulatory action.
Subsidiaries with insurance operations outside the United States are also
subject to regulation in the countries in which they operate.
4
<PAGE>
Reinsurance
Information as to CNA's reinsurance activities is set forth in Note G of
the Consolidated Financial Statements of the 2000 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
Employee Relations
As of December 31, 2000, CNA had approximately 19,100 full-time equivalent
employees and has experienced satisfactory labor relations. CNA has never had
work stoppages due to labor disputes.
CNA has comprehensive benefit plans for substantially all of its employees,
including retirement plans, savings plans, disability programs, group life
programs and group healthcare programs. See Note I of the Consolidated Financial
Statements of the 2000 Annual Report to Shareholders for further discussion,
incorporated by reference in Item 8, herein.
Government Contracts
CNA's premium revenue includes premiums under contracts involving U.S.
government employees and their dependents. Such premiums were approximately
$2.1 billion, $2.1 billion and $2.0 billion in 2000, 1999 and 1998.
Business Segments
Information as to CNA's business segments is set forth in Note M of the
Consolidated Financial Statements of the 2000 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
Additional information as to CNA's business segments is set forth in the
Management's Discussion and Analysis section of the 2000 Annual Report to
Shareholders, incorporated by reference in Item 7, herein.
5
<PAGE>
Supplementary Insurance Data
The following table sets forth supplementary insurance data:
<TABLE>
<CAPTION>
Years ended December 31, 2000 1999 1998
---------- ---------- ----------
(In millions, except ratio information)
<S> <C> <C> <C>
Trade Ratios - GAAP basis (a)
Loss ratio 81.2% 87.1% 81.8%
Expense ratio 30.3 32.4 33.6
Combined ratio (before policyholder dividends) 111.5 119.5 115.4
Policyholder dividend ratio 0.9 0.3 1.1
Trade Ratios - Statutory basis (a)
Loss ratio 80.4% 87.3% 81.5%
Expense ratio 33.2 33.5 32.8
Combined ratio (before policyholder dividends) 113.6 120.8 114.3
Policyholder dividend ratio 1.2 0.3 1.0
Gross Life Insurance In-force
Life (b) $ 462,799 $ 394,743 $ 317,720
Group 71,982 75,247 76,674
---------- ---------- ----------
$ 534,781 $ 469,990 $ 394,394
========== ========== ==========
Other Data - Statutory basis (c)
Property-casualty capital and surplus* $ 8,387 $ 8,679 $ 7,623
Life capital and surplus 1,274 1,222 1,109
Property-casualty written premiums to surplus ratio 1.0 1.0 1.4
Life capital and surplus-percent of total liabilities 24.5% 21.9% 20.5%
Participating policyholders-percent of gross life insurance in force 0.4% 0.5% 0.5%
</TABLE>
* Surplus includes equity of property-casualty companies' ownership in life
insurance subsidiaries.
(a) Trade ratios reflect the results of CNA's property-casualty insurance
subsidiaries. Trade ratios are industry measures of property-casualty
underwriting results. The loss ratio is the percentage of incurred claim
and claim adjustment expenses to premiums earned. The primary difference in
this ratio between statutory accounting practices (SAP) and accounting
principles generally accepted in the United States of America (GAAP) is
related primarily to the treatment of active life reserves (ALR). For GAAP,
ALR are classified as loss reserves whereas for SAP, ALR are classified as
unearned premium reserves. The expense ratio, using amounts determined in
accordance with GAAP, is the percentage of underwriting expenses, including
the amortization of deferred acquisition costs, to premiums earned. The
expense ratio, using amounts determined in accordance with SAP, is the
percentage of underwriting expenses (with no deferral of acquisition costs)
to premiums written. The combined ratio (before policyholder dividends) is
the sum of the loss and expense ratios. The policyholder dividend ratio,
using amounts determined in accordance with GAAP, is the ratio of dividends
incurred to premiums earned. The policyholder dividend ratio, using amounts
determined in accordance with SAP, is the ratio of dividends paid to
premiums earned.
(b) Lapse ratios for individual life insurance, as measured by surrenders and
withdrawals as a percentage of average ordinary life insurance in-force,
were 12.7%, 10.9% and 14.7% in 2000, 1999 and 1998.
(c) Other data is determined in accordance with SAP. Life statutory capital and
surplus as a percent of total liabilities is determined after excluding
Separate Account liabilities and reclassifying the statutorily required
Asset Valuation Reserve to surplus.
6
<PAGE>
The following table displays the distribution of gross written premiums for
CNA's operations:
<TABLE>
<CAPTION>
Percent of Total
Gross Written Premiums --------------------------------
Years ended December 31, 2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
New York 7.3% 7.4% 8.3%
California 6.0 7.1 8.0
Texas 4.7 5.4 5.6
Florida 4.8 4.6 4.5
Pennsylvania 3.8 4.1 4.4
New Jersey 3.4 3.5 4.0
Illinois 9.2 8.6 9.2
Maryland 5.6 4.5 2.1
United Kingdom 5.3 5.8 3.5
All other states, countries or political subdivisions (a) 49.9 49.0 50.4
---------- ---------- ----------
Total 100.0% 100.0% 100.0%
========== ========== ==========
</TABLE>
(a) No other individual state, country or political subdivision accounts for
more than 3.0% of gross written premiums.
Approximately 8.2%, 7.6% and 5.0% of CNA's gross written premiums are
derived from outside of the United States for the years ended
December 31, 2000, 1999 and 1998. The increase in foreign premiums are
indicative of CNA's continued expansion overseas, which reflects greater
awareness and working knowledge of international business to seize the
opportunities of international economic growth. Premiums from any individual
foreign country besides those stated in the table above are not significant.
Property-Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over
time of reserves established for property-casualty claim and claim adjustment
expenses at the end of the preceding eleven calendar years for CNA's
property-casualty operations. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down, shows
the cumulative amounts paid as of the end of successive years with respect to
the originally reported reserve liability. The third section, reading down,
shows re-estimates of the originally recorded reserves as of the end of each
successive year, which is the result of the Company's property-casualty
insurance subsidiaries' expanded awareness of additional facts and circumstances
that pertain to the unsettled claims. The last section compares the latest
re-estimated reserves to the reserves originally established, and indicates
whether the original reserves were adequate or inadequate to cover the estimated
costs of unsettled claims.
7
<PAGE>
The loss reserve development table for property-casualty companies is
cumulative and, therefore, ending balances should not be added since the amount
at the end of each calendar year includes activity for both the current and
prior years.
<TABLE>
<CAPTION>
Schedule of Property-Casualty
Loss Reserve Development
Calendar Year Ended 1990(a) 1991(a) 1992(a) 1993(a) 1994(a) 1995(b) 1996
-------- -------- -------- -------- -------- -------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Originally reported gross reserves
for unpaid claims and claim expenses $ 20,812 $ 21,639 $ 31,044 $ 29,357
Originally reported ceded recoverable 2,491 2,705 6,089 5,660
-------- -------- -------- --------
Originally reported net reserves for
unpaid claim and claim expenses $ 13,090 $ 14,415 $ 17,167 $ 18,321 $ 18,934 $ 24,955 $ 23,697
-------- -------- -------- -------- -------- -------- --------
Cumulative net paid as of:
One year later $ 3,285 $ 3,411 $ 3,706 $ 3,629 $ 3,656 $ 6,510 $ 5,851
Two years later 5,623 6,024 6,354 6,143 7,087 10,485 9,796
Three years later 7,490 7,946 8,121 8,764 9,195 13,363 13,602
Four years later 8,845 9,218 10,241 10,318 10,624 16,271 15,793
Five years later 9,726 10,950 11,461 11,378 12,577 17,947 --
Six years later 11,207 11,951 12,308 13,100 13,472 -- --
Seven years later 12,023 12,639 13,974 13,848 -- -- --
Eight years later 12,592 14,271 14,640 -- -- -- --
Nine years later 14,159 14,873 -- -- -- -- --
Ten years later 14,693 -- -- -- -- -- --
Net reserves re-estimated as of:
End of initial year $ 13,090 $ 14,415 $ 17,167 $ 18,321 $ 18,934 $ 24,955 $ 23,697
One year later 12,984 16,032 17,757 18,250 18,922 24,864 23,441
Two years later 14,693 16,810 17,728 18,125 18,500 24,294 23,102
Three years later 15,737 16,944 17,823 17,868 18,008 23,814 23,270
Four years later 15,977 17,376 17,765 17,511 17,354 24,092 22,977
Five years later 16,440 17,329 17,560 17,082 17,506 23,854 --
Six years later 16,430 17,293 17,285 17,176 17,248 -- --
Seven years later 16,551 17,069 17,398 17,017 -- -- --
Eight years later 16,487 17,189 17,354 -- -- -- --
Nine years later 16,592 17,174 -- -- -- -- --
Ten years later 16,586 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total net (deficiency) redundancy $ (3,496) $ (2,759) $ (187) $ 1,304 $ 1,686 $ 1,101 $ 720
======== ======== ======== ======== ======== ======== ========
Reconciliation to gross re-estimated reserves:
Net reserves re-estimated $ 16,586 $ 17,174 $ 17,354 $ 17,017 $ 17,248 $ 23,854 $ 22,977
======== ======== ========
Re-estimated ceded recoverable 1,640 1,956 5,835 5,151
-------- -------- -------- --------
Total gross re-estimated reserves $ 18,657 $ 19,204 $ 29,689 $ 28,128
======== ======== ======== ========
Net (deficiency) redundancy related to:
Asbestos claims $ (3,421) $ (3,378) $ (1,690) $ (1,091) $ (1,057) $ (893) $ (992)
Environmental claims (977) (936) (894) (452) (283) (201) (142)
-------- -------- -------- -------- -------- -------- --------
Total asbestos and environmental (4,398) (4,314) (2,584) (1,543) (1,340) (1,094) (1,134)
Other claims 902 1,555 2,397 2,847 3,026 2,195 1,854
-------- -------- -------- -------- -------- -------- --------
Total net (deficiency) redundancy $ (3,496) $ (2,759) $ (187) $ 1,304 $ 1,686 $ 1,101 $ 720
======== ======== ======== ======== ======== ======== ========
<CAPTION>
Schedule of Property-Casualty
Loss Reserve Development
Calander Year Ended 1997(c) 1998(d) 1999(e) 2000(f)
-------- -------- -------- --------
(In millions)
<S> <C> <C> <C> <C>
Orginally reported gross reserves
for unpaid claims and claim expenses $ 28,533 $ 28,317 $ 26,631 $ 26,408
Originally reported ceded recoverable 5,326 5,424 6,273 7,568
-------- -------- -------- --------
Originally reported net reserves for
unpaid claim and claim expenses $ 23,207 $ 22,893 $ 20,358 $ 18,840
-------- -------- -------- --------
Cumulative net paid as of:
One year later $ 5,954 $ 7,321 $ 6,546 $ --
Two years later 11,394 12,241 -- --
Three years later 14,423 -- -- --
Four years later -- -- -- --
Five years later -- -- -- --
Six years later -- -- -- --
Seven years later -- -- -- --
Eight years later -- -- -- --
Nine years later -- -- -- --
Ten years later -- -- -- --
Net reserves re-estimated as of:
End of initial year $ 23,207 $ 22,893 $ 20,358 $ 18,840
One year later 23,470 23,920 20,785 --
Two years later 23,717 23,774 -- --
Three years later 23,414 -- -- --
Four years later -- -- -- --
Five years later -- -- -- --
Six years later -- -- -- --
Seven years later -- -- -- --
Eight years later -- -- -- --
Nine years later -- -- -- --
Ten years later -- -- -- --
-------- -------- -------- --------
Total net (deficiency) redundancy $ (207) $ (881) $ (427) $ --
======== ======== ======== ========
Reconciliation to gross re-estimated reserves:
Net reserves re-estimated $ 23,414 $ 23,774 $ 20,785 $ --
Re-estimated ceded recoverable 4,481 4,614 6,530 --
-------- -------- -------- --------
Total gross re-estimated reserves $ 27,895 $ 28,388 $ 27,315 $ --
======== ======== ======== ========
Net (deficiency) redundancy related to:
Asbestos claims $ (888) $ (644) $ (65) $ --
Environmental claims (154) 70 (17) --
-------- -------- -------- --------
Total asbestos and environmental (1,042) (574) (82) --
Other claims 835 (307) (345) --
-------- -------- -------- --------
Total net (deficiency) redundancy $ (207) $ (881) $ (427) $ --
======== ======== ======== ========
</TABLE>
(a) Reflects reserves of CNA's property-casualty insurance subsidiaries,
excluding Continental reserves, which were acquired on May 10, 1995 (the
Acquisition Date). Accordingly, the reserve development (net reserves
recorded at the end of the year, as initially estimated, less net reserves
re-estimated as of subsequent years) does not include Continental.
(b) Includes Continental gross reserves of $9,713 million and net reserves of
$6,063 million acquired on the Acquisition Date and subsequent development
thereon.
(c) Includes net and gross reserves of acquired companies of $57 million and
$64 million.
(d) Includes net and gross reserves of acquired companies of $122 million and
$223 million.
(e) Ceded recoverable includes reserves transferred under retroactive
reinsurance agreements of $784 million as of December 31, 1999.
(f) Includes net and gross reserves of acquired companies of $9 million and
$13 million. Ceded recoverable includes reserves transferred under
retroactive reinsurance agreements of $414 million as of December 31, 2000.
8
<PAGE>
Additional information as to CNA's property-casualty claim and claim
expense reserves and reserve development is set forth in Notes A and E of the
Consolidated Financial Statements of the 2000 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
Investments
Information as to the Company's investments is set forth in Notes B and C
of the Consolidated Financial Statements of the 2000 Annual Report to
Shareholders, incorporated by reference in Item 8, herein.
Additional information as to the Company's investments is set forth in the
Management's Discussion and Analysis section of the 2000 Annual Report to
Shareholders, incorporated by reference in Item 7, herein.
9
<PAGE>
ITEM 2. PROPERTIES
CNA Plaza, owned by Continental Assurance Company, serves as the home
office for CNAF and its insurance subsidiaries. An adjacent building (located at
55 E. Jackson Blvd.), jointly owned by Continental Casualty Company and
Continental Assurance Company, is partially situated on grounds under leases
expiring in 2058. Approximately 40% of the adjacent building is rented to
non-affiliates. CNAF's subsidiaries lease office space in various cities
throughout the United States and in other countries. The following table sets
forth certain information with respect to the principal office buildings owned
or leased by CNAF's subsidiaries:
----------------------------------------------------------------------------
Amount Of Building
Owned and Occupied or
Leased by CNA or its
Location Subsidiaries Principal Usage
----------------------------------------------------------------------------
CNA Plaza
333 S. Wabash 1,144,378 sq. ft.(1) Principal executive
Chicago, Illinois offices of CNAF
180 Maiden Lane 1,115,100(1)(3) Property-casualty
New York, New York insurance offices
55 E. Jackson Blvd. 440,292(1) Principal executive
Chicago, Illinois offices of CNAF
401 Penn Street 254,589(1) Leased to tenants
Reading, Pennsylvania
100 CNA Drive 251,363(1) Life insurance offices
Nashville, Tennessee
1111 E. Broad St. 225,470(2) Property-casualty
Columbus, Ohio insurance offices
40 Wall Street 199,238(2) Property-casualty
New York, New York insurance offices
1110 Ward Avenue 186,687(1) Property-casualty
Honolulu, Hawaii insurance offices
2405 Lucien Way 178,744(2) Property-casualty
Maitland, Florida insurance offices
3500 Lacey Road 168,793(2) Property-casualty
Downers Grove, Illinois insurance offices
333 Glen Street 164,032(2) Property-casualty
Glens Falls, New York insurance offices
1100 Cornwall Road 147,884(2) Property-casualty
Monmouth Junction, New Jersey insurance offices
600 North Pearl Street 139,151(2) Property-casualty
Dallas, Texas insurance offices
(1) Represents property owned by CNAF or its subsidiaries.
(2) Represents property leased by CNAF or its subsidiaries.
(3) Sold subsequent to December 31, 2000.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Information as to CNA's legal proceedings is set forth in Note F of the
Consolidated Financial Statements of the 2000 Annual Report to Shareholders,
incorporated by reference in Item 8, herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from page 74 of the 2000 Annual Report to
Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from page 1 of the 2000 Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated herein by reference from pages 21 through 40 of the 2000
Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference from pages 34 through 38 of the 2000
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Operations - Years Ended December 3l, 2000, 1999
and 1998
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Cash Flows - Years Ended December 31, 2000, 1999
and 1998
Consolidated Statements of Stockholders' Equity - December 31, 2000, 1999
and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
The above Consolidated Financial Statements, the related Notes to the
Consolidated Financial Statements and the Independent Auditors' Report are
incorporated herein by reference from pages 41 through 72 of the 2000 Annual
Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION AND
OFFICES HELD FIRST BECAME
NAME WITH REGISTRANT AGE OFFICER OF CNA PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Laurence A. Tisch Chief Executive 78 1974 Co-Chairman of the Board of Loews Corporation since
Officer, CNA January 1999. Chief Executive Officer of CNA and Director
Financial of Automatic Data Processing, Inc. and Bulova Corporation.
Corporation Prior to 1999, Mr. Tisch had been Co-Chairman of the Board
and Co-Chief Executive Officer of Loews since 1994.
Executive Officer of the Registrant since 1974.
Bernard L. Hengesbaugh Chairman of the 54 1980 Chairman of the Board and Chief Executive Officer of CNA
Board and Chief insurance companies since February 1999. Executive Vice
Executive President and Chief Operating Officer of CNA insurance
Officer, CNA companies from February 1998 until February 1999. Senior
insurance Vice President of CNA insurance companies since November 1990.
companies Executive Officer of the Registrant since 1996.
Robert V. Deutsch Senior Vice 41 1999 Senior Vice President and Chief Financial Officer of CNA
President and Financial Corporation and subsidiaries since August 1999.
Chief Financial From June 1987 until August 1999, Mr. Deutsch was Executive
Officer, CNA Vice President, Chief Financial Officer, Chief Actuary and
Financial Assistant Secretary of Executive Risk, Inc. Executive
Corporation Officer of the Registrant since 1999.
Jonathan D. Kantor Senior Vice 45 1994 Senior Vice President, General Counsel and Secretary of the
President, Registrant since 1998. Senior Vice President, General
General Counsel Counsel and Secretary of CNA insurance companies since 1997.
and Secretary, Prior thereto, Group Vice President of CNA insurance
CNA Financial companies since 1994. Executive Officer of the Registrant
Corporation since 1997.
Thomas Pontarelli Senior Vice 51 1998 Senior Vice President of the Registrant since March 2000.
President, CNA From January 1998 to March 2000, Mr. Pontarelli was Group
Financial Vice President. Prior to that time, he was Chairman of the
Corporation Board, Chief Executive and President of Washington National
Insurance Company, Director of the Registrant since March
2000.
</TABLE>
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
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.
ITEM 11. EXECUTIVE COMPENSATION
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
12
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
13
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
Page
(a) 1. FINANCIAL STATEMENTS: Number
------
A separate index to the Consolidated Financial Statements
is presented in Part II, Item 8...................................11
(a) 2. FINANCIAL STATEMENT SCHEDULES:
Schedule I Summary of Investments..............................17
Schedule II Condensed Financial Information (Parent Company)....18
Schedule III Supplementary Insurance Information.................23
Schedule IV Reinsurance.........................................24
Schedule V Valuation and Qualifying Accounts...................24
Schedule VI Supplementary Information Concerning
Property-Casualty Insurance Operations............24
Independent Auditors' Report......................................25
(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 20, 1999 (Exhibit 3.1 to 1999 Form 10-K
incorporated herein by reference.)...............................3.1
By-Laws of CNA Financial Corporation, as amended
February 10, 1999 (Exhibit 3.2 to 1998 Form 10-K
incorporated herein by reference.)...............................3.2
(4) Instruments defining the rights of security holders,
including indentures: CNA Financial Corporation hereby agrees
to furnish to the Commission upon request copies of
instruments with respect to long-term debt, pursuant to
Item 601(b)(4)(iii) of Regulation S-K............................4.1
(10) Material contracts:
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.)..............................10.1
14
<PAGE>
Exhibit
Description of Exhibit Number
---------------------- ------
(10) Material contracts (continued):
Continuing Services Agreement between CNA Financial
Corporation and Edward J. Noha, dated February 27, 1991
(Exhibit 6.0 to 1991 Form 8-K, filed March 18, 1991,
incorporated herein by reference.)............................10.2
CNA Employees' Supplemental Savings Plan, as amended
through January 1, 1994 (Exhibit 10.3 to 1999 Form 10-K
incorporated herein by reference.)............................10.3
CNA Employees' Retirement Benefit Equalization Plan, as
amended through January 1, 1994 (Exhibit 10.4 to 1999
Form 10-K incorporated herein by reference.)..................10.4
Continental Casualty Company "CNA" Annual Incentive Bonus
Plan Provisions (Exhibit 10.1 to 1994 Form 10K incorporated
herein by reference.).........................................10.5
Continuing Services Agreement between CNA Financial
Corporation and Dennis H. Chookaszian, dated
February 9, 1999 (Exhibit 10.2 to 1998 Form 10-K
incorporated herein by reference.)............................10.6
Employment Agreement between CNA Financial Corporation
and Bernard Hengesbaugh, dated November 2, 2000 (Exhibit 10
to September 30, 2000 Form 10-Q incorporated herein by
reference.)...................................................10.7
CNA Financial Corporation 2000 Long-Term Incentive Plan,
dated August 4, 1999 (Exhibit 4.1 to 1999 Form S-8 filed
August 4, 1999, incorporated herein by reference.)............10.8
Employment Agreement between CNA Financial Corporation
and Robert V. Deutsch, dated August 16, 1999 (Exhibit 10
to September 30, 1999 Form 10-Q incorporated herein by
reference.)...................................................10.9
Employment Agreement between CNA Financial Corporation
and Thomas F. Taylor dated November 2, 1999 (Exhibit
10.14 to 1999 Form 10-K incorporated herein by
reference.)...................................................10.10
Sale and Purchase Agreement between CNA Financial
Corporation and PGI-WvF 180, L.P. dated October 13, 2000
for the sale of real property commonly known as
180 Maiden Lane...............................................10.11*
(12) Computation of Ratio of Earnings to Fixed Charges.............12.1*
(13) 2000 Annual Report............................................13.1*
(21) Primary Subsidiaries of CNAF..................................21.1*
15
<PAGE>
Exhibit
Description of Exhibit Number
---------------------- ------
(23) Independent Auditors' Consent.................................23.1*
*Filed herewith
(b) Reports on Form 8-K:
None.
(c) Exhibits:
None.
(d) Condensed Financial Information of Unconsolidated Subsidiaries:
None.
16
<PAGE>
SCHEDULE I CNA FINANCIAL CORPORATION SUMMARY OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 2000
---------------------------------------
(In millions) Cost or
Amortized Fair Carrying
Cost Value Value
------- ------- -------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Bonds:
United States Government and government
agencies and authorities - taxable $ 8,807 $ 9,051 $ 9,051
States, municipalities and political
subdivisions - tax exempt 3,279 3,349 3,349
Foreign governments and political
subdivisions 2,306 2,250 2,250
Public utilities 680 662 662
Convertibles and bonds with
warrants attached 209 199 199
All other corporate bonds 11,244 11,087 11,087
Redeemable preferred stocks 54 54 54
------- ------- -------
Total fixed maturity securities available-for-sale 26,579 26,652 26,652
------- ======= -------
Equity securities available-for-sale:
Common stocks:
Banks, trusts and insurance companies 23 29 29
Public utilities 17 20 20
Industrial and other 928 2,167 2,167
Non-redeemable preferred stocks 207 196 196
------- ------- -------
Total equity securities available-for-sale 1,175 $ 2,412 2,412
------- ======= -------
Mortgage loans 22 22
Real estate 4 4
Policy loans 193 193
Other invested assets 1,119 1,116
Short-term investments 4,723 4,723
------- -------
Total investments $33,815 $35,122
======= =======
</TABLE>
17
<PAGE>
SCHEDULE II CNA FINANCIAL CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL
INFORMATION
<TABLE>
<CAPTION>
Financial Position
December 31, 2000 1999
------- -------
<S> <C> <C>
(In millions)
Assets:
Cash $ -- $ 4
Investment in subsidiaries 11,284 10,490
Amounts due from subsidiaries 262 409
Notes receivable from affiliates 454 534
Short-term investments -- 3
Other 6 19
------- -------
Total assets $12,006 $11,459
======= =======
Liabilities:
Debt $ 2,355 $ 2,492
Other 4 29
------- -------
Total liabilities 2,359 2,521
------- -------
Stockholders' equity:
Other comprehensive income 873 1,188
Other stockholders' equity 8,774 7,750
------- -------
Total stockholders' equity 9,647 8,938
------- -------
Total liabilities and stockholders' equity $12,006 $11,459
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Information.
18
<PAGE>
<TABLE>
<CAPTION>
Results of Operations
Years ended December 31, 2000 1999 1998
------- ----- -----
(In millions)
<S> <C> <C> <C>
Revenues:
Net investment income $ 11 $ 8 $ 13
Realized investment (losses) gains (4) 8 (2)
Other income 38 25 25
------- ----- -----
Total revenues 45 41 36
------- ----- -----
Expenses:
Administrative and general 208 206 189
Interest 175 160 148
------- ----- -----
Total expenses 383 366 337
------- ----- -----
Loss from operations before income taxes, equity in net income of
subsidiaries and the cumulative effect of a change in accounting principle (338) (325) (301)
Income tax benefit 118 114 105
------- ----- -----
Loss before equity in net income of subsidiaries and the cumulative
effect of a change in accounting principle (220) (211) (196)
Equity in net income of subsidiaries 1,434 258 478
Cumulative effect of a change in accounting principle, net of tax of $95 -- (177) --
------- ----- -----
Net income (loss) $ 1,214 $(130) $ 282
======= ===== =====
</TABLE>
See accompanying Notes to Condensed Financial Information.
19
<PAGE>
<TABLE>
<CAPTION>
Cash Flows
Years ended December 31, 2000 1999 1998
------- ------- -------
(In millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,214 $ (130) $ 282
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
(Undistributed earnings) distributions in excess of earnings of affiliates (1,005) 350 (55)
Cumulative effect of change in accounting principle, net of tax -- 177 --
Realized losses (gains) 4 (8) 2
Changes in:
Amounts due from affiliates 147 (59) (53)
Other, net 36 88 (64)
------- ------- -------
Total adjustments (818) 548 (170)
------- ------- -------
Net cash flows from operating activities 396 418 112
------- ------- -------
Cash flows from investing activities:
Change in short-term investments 3 -- 171
Capital contributions to subsidiaries, net (165) (198) (260)
Purchase of preferred stock of subsidiaries -- -- (305)
Loans to subsidiaries 80 (20) (309)
Other, net 9 -- (3)
------- ------- -------
Net cash flows used by investing activities (73) (218) (706)
------- ------- -------
Cash flows from financing activities:
Dividends paid to preferred shareholders (1) (13) (7)
Proceeds from issuance of long-term debt -- 175 993
Principal payments on long-term debt (137) (158) (490)
Issuance (redemption) of cumulative exchangeable preferred stock (150) (200) 200
Purchase of treasury stock (35) -- (102)
Other, net (4) -- --
------- ------- -------
Net cash flows (used by) from financing activities (327) (196) 594
------- ------- -------
Net change in cash and cash equivalents (4) 4 --
Cash and cash equivalents, beginning of year 4 -- --
------- ------- -------
Cash and cash equivalents, end of year $ -- $ 4 $ --
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid (received):
Interest $ 168 $ 169 $ 129
Federal income taxes (154) (279) 143
Non-cash transactions:
Notes receivable for the issuance of common stock 4 19 44
</TABLE>
See accompanying Notes to Condensed Financial Information.
20
<PAGE>
Notes to Condensed Financial Information
a. Basis of presentation
The condensed financial information of CNA Financial Corporation (Parent
Company) should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the CNA Financial Corporation 2000
Annual Report to Shareholders. Investments in subsidiaries are accounted for
using the equity method of accounting.
Certain amounts applicable to prior years have been reclassified to conform to
classifications followed in 2000.
b. Debt
<TABLE>
<CAPTION>
December 31, 2000 1999
------ ------
<S> <C> <C>
(In millions)
Variable rate debt:
Commercial paper $ 627 $ 675
Credit facility -- 77
Senior notes:
6.25%, due November 15, 2003 249 249
6.50%, due April 15, 2005 491 497
6.75%, due November 15, 2006 249 248
6.45%, due January 15, 2008 149 149
6.60%, due December 15, 2008 199 199
6.95%, due January 15, 2018 148 148
7.25% Debenture, due November 15, 2023 240 247
1.00% Urban Development Action Grant, due May 7, 2019 3 3
------ ------
Total $2,355 $2,492
====== ======
</TABLE>
The Parent Company has a $750 million revolving credit facility (the Facility)
that expires in May 2001. The amount available under the Facility is reduced by
the Parent Company's outstanding commercial paper borrowings. As of
December 31, 2000, there was $123 million of unused borrowing capacity under the
Facility. The interest rate on the Facility is equal to the London Interbank
Offered Rate (LIBOR), plus 27.5 basis points. Additionally, there is an annual
facility fee of 12.5 basis points on the entire Facility. There were no
borrowings under the Facility at December 31, 2000. The average interest rate on
the borrowings under the Facility, excluding facility fees, for the year ended
December 31, 1999 was 6.66%.
The weighted average interest rate on commercial paper was 7.24%, 6.50% and
5.89% at December 31, 2000, 1999 and 1998. At December 31, 2000, the commercial
paper program had a weighted average maturity of 22 days.
To offset the variable rate characteristics of the Facility and the interest
rate risk associated with periodically reissuing commercial paper and
variable-rate bank loans, the Parent Company was party to interest rate swap
agreements with several banks. The last of these agreements expired on
December 14, 2000. These agreements required the Parent Company to pay interest
at a fixed rate in exchange for the receipt of three-month LIBOR. The effect of
the interest rate swap agreements was to decrease interest expense by
approximately $2 million for the year ended December 31, 2000 and increase
interest expense by approximately $4 million and $2 million for the years ended
December 31, 1999 and 1998.
The combined weighted average cost of Facility borrowings, and commercial paper
borrowings, including Facility fees and interest rate swaps, was 7.36%, 6.47%
and 6.36% at December 31, 2000, 1999 and 1998.
21
<PAGE>
On February 15, 2000, Standard & Poor's lowered the Parent Company's senior debt
rating from A- to BBB and lowered the Parent Company's preferred stock rating
from BBB to BB+. As a result of these actions the facility fee payable on the
aggregate amount of the Facility was increased to 12.5 basis points per annum
and the interest rate on the Facility was increased to LIBOR plus 27.5 basis
points from their previous levels of 9 basis points per annum and LIBOR plus
16 basis points.
c. Management and administrative expenses
The Parent Company has reimbursed, or will reimburse, its subsidiaries for the
net of general management and administrative expenses, certain extra contractual
obligations and investment expenses of $200 million, $203 million and
$189 million in 2000, 1999 and 1998, respectively.
d. Capital transactions
In 2000, 1999 and 1998, the Parent Company contributed approximately
$171 million, $207 million and $260 million to the capital of its subsidiaries.
In 2000 and 1999, CNA subsidiaries returned capital to the Parent Company of
approximately $6 million and $9 million. There were no returns of capital in
1998.
e. Dividends from subsidiaries and affiliates
In 2000, 1999 and 1998, the Parent Company received approximately $429 million,
$608 million and $423 million in dividends from subsidiaries included in its
consolidated financial statements.
22
<PAGE>
SCHEDULE III CNA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Gross Insurance Reserves
----------------------------------------- Insurance Amortiz-
Claim Claims and ation
Deferred and Future Policy- Net Net Policy- of Deferred
Acquisition Claim Policy Unearned holders' Premium Investment holders' Acquisition
(In millions) Costs Expense Benefits Premium Funds Revenue Income Benefits Costs
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 2000
Agency Market Operations $ 3,331 $ 604 $ 2,778 $ 880
Specialty Operations 799 216 603 161
CNA Re 1,089 195 888 263
Global Operations 1,089 136 657 305
Risk Management 637 163 610 86
Group Operations 3,675 142 3,068 17
Life Operations 876 601 1,104 168
Corporate and Other 24 23 169 --
Eliminations (46) -- (46) --
Consolidated Operations $ 2,418 $ 26,962 $ 6,669 $ 4,821 $ 602 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ 2,418 $ 26,962 $ 6,669 $ 4,821 $ 602 $ 11,474 $ 2,080 $ 9,831 $ 1,880
======== ======== ======== ======== ======== ======== ======== ======== ========
December 31, 1999
Agency Market Operations $ 4,799 $ 686 $ 4,339 $ 1,182
Specialty Operations 1,001 235 907 187
CNA Re 1,176 161 998 290
Global Operations 1,010 132 578 231
Risk Management 801 154 755 71
Group Operations 3,571 130 3,053 2
Life Operations 936 556 1,122 180
Corporate and Other 35 47 185 --
Eliminations (47) -- (47) --
Consolidated Operations $ 2,436 $ 27,356 $ 6,102 $ 5,103 $ 710 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ 2,436 $ 27,356 $ 6,102 $ 5,103 $ 710 $ 13,282 $ 2,101 $ 11,890 $ 2,143
======== ======== ======== ======== ======== ======== ======== ======== ========
December 31, 1998
Agency Market Operations $ 5,247 $ 744 $ 4,436 $ 1,239
Specialty Operations 1,092 245 949 175
CNA Re 944 163 707 252
Global Operations 941 110 589 224
Risk Management 823 144 765 98
Group Operations 3,733 133 3,171 5
Life Operations 823 525 997 178
Corporate and Other (26) 82 128 9
Eliminations (41) -- (41) --
Consolidated Operations -- -- -- --
-------- -------- -------- --------
$ 13,536 $ 2,146 $ 11,701 $ 2,180
======== ======== ======== ========
<CAPTION>
Other Net
Operating Premiums
(In millions) Expenses Written*
-------- --------
<S> <C> <C>
December 31, 2000
Agency Market Operations $ 299 $ 3,230
Specialty Operations 85 805
CNA Re 48 951
Global Operations 279 1,160
Risk Management 388 633
Group Operations 731 1,497
Life Operations 143 388
Corporate and Other 49 22
Eliminations (135) --
Consolidated Operations -- --
-------- --------
$ 1,887 $ 8,686
======== ========
December 31, 1999
Agency Market Operations $ 347 $ 3,667
Specialty Operations 102 948
CNA Re 76 1,275
Global Operations 315 1,080
Risk Management 417 839
Group Operations 697 804
Life Operations 94 337
Corporate and Other 236 37
Eliminations (188) --
Consolidated Operations -- --
-------- --------
$ 2,096 $ 8,987
======== ========
December 31, 1998
Agency Market Operations $ 427 $ 5,461
Specialty Operations 171 1,023
CNA Re 57 908
Global Operations 247 985
Risk Management 378 889
Group Operations 758 1,008
Life Operations 104 295
Corporate and Other 312 --
Eliminations 13 --
Consolidated Operations -- --
-------- --------
$ 2,467 $ 10,569
======== ========
</TABLE>
* Premiums written relate to property-casualty companies only.
23
<PAGE>
SCHEDULE IV CNA FINANCIAL CORPORATION REINSURANCE
Incorporated herein by reference from Note G on page 60 of the 2000 Annual
Report to Shareholders.
SCHEDULE V CNA FINANCIAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
(In millions) of Period Expenses Accounts Deductions Period
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 2000
Deducted from assets:
Allowance for doubtful accounts:
Receivables $ 310 $ 16 $ -- $ 5 $ 321
======= ======= ======= ======= =======
Year ended December 31, 1999
Deducted from assets:
Allowance for doubtful accounts:
Receivables $ 328 $ (6) $ -- $ 12 $ 310
======= ======= ======= ======= =======
</TABLE>
SCHEDULE VI CNA FINANCIAL CORPORATION SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
Consolidated Property-Casualty Entities
---------------------------------------
As of and for the years ended December 31, 2000 1999 1998
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Deferred acquisition costs $ 1,121 $ 1,126
Reserves for unpaid claim and claim adjustment expenses 26,408 26,631
Discount deducted from claim and claim adjustment expense reserves above
(based on interest rates ranging from 3.5% to 7.5%) 2,413 2,376
Unearned premiums 4,821 5,103
Net earned premiums 8,893 10,010 $ 10,281
Net investment income 1,540 1,632 1,741
Incurred claim and claim adjustment expenses related to current year 6,331 7,287 7,903
Incurred claim and claim adjustment expenses related to prior years 427 1,027 263
Amortization of deferred acquisition costs 1,729 2,005 2,042
Paid claim and claim adjustment expenses 8,434 9,964 8,745
Net written premiums 8,686 8,987 10,569
</TABLE>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CNA Financial Corporation
We have audited the consolidated financial statements of CNA Financial
Corporation (an affiliate of Loews Corporation) and subsidiaries as of
December 31, 2000 and 1999, and for each of the three years in the period ended
December 31, 2000, and have issued our report thereon dated February 14, 2001,
which report includes an explanatory paragraph as to a certain accounting
change; such consolidated financial statements and report are included in the
Company's 2000 Annual Report to Shareholders and are incorporated herein by
reference. Our audits also included the financial statement schedules of CNA
Financial Corporation and subsidiaries listed in Item 14. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
February 14, 2001
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNA Financial Corporation
By /s/ Laurence A. Tisch
-----------------------------------
Laurence A. Tisch
Chief Executive Officer
(Principal Executive Officer)
By /s/ Robert V. Deutsch
-----------------------------------
Robert V. Deutsch
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Date: March 16, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title
/s/ Antoinette Cook Bush Director
- ------------------------------------
Antoinette Cook Bush
/s/ Dennis H. Chookaszian Director
- ------------------------------------
Dennis H. Chookaszian
/s/ Ronald L. Gallatin Director Dated
- ------------------------------------
Ronald L. Gallatin March 16, 2001
/s/ Robert P. Gwinn Director
- ------------------------------------
Robert P. Gwinn
/s/ Walter L. Harris Director
- ------------------------------------
Walter L. Harris
/s/ Bernard L. Hengesbaugh Director
- ------------------------------------
Bernard L. Hengesbaugh
26
<PAGE>
Signature Title
/s/ Walter F. Mondale Director
- ------------------------------------
Walter F. Mondale
/s/ Edward J. Noha Chairman of the Board
- ------------------------------------ and Director
Edward J. Noha
/s/ Joseph Rosenberg Director
- ------------------------------------
Joseph Rosenberg
/s/ James S. Tisch Director Dated
- ------------------------------------
James S. Tisch March 16, 2001
/s/ Laurence A. Tisch Chief Executive Officer
- ------------------------------------ and Director
Laurence A. Tisch
/s/ Preston R. Tisch Director
- ------------------------------------
Preston R. Tisch
/s/ Marvin Zonis Director
- ------------------------------------
Marvin Zonis
27
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>2
<FILENAME>d25096_ex10-10.txt
<DESCRIPTION>FIRST AMENDMENT TO SALE AND PURCHASE AGREEMENT
<TEXT>
SALE AND PURCHASE AGREEMENT
BETWEEN
THE SELLER POOL COMPANIES,
as set forth on Exhibit A
(SELLER)
AND
PGI-WvF 180 , L.P.
(PURCHASER)
<PAGE>
TABLE OF CONTENTS
Section Page
ARTICLE I
RECITALS
1.1 Real Property.................................................1
1.2 Personal Property.............................................1
1.3 Purchase and Sale.............................................1
ARTICLE II
PURCHASE PRICE
2.1 Price.........................................................2
2.1.1 Deposit...............................................2
2.1.2 Balance of Purchase Price.............................2
2.2 Investment....................................................2
2.3 Interest on the Cash Deposit..................................3
ARTICLE III
DUE DILIGENCE PERIOD
3.1 Due Diligence Materials.......................................3
3.2 Inspection of Property........................................3
3.3 Title and Survey..............................................4
3.4 Violations....................................................5
3.5 Seller's Obligations During Due Diligence Period..............6
3.5.1 27th Floor............................................6
3.5.2 Authority of Seller...................................6
3.6 Intentionally Deleted.........................................6
3.7 Seller's Payment to Purchaser.................................7
3.8 Purchaser's Termination Rights................................7
ARTICLE IV
CONDITIONS TO THE PARTIES' OBLIGATIONS
4.1 Conditions to Purchaser's Obligation to Purchase..............8
4.1.1 Performance by Seller.................................8
4.1.2 Delivery of Title and Possession.....................10
4.1.3 Tenant Estoppels.....................................10
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4.1.4 Seller's Representations.............................12
4.1.5 No Breach............................................12
4.2 Conditions to Seller's Obligation to Sell....................12
4.2.1 Performance by Purchaser.............................12
4.2.2 Receipt of Purchase Price............................12
ARTICLE V
PURCHASER'S DELIVERIES TO SELLER
5.1 Deliveries...................................................12
5.1.1 Purchase Price.......................................12
5.1.2 Assignment of Leases and Contracts...................12
5.1.3 Bill of Sale.........................................12
5.1.4 State Transfer Tax Form..............................12
5.1.5 City Transfer Tax Form...............................12
5.1.6 27th Floor Lease.....................................13
5.1.7 Closing Statement....................................13
5.1.8 Cash - Prorations....................................13
5.1.9 Resolutions..........................................13
5.1.10 Required Items.......................................13
5.1.11 Other Documents......................................13
ARTICLE VI
SELLER'S DELIVERIES TO PURCHASER
6.1 Delivery of Instruments and Documents........................13
6.1.1 Deed.................................................13
6.1.2 Assignment of Leases and Contracts...................13
6.1.3 Bill of Sale.........................................14
6.1.4 Notices to Tenants...................................14
6.1.5 FIRPTA Affidavit.....................................14
6.1.6 State Transfer Tax Form..............................14
6.1.7 City Transfer Tax Form...............................14
6.1.8 Closing Statement....................................14
6.1.9 Cash - Prorations....................................14
6.1.10 Estoppel Certificates................................14
6.1.11 Letters of Credit....................................14
6.1.12 Title Company Requirements...........................15
6.1.13 Assignment - Warranties/Guarantees...................15
6.1.14 Keys.................................................15
6.1.15 Licenses and Permits.................................15
6.1.16 Resolutions..........................................15
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6.1.17 Required Items.......................................15
6.1.18 Rent Roll............................................15
6.1.19 Utility Bills........................................15
6.1.20 Guarantee............................................15
6.1.21 Updated Representation Certificate...................16
6.1.22 Terminated Contracts.................................16
6.1.23 Assignment and Assumption of Contracts for
Work in Progress.....................................16
6.1.24 G.S. Waiver..........................................16
6.1.25 Lien Waivers.........................................16
6.1.26 The 27th Floor Lease.................................16
6.1.27 The 27th Floor Lease Guarantee.......................16
ARTICLE VII
BROKERS AND ADVISORS
7.1 Brokers and Advisors.........................................16
ARTICLE VIII
THE CLOSING
8.1 Date and Manner of Closing...................................17
8.1.1 Funds and Documents..................................17
8.1.2 Title Insurance......................................17
8.2 Additional Title Insurance...................................17
ARTICLE IX
PRORATION, FEES, COSTS AND ADJUSTMENTS
9.1 Prorations...................................................18
9.1.1 Leasing Costs Credited to Purchaser..................18
9.1.2 Leasing Costs During Contract Period.................19
9.1.3 Taxes................................................19
9.1.4 Security and Other Deposits..........................20
9.1.5 Rent.................................................20
9.1.6 Additional Rent......................................20
9.2 Seller's Closing Costs.......................................22
9.3 Purchaser's Closing Costs....................................22
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ARTICLE X
ESCROW
10.1 Escrow.......................................................22
ARTICLE XI
RETURN OF DOCUMENTS AND FUNDS UPON TERMINATION
11.1 Return of Seller's Documents.................................22
11.2 Deposit......................................................23
11.3 No Effect on Rights of Parties; Survival.....................23
ARTICLE XII
DEFAULT
12.1 Seller's Remedies............................................23
12.2 Purchaser's Remedies.........................................23
ARTICLE XIII
REPRESENTATIONS AND WARRANTIES
13.1 Seller's Warranties and Representations......................24
13.1.1 Power and Authority..................................24
13.1.2 Proceedings..........................................25
13.1.3 Contravention........................................25
13.1.4 Leases and Contracts.................................25
13.1.5 Compliance...........................................26
13.1.6 Employees............................................26
13.1.7 Litigation...........................................27
13.1.8 Notice of Violations.................................27
13.1.9 Licenses and Permits.................................28
13.1.10 Allowances; Leasing Commissions......................28
13.1.11 Tax Proceedings......................................28
13.1.12 Insurance............................................29
13.1.13 Personal Property....................................29
13.1.14 Environmental and Engineering Reports................29
13.1.15 Utilities............................................29
13.1.16 Business Improvement District........................29
13.1.17 Non-Foreign Person...................................29
13.1.18 Access to Documents..................................29
13.1.19 Brokerage Agreements.................................29
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13.1.20 Work.................................................30
13.1.21 Rezoning.............................................30
13.1.22 Financial Statements.................................30
13.2 Purchaser's Warranties and Representations...................30
13.2.1 Power and Authority..................................30
13.2.2 Execution and Delivery...............................30
13.2.3 Independent Investigation............................31
13.2.4 Purchaser Reliance...................................31
13.3 No Other Warranties and Representations......................31
13.3.1 No Environmental Representations.....................31
13.3.2 Release of Claims....................................32
ARTICLE XIV
CASUALTY AND CONDEMNATION
14.1 Insured Casualty.............................................32
14.2 Uninsured Casualty...........................................33
14.3 Condemnation.................................................33
14.4 Purchaser's Right to Participate and/or Consent..............34
14.5 General Obligations Law......................................34
ARTICLE XV
CONDUCT PRIOR TO THE CLOSING
15.1 Conduct by Seller............................................34
15.2 Actions Prohibited...........................................35
15.3 Leases and Contracts During Due Diligence Period.............36
15.4 After Due Diligence Period...................................36
15.5 Conduct by Purchaser.........................................37
15.6 Confidentiality..............................................37
ARTICLE XVI
NOTICES
ARTICLE XVII
TRANSFER OF TITLE AND POSSESSION
17.1 Transfer of Possession.......................................39
17.1.1 Delivery of Documents at Closing.....................39
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ARTICLE XVIII
GENERAL PROVISIONS
18.1 Captions.....................................................39
18.2 Exhibits.....................................................39
18.3 Entire Agreement.............................................39
18.4 Modification.................................................39
18.5 Attorneys' Fees..............................................40
18.6 Governing Law................................................40
18.7 Time of Essence..............................................40
18.8 Survival of Warranties.......................................40
18.9 Assignment by Purchaser......................................41
18.10 Severability.................................................41
18.11 Successors and Assigns.......................................41
18.12 Interpretation...............................................41
18.13 Counterparts.................................................41
18.14 Recordation..................................................41
18.15 Limitation on Liability......................................41
18.16 WAIVER OF JURY TRIAL.........................................41
18.17 Further Assurances...........................................42
18.18 Non-Waiver of Rights.........................................42
18.19 Mortgage Transactions........................................42
18.20 Credit Lyonnaise Rouse (USA) ("Credit Lyonnaise")
Transaction..................................................43
18.21 Indemnity by Seller..........................................44
18.22 Indemnity by Purchaser.......................................44
18.23 Counterparts.................................................44
18.24 Indemnification..............................................45
18.25 Definitions..................................................45
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SALE AND PURCHASE AGREEMENT
This Agreement, dated as of October 13, 2000, is made by and between the
companies listed on Exhibit A (the "Seller Pool Companies"), located at 180
Maiden Lane, New York, New York 10038 ("Seller"), for which TCC ACQUISITION
CORP., a Delaware corporation acts as Agent ("Agent"), and PGI-WvF 180, L.P., a
New York limited partnership ("Purchaser").
ARTICLE I
RECITALS
1.1 Real Property. Seller owns and holds fee title to that certain land
(the "Land") described in Exhibit B, together with all improvements, buildings
and structures and all fixtures and equipment (including, without limitation,
all of the following (other than the property of tenants under Leases (the
"Tenants") or of public or private utilities): plumbing, electrical, mechanical,
elevator, communication, heating, air conditioning and ventilating components,
lines and systems and boilers and each and every other type of physical
improvement located at, on or affixed to the Land to the full extent such items
constitute or are or can or may be construed as realty under the laws of the
State of New York (collectively, the "Improvements") located thereon known as
180 Maiden Lane and located at New York, New York (collectively, the "Real
Property").
1.2 Personal Property. In connection with the Real Property, Seller has (i)
obtained certain governmental permits and approvals, (ii) obtained certain
contractual rights and other intangible assets, and (iii) acquired certain other
items of tangible personal property more completely described in Exhibit C
together with all of Seller's rights to the name of the Real Property
(collectively, the "Personal Property"). The Real Property and the Personal
Property together with all appurtenances, rights and privileges pertaining
thereto including, without limitation, all of Seller's right, title and interest
in and to the rights of way, streets, alleys, easements, strips or gores of land
adjacent thereto are collectively referred to as the "Property." The parties
agree that the Personal Property being conveyed by Seller to Purchaser is de
minimis and no portion of the Purchase Price is attributable thereto.
1.3 Purchase and Sale. Seller now desires to sell and Purchaser now desires
to purchase all of Seller's right, title and interest in and to the Property,
upon the terms and covenants and subject to the conditions set forth below.
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ARTICLE II
PURCHASE PRICE
2.1 Price. In consideration of the covenants herein contained, Seller
hereby agrees to sell and Purchaser hereby agrees to purchase the Property for a
total purchase price of Two Hundred Ninety Million Six Hundred Fifteen Thousand
and 00/100 Dollars ($290,615,000) subject to prorations and adjustments as set
forth herein (the "Purchase Price"), which shall be paid by Purchaser as
follows:
2.1.1 Deposit. Purchaser has, concurrently herewith, deliver to a
TitleServ Agency of New York ("Escrow Agent") having an address at 9 West
57th Street, New York, New York 10019, pursuant to the terms of the Escrow
Agreement attached hereto as Exhibit X by bank wire of immediately
available funds or by delivering to Escrow Agent a clean, unconditional and
irrevocable letter of credit in favor of Seller in such amount (the
"Deposit Letter of Credit"), issued or confirmed for direct payment by Bank
of New York or other bank which is rated AA and is reasonably acceptable to
Seller, in the form of the letter of credit annexed hereto as Exhibit D,
the sum of Fifteen Million and 00/100 Dollars ($15,000,000) (together with
any interest earned thereon if the deposit was made in cash, the
"Deposit").
2.1.2 Balance of Purchase Price. Purchaser shall at the Closing (as
defined in Section 8.1), deliver to Seller, by bank wire transfer of
immediately available funds to an account designated by Seller no less than
3 days prior to Closing, (i) in the event that the Deposit was in cash, the
additional sum of Two Hundred Seventy-Five Million Six Hundred Fifteen
Thousand and 00/100 Dollars ($275,615,000) representing the balance of the
Purchase Price or (ii) in the event that the Deposit was the Deposit Letter
of Credit, the sum of Two Hundred Ninety Million Six Hundred Fifteen
Thousand and 00/100 Dollars ($290,615,000) upon receipt of which, Escrow
Agent shall return the Deposit Letter of Credit to Purchaser. The balance
of the Purchase Price received by Seller at the Closing shall be adjusted
to reflect prorations and other adjustments pursuant to Section 2.3 and
Section 9.1 and, if applicable, Sections 3.5.1, 4.1.1.1, 4.1.1.2, 4.1.1.3
and 18.20.
2.2 Investment. Following the collection of the Deposit if in cash (the
"Cash Deposit"), Escrow Agent shall invest the Cash Deposit in an
interest-bearing account at Citibank, N.A. or, at the request of Purchaser,
shall invest the Cash Deposit in short-term United States Treasury securities or
other insured, low-risk, short-term securities mutually agreed upon by both
parties.
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2.3 Interest on the Cash Deposit. If the transaction does not close, any
interest earned on the Cash Deposit shall be credited and delivered to the party
receiving the Cash Deposit. If the transaction closes, at the Closing any
interest earned on the Cash Deposit shall be credited to Purchaser.
ARTICLE III
DUE DILIGENCE PERIOD
3.1 Due Diligence Materials. Seller made available to Purchaser and
Purchaser's representatives, for their review and approval during the period
prior to the date hereof (the "Due Diligence Period"), copies of all Leases,
subleases, license and concession agreements, Contracts, records, employment
rosters and other information regarding employees who are employed at the
Property, tenant files, accounting records, correspondence, service and
management agreements, plans, specifications, "as-builts", surveys, permits and
engineering and environmental reports, financial information (including, without
limitation, books and records), appraisals and reports and any other information
or documents reasonably requested by Purchaser (to the extent that any of such
items are in Seller's possession or control and have not yet been delivered to
Purchaser) (the "Due Diligence Materials"). The Due Diligence Materials were
made available to Purchaser and its representatives at the offices of Seller or
its property manager at reasonable times and upon reasonable telephone notice
during the Due Diligence Period and Purchaser made copies of any such materials,
all of which Purchaser will return to Seller in the event that this Agreement is
terminated prior to Closing. In addition, Purchaser, at its sole cost and
expense, was permitted, during the Due Diligence Period, to make a complete
review and inspection of the physical condition of the Property, including,
without limitation, the mechanical, electrical and HVAC systems, roof, facade
and elevator inspections, and a complete ADA compliance, fire safety and
environmental review.
3.2 Inspection of Property. During the term of this Agreement, Purchaser
shall have the right to enter the Property subject to the following limitations:
(A) any entry onto the Property by Purchaser, its agents or representatives,
shall be during normal business hours, following reasonable prior telephone
notice to Seller and delivery to Seller of satisfactory evidence of Purchaser's
general liability insurance, and, at Seller's discretion, Purchaser, its agents
or representatives shall be accompanied by a representative of Seller; (B)
Purchaser shall not conduct any drilling, test borings or other invasive testing
or disturbance of the Property for review of soils, compaction, environmental,
structural or other conditions without Seller's prior written consent; (C) any
discussions or interviews with any of the tenants of the Property or their
personnel or counsel shall be conducted in the presence of Seller or its
representatives; (D) Purchaser shall exercise reasonable diligence not to
disturb the use or occupancy of any occupant of the Property; and (E) Purchaser
shall indemnify, defend and hold Seller
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harmless from all loss, cost, and expense (including, without limitation,
reasonable attorney's fees and disbursements), resulting from any personal
injury or property damage caused by any entry or inspections or other due
diligence activities performed by Purchaser, its agents and representatives.
Purchaser's obligations under this Section shall survive any termination of this
Agreement. Seller hereby grants Purchaser from and after the date hereof, and
continuing through the date of Closing the right to have discussions with and
interview representatives of GS (hereinafter defined) and Stroock & Stroock &
Lavan LLP ("SSL") provided that a representative of Seller is present during
such discussions and interviews. During the term of this Agreement, Seller shall
cooperate with Purchaser in scheduling any inspections, tests and tenant
interviews in an expeditious fashion so as to enable Purchaser to fully
investigate the Property, which Purchaser shall have the right to do at any time
prior to Closing in accordance with the provisions of this Agreement, and shall
provide Purchaser with the Due Diligence Materials, provided that subsequent to
the Due Diligence Period, Purchaser shall have no right to terminate this
Agreement based on its continued investigation of the Property except as
specifically set forth in this Agreement.
3.3 Title and Survey. Purchaser acknowledges that prior to the execution
and delivery of this Agreement, Purchaser has received a Certificate and Report
of Title from New York Land Services Inc. (the "Title Company") and ordered a
survey of the Property from a licensed surveyor (the "Survey"). On or prior to
the Closing Date, Seller shall remove, discharge or insure over any lien or
encumbrance on the Property which is not listed on Exhibit E attached hereto
(the "Permitted Encumbrances") (a "Title Defect"), provided that Seller shall
only be required to cure Title Defects that are liquidated in amount if the
aggregate cost of the cure shall not exceed $2,500,000 (the "Title Cap"), except
for monetary liens created by Seller (including the First Mortgage and the
Second Mortgage, as defined below) all of which shall be cured by Seller
regardless of cost. Notwithstanding the foregoing, Seller shall not be required
to cure any mechanic's liens created by GS, or any of its affiliates in
connection with the performance of work under the GS Lease. Any liens evidencing
liquidated claims created by any Tenant (except the mechanic's liens created by
GS described above) shall be cured by Seller, up to the amount of the Title Cap,
and Seller shall have the right to bond such lien and to seek recovery from the
Tenant, including by instituting suit for the amount expended by Seller to
effect such cure. If such liens or encumbrances are not bonded or discharged,
Purchaser shall have the right to terminate this Agreement as described in the
last paragraph of this Section 3.3.
Seller may use any proceeds of the sale to remove, discharge, insure over
or otherwise satisfy (at Closing) any Title Defect.
If, on the date on which the Closing occurs (the "Closing Date"), the Title
Company fails to deliver to Purchaser and Purchaser's lender a title policy in
form and substance substantially the same as the pro forma title policy attached
hereto as Exhibit F,
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Purchaser may, at its option, (i) accept title to the Property subject to any
Title Defects and receive at Closing a credit against the Purchase Price in an
amount required to cure, as determined by the Title Company, any such Title
Defects, provided that the total amount of credit shall not exceed the amount of
the Title Cap (excluding any monetary liens created by Seller which Seller shall
cure regardless of the cost of cure (including the First Mortgage and the Second
Mortgage) or (ii) if the Title Defects, excluding any monetary liens created by
Seller, exceed the Title Cap, terminate this Agreement by written notice to
Seller, in which event the Deposit shall be returned to Purchaser and thereafter
neither party shall have any further rights or obligations hereunder, except
those specifically stated to survive a termination of this Agreement.
Notwithstanding anything to the contrary in the foregoing, Seller has advised
Purchaser that it is currently disputing with the holder of a mortgage
encumbering the Property the amount which may be due and owing to satisfy such
mortgage and Seller acknowledges that it shall be Seller's obligation to deliver
at Closing to the Title Company any instrument as shall be required by the Title
Company to remove of record the mortgage, identified as Mortgages A-K (the
"First Mortgage") in the Report of Title dated June 1, 2000 (the "Report of
Title") issued by the Title Company; which obligation may include the deposit of
a sum of money with an escrow agent until resolution of the dispute, a procedure
more particularly described in the First Mortgage. In addition to the First
Mortgage, Seller shall also remove of record at or prior to Closing the Mortgage
identified as Mortgage L (the "Second Mortgage") on the Report of Title.
With respect to any Title Defect as to which Seller did not have notice at
least ten days prior to the Closing Date (a "New Exception"), Seller shall be
entitled to a reasonable adjournment of the Closing Date provided for herein
(which adjournment period shall not exceed thirty (30) days) time being of the
essence during which to remove or cure any such New Exception, subject to the
limitations on cure costs set forth in this Section 3.3. If the cost to cure the
New Exception is less than the Title Cap and for a liquidated sum, Purchaser
shall close with a credit for the cost of cure; if the cost to cure is greater
than the Title Cap, Purchaser shall have the option (x) to close subject to
Seller expending up to the Title Cap to cure such New Exception or Seller giving
a credit to Purchaser at Closing for the amount necessary to effect such cure
(up to the amount of the Title Cap), and so long as Seller cures all monetary
liens created by Seller or (y) to terminate this Agreement as set forth in the
preceding paragraph.
3.4 Violations. If the Land or the Improvements is or becomes subject to
any notes or notices of violation of any Laws that have been noted in or issued
by any federal, state or municipal department having jurisdiction prior to the
date of this Agreement, and which have not been fully remedied or discharged of
record ("Violations"), Seller shall remedy such Violations prior to Closing and
shall discharge such Violations of record prior to Closing. Except as otherwise
provided in the next sentence of this Section, in the event that any material
Violations have not been cured prior to Closing, Purchaser may, at its option,
(i) accept title to the Property subject to such Violations and receive a credit
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at Closing in the amount necessary to effect such cure or (ii) terminate this
Agreement by written notice to Seller, in which event the Deposit shall be
returned to Purchaser and neither party shall have any further rights or
obligations hereunder, except those specifically stated to survive a termination
of this Agreement. Notwithstanding the foregoing, in the event that any of the
Violations listed on Exhibit Z are the responsibility of any Tenant to cure
pursuant to its Lease, Seller shall not be responsible to cure any such
Violations, and Purchaser shall have no right to terminate as a result thereof
so long as Seller is using commercially reasonable methods to enforce the
Tenant's obligations to cure the Violations, which shall include Seller's
request in writing that such Tenant cure such Violation. A copy of such request
shall be delivered by Seller to Purchaser.
3.5 Seller's Obligations During Due Diligence Period. Seller shall, within
the time periods set forth below, complete the following (the obligations
described in Section 3.5.1 and Section 3.5.2 are hereinafter defined as
"Seller's Due Diligence Obligations"):
3.5.1 27th Floor. Seller has entered into an amendment of the GS Lease
to include the entire 27th Floor in the GS Lease, in form and substance
reasonably acceptable to Purchaser (the "GS 27th Floor Amendment"). Seller
shall cause to be executed and delivered at Closing a new lease for the
entire 27th floor (the "27th Floor Lease"), between Purchaser, as Landlord,
and The Continental Insurance Company, as Tenant, in the form of Exhibit G,
which 27th Floor Lease shall be subordinate to the GS 27th Floor Amendment
in accordance with the terms of the subordination provisions of Article 33
of the 27th Floor Lease without the need for any further documents or
agreements. In the event that the Rent Commencement Date (as defined in the
GS 27th Floor Amendment) has not occurred on or prior to the Closing Date,
Seller shall be liable to Purchaser for the amount of Fixed Rent (as
defined in the GS Lease) that would have been payable by GS for the time
period from the Closing Date to the date that the Rent Commencement Date
under the GS 27th Floor Amendment occurs (the "27th Floor Fixed Rent
Differential"). If the amount of the credit cannot be calculated at
Closing, Seller shall make such payment to Purchaser monthly and the 27th
Floor Fixed Rent Differential payment obligations shall survive Closing.
The Seller's obligation for the GS 27th Floor Fixed Rent Differential shall
be guaranteed pursuant to the terms of the Guarantee (as defined below).
3.5.2 Authority of Seller. Seller has delivered confirmation,
reasonably acceptable to Purchaser, that TCC Acquisition Corp. is
authorized by the Seller Pool Companies, to enter into the Letter of
Intent, dated August 16, 2000, between Seller and Purchaser ("LOI") with
respect to the Property and that the Seller Pool Companies are authorized
to enter into this Agreement.
3.6 Intentionally Deleted.
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3.7 Seller's Payment to Purchaser. In the event that this Agreement has
been terminated in accordance with its terms and Seller enters into a contract
to sell the Property to GS or any of its Affiliates on or prior to
December 31, 2000, Seller shall pay to Purchaser the amount of $1,000,000 in
immediately available funds to an account designated by Purchaser no later than
3 business days after entering into such contract.
If any payment required to be made by Seller under this Section is not made
within the time period set forth herein, all outstanding amounts shall accrue
interest at the rate of 10% per annum. The obligations of Seller set forth in
this Section shall survive a termination of this Agreement.
3.8 Purchaser's Termination Rights. If Purchaser, after the date hereof,
obtains knowledge at or prior to Closing of any matter entitling Purchaser to
terminate this Agreement (individually or collectively, as applicable, a "Post
Signing Termination Matter"), including without limitation a breach of a
representation or warranty or an unacceptable Estoppel Certificate (as
hereinafter defined), and the aggregate amount of the loss to Purchaser in
connection with the Post Signing Termination Matter is reasonably quantifiable
and is for an amount of $2,500,000 or less in the aggregate, Purchaser shall
remain obligated to acquire the Property on the terms set forth in this
Agreement and Seller shall indemnify Purchaser for all losses suffered in
connection with such Post Signing Termination Matters up to the amount of
$2,500,000 in the aggregate. If Purchaser obtains knowledge at or prior to
Closing of any Post Signing Termination Matter which is reasonably quantifiable
and the aggregate loss exceeds $2,500,000 in the aggregate, Purchaser may (x)
terminate this Agreement and receive a return of the Deposit in which case the
parties hereto shall have no further rights or obligations hereunder, except
those specifically stated to survive a termination of this Agreement or (y)
acquire the Property. If Purchaser shall acquire the Property, Purchaser agrees
that (except as provided in Section 3.3.) it shall not have the right to raise a
claim pursuant to Section 18.21 with respect to the Post Signing Termination
Matter of which Purchaser had prior knowledge and Seller shall indemnify
Purchaser for all losses suffered in connection with such Post Signing
Termination Matter up to $2,500,000 in the aggregate. Seller's indemnity in this
Section 3.8 shall be covered by the Guaranty. It is understood that the Post
Signing Termination Matters shall not include any issues relating to the
following: base year amounts; costs for cleaning; insurance; taxes and
electricity; reduction of sundry income; income and expense of fitness center;
or the physical condition of the Building (except that the Post Signing
Termination Matters shall include matters related to Seller's obligations herein
to (a) repair and maintain the Building from the date hereof to the date of
Closing, (b) comply with its obligations pursuant to Article XIV and (c) perform
the items set forth on Exhibits H and I) and Purchaser waives all rights to
terminate this Agreement or to claim for indemnity or breach of representation
with respect thereto. Purchaser shall notify Seller, promptly when it becomes
aware of a Post Signing Termination Matter and in any event, prior to Closing.
The obligations of
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Seller pursuant to this Section 3.8 are in addition to the obligations of Seller
pursuant to Section 18.21.
ARTICLE IV
CONDITIONS TO THE PARTIES' OBLIGATIONS
4.1 Conditions to Purchaser's Obligation to Purchase. Purchaser's
obligation to purchase is expressly conditioned upon each of the following:
4.1.1 Performance by Seller. Performance in all material respects of
the obligations and covenants of, and deliveries required of, Seller
hereunder, including, without limitation, the following:
4.1.1.1 Capital Improvements. Seller shall complete, prior to the
Closing, and in accordance with the original scope of work which
supports the estimated costs as itemized, all work ("Work") shown in
Exhibit H annexed hereto pursuant to Contracts and agreements approved
in writing by Purchaser to the extent such Work has not been
previously completed. The Contracts and agreements existing on the
date hereof are approved or deemed approved and are listed on Exhibit
H and Exhibit I (the "Prior Agreements"). To the extent that any of
the Work shown on Exhibit H or Exhibit I is not completed as of the
date of this Agreement, Purchaser shall have the right to reasonably
supervise the performance and completion of the Work and to approve
all Contracts and agreements (other than the Prior Agreements). In the
event that any portion of the Work shown on Exhibit H or Exhibit I
remains incomplete as of the Closing, Seller shall credit against the
balance of the Purchase Price owed by Purchaser an amount equal to (a)
the unpaid balances on any contracts for performance of the Work which
have been executed by Seller and approved by Purchaser or which are
Prior Agreements plus (b) the amount required to complete any Work
which has not yet been contracted for, which amount shall be agreed to
in good faith by Seller and Purchaser, (except in any case where the
amount of the credit for any unfinished Work is set forth on Exhibit H
in which case the amount so set forth shall be the amount of the
credit) and Seller shall assign to Purchaser at Closing all of the
Contracts and agreements for the Work approved by Purchaser and the
Prior Agreements. Seller shall deliver at Closing lien waivers for
Work that is shown on Exhibit H and Exhibit I that Seller has
completed prior to Closing.
4.1.1.2 Ricker Auditorium. Seller and GS have entered into an
amendment of the GS Lease to include an additional 8,111 rentable
square
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feet, identified in the GS Lease as the Ricker Auditorium, at an
annual Fixed Rent in the amount of not less than Three Hundred Fifty
Thousand Dollars ($350,000), to be co-terminus with the GS Lease,
subject to Article 38 of the GS Lease, and otherwise on terms and
conditions agreed upon between Seller and GS, with the approval of
Purchaser (the "Ricker Amendment"). Any costs incurred in connection
with the Ricker Amendment shall be for the account of Seller and paid
for by Seller at or prior to Closing. At the Closing, in order to
compensate Purchaser for Fixed Rent for the number of days between the
Closing and the date GS is required to commence paying Fixed Rent,
Purchaser shall receive a credit in the amount of the per diem Fixed
Rent that Purchaser would have been entitled to receive from GS had
Fixed Rent pursuant to the Ricker Amendment been payable on or before
the Closing Date. Any revenue that Purchaser, as landlord, shall
receive from the Ricker Auditorium attributable to the period from the
Closing to the date GS is required to commence paying Fixed Rent shall
be for the account of Seller and Purchaser shall collect such revenue
in the normal course of business and shall remit such revenue net of
any actual expenses incurred by Purchaser and attributable to the
Ricker Auditorium during such period to Seller promptly upon receipt.
The obligations of Purchaser in this Section shall survive Closing.
4.1.1.3 Management Office. Prior to the Closing, Seller and
Purchaser shall identify available space in the Real Property for use
by Purchaser as a management office. The location shall be at
Purchaser's sole discretion from the available space and shall be
selected by Purchaser prior to Closing. The costs of construction of
the management office shall be shared equally between Seller and
Purchaser; provided, however, that the maximum amount of Seller's
contribution shall be Twenty-Five Thousand Dollars ($25,000). In the
event that the construction of and payment for the management office
are not completed prior to the Closing, Purchaser shall be entitled to
a credit at the Closing in the amount of $25,000 less any amounts
previously paid by Seller towards the cost of the management office.
In the event that it is determined that Seller's share of the costs is
less than $25,000, Purchaser shall promptly reimburse Seller for the
excess amount paid by Seller. Purchaser shall make all decisions with
respect to the design, construction, and layout of the management
office. All contracts and agreements to be entered into for the
construction of the management office shall be negotiated by Purchaser
and, upon the request of Purchaser, executed by Seller, subject to the
provisions set forth in this Section regarding payment of costs
related to the management office. All work in connection with the
management office shall be performed by Purchaser; provided, however,
that in the
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event that Purchaser shall desire to commence work prior to the
Closing, Purchaser shall provide to Seller evidence of such insurance
as shall be reasonably required by Seller naming Seller as an insured
in respect of any and all claims for personal injury, death or
property damage occurring in connection with Purchaser's performance
of the work. Purchaser acknowledges and agrees that the existing
management office located on the 27th floor will not be available to
Purchaser to use as a management office.
4.1.1.4 Guarantee. At the Closing, Seller shall deliver to
Purchaser a guarantee in the form attached hereto as Exhibit J (the
"Guarantee") of CNA Financial Corp. (the "Guarantor").
4.1.1.5 Contingent Obligations. Seller shall be liable for and
shall pay to Purchaser upon demand any of the Contingent Obligations
if and to the extent that any shall become due. This obligation of
Seller should survive the Closing and be covered by the Guarantee.
4.1.2 Delivery of Title and Possession. Delivery at the Closing of (i)
all the items listed in Section 6.1 hereof including, without limitation,
the Deed (as defined in Section 6.1.1) and issuance of the Title Policy (as
defined in Section 8.1.2) showing title in Purchaser in the condition
described in Section 8.1.2, and (ii) possession as provided in Section
17.1.
4.1.3 Tenant Estoppels. Receipt by Purchaser of estoppel certificates
(collectively, the "Estoppel Certificates") dated not more than 45 days
prior to the Closing Date executed by each of (i) subject to clause (iii)
below, GS, SSL, Weitz & Luxenburg, PC. and Nomura Asset Management
(collectively, the "Major Tenants"), in the form attached hereto as Exhibit
L with respect to all of the Major Tenants (provided that if any of the
Leases for such Major Tenants prescribes the form or requirements of the
estoppel certificate, then an estoppel certificate in conformity with the
such form or requirements shall be an acceptable substitute for the form
attached as Exhibit L and shall be deemed an acceptable estoppel
certificate hereunder); (ii) subject to clause (iii) below, Tenants
occupying in the aggregate not less than ninety percent (90%) of the total
rentable area of the Property not occupied by the Major Tenants
(collectively, the "Other Tenants"), in the form attached hereto as Exhibit
L (except that if any of the Leases for Other Tenants prescribes the form
or requirements of the estoppel certificate, then an estoppel certificate
in conformity with the such form or requirements shall be an acceptable
substitute for the form attached as Exhibit L and shall be deemed an
acceptable estoppel certificate hereunder); and (iii) to the extent, if
any, that estoppel certificates from the Major Tenants and/or Other Tenants
are not all obtained, a certificate of Seller in the form of Exhibit N
attached hereto (the
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"Landlord Estoppel") with respect to each Major Tenant and/or Other Tenant
from whom Seller has not obtained an estoppel certificate. Notwithstanding
this Section 4.1.3(iii), in the event that an Estoppel Certificate is not
obtained from any Major Tenant and Seller delivers a Landlord Estoppel
therefor, Purchaser may either elect to terminate this Agreement in
accordance with the terms hereof or waive the requirement for such Major
Tenant Estoppel Certificate and accept a Landlord Estoppel in lieu of such
Major Tenant Estoppel Certificate. If Purchaser elects to terminate this
Agreement pursuant to the immediately preceding sentence, this Agreement
shall immediately terminate and the Deposit shall be returned to Purchaser
and the parties hereto shall have no liability hereunder except as
specifically stated to survive a termination of this Agreement, except that
if Purchaser shall elect to terminate this Agreement pursuant to the
immediately preceding sentence, Seller shall have the right, but not the
obligation, to elect to adjourn the Closing for a reasonable period of time
not to exceed thirty (30) days in order to obtain a Tenant Estoppel from
such Major Tenant that was not previously delivered.
The Landlord Estoppel, if any, delivered hereunder and Seller's
liability thereunder shall survive the Closing, on a Lease by Lease basis,
until the delivery of an estoppel certificate from the Major Tenants and/or
Other Tenant for which such Landlord Estoppel was substituted. For purposes
of satisfying the 90% requirement set forth in the foregoing clause (ii),
the Tenants shall conclusively be deemed to occupy the rentable area set
forth opposite their names in Exhibit Y attached hereto. Seller agrees to
deliver the appropriate form of Estoppel Certificate to each Tenant and to
request execution of the same. No Estoppel Certificate shall be deemed
obtained if it contains information materially inconsistent with the Rent
Roll or Seller's representations and warranties made herein or the Leases
delivered or made available to Purchaser, provided, however, that if any
Estoppel Certificate would otherwise be deemed not obtained pursuant to
this sentence, Purchaser's right to terminate this Agreement as a result
shall be subject to Section 3.8. To the extent Seller elects to send any of
the Major Tenants or Other Tenants an estoppel certificate in the form
prescribed by, or in accordance with the requirements of, the Lease for
such Tenant, Purchaser shall promptly review the form of such estoppel
certificate proposed by Seller prior to Seller sending such form to such
Tenant, and promptly confirm whether it is consistent with the requirements
of such Lease. In the event that any Estoppel Certificate required to be
delivered by a Tenant is dated more than thirty (30) days prior to the
Closing, Seller shall deliver a certificate with respect to any such
Estoppel Certificate that there have been no defaults or, to Seller's
knowledge, events with which the passage of time or giving of notice would
result in a default since the date of the Estoppel Certificate.
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4.1.4 Seller's Representations. The representations and warranties by
Seller set forth in Section 13.1 being true and correct in all material
respects as of the Closing except as modified by notice (in accordance with
Section 13.1) to which Purchaser does not object in writing within 3
business days after receipt of such notice.
4.1.5 No Breach. There shall be no material breach of a covenant,
undertaking and/or agreement of Seller to be performed hereunder.
4.2 Conditions to Seller's Obligation to Sell. Seller's obligation to sell
is expressly conditioned upon each of the following:
4.2.1 Performance by Purchaser. Performance in all material respects
of the obligations and covenants of, and deliveries required of, Purchaser
hereunder.
4.2.2 Receipt of Purchase Price. Receipt of the Purchase Price and any
adjustments due Seller under Article IX at the Closing in the manner herein
provided.
ARTICLE V
PURCHASER'S DELIVERIES TO SELLER
5.1 Deliveries. Purchaser shall, at or before the Closing, deliver to
Seller each of the following:
5.1.1 Purchase Price. The Purchase Price as set forth in Article II,
subject to adjustments and prorations in accordance with this Agreement.
5.1.2 Assignment of Leases and Contracts. Four executed counterparts
of the Assignment and Assumption of Leases, Contracts and Other Property
Interests (the "Assignment of Leases and Contracts") in the form of
Exhibit O.
5.1.3 Bill of Sale. Four executed counterparts of a bill of sale (the
"Bill of Sale") in the form of Exhibit P, pursuant to which Seller shall
convey and transfer to Purchaser all of its right, title and interest in
and to the Personal Property.
5.1.4 State Transfer Tax Form. An executed New York State Combined
Real Estate Transfer Tax Return and Credit Line Mortgage Certificate
(TP-584).
5.1.5 City Transfer Tax Form. An executed New York City Real Property
Transfer Tax Return (RPT).
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5.1.6 27th Floor Lease. An executed 27th Floor Lease.
5.1.7 Closing Statement. An executed settlement statement reflecting
the adjustments and prorations required under this Agreement.
5.1.8 Cash - Prorations. The amount, if any, required of Purchaser
under this Agreement.
5.1.9 Resolutions. Purchaser's resolutions authorizing this
transaction and the assignment to the Affiliate to which the Agreement is
being assigned and resolutions of the Affiliate authorizing the assumption
of the Agreement.
5.1.10 Required Items. All other items or amounts required by the
terms of this Agreement to be delivered at or prior to Closing by a party.
5.1.11 Other Documents. Such other documents, closing statements, and
other instruments as may be reasonably required from Purchaser to
consummate the purchase of the Property as contemplated by this Agreement.
ARTICLE VI
SELLER'S DELIVERIES TO PURCHASER
6.1 Delivery of Instruments and Documents. Seller shall, at or before the
Closing, deliver to Purchaser the following instruments and documents:
6.1.1 Deed. A Bargain and Sale Deed without Covenants against
Grantor's Acts (the "Deed") with respect to the Real Property, in the form
of Exhibit Q executed and acknowledged by Seller, pursuant to which Seller
shall convey title to the Real Property subject only to the Permitted
Encumbrances.
6.1.2 Assignment of Leases and Contracts. Four executed counterparts
of the Assignment of Leases and Contracts which shall assign to Purchaser
the Leases and, to the extent not objected to by Purchaser, the Contracts,
together with original executed counterparts (or copies if originals are
not in Seller's possession which copies shall be certified by Seller as
being true, correct and complete) of the leases affecting the Property
enumerated in Exhibit R and any leases executed in accordance with this
Agreement after the date hereof and all amendments and modifications
thereto (collectively, the "Leases") and the service contracts, equipment
leases, maintenance agreements and other contracts for goods, services and
equipment entered into by Seller and affecting the Property enumerated in
Exhibit S (the "Contracts") assigned thereby.
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6.1.3 Bill of Sale. Four executed counterparts of the Bill of Sale
which shall transfer to Purchaser all of Seller's right, title and interest
in the Personal Property.
6.1.4 Notices to Tenants. Notices signed by Seller (or Seller's
manager for the Improvements) addressed to each tenant under each Lease in
the form of Exhibit T.
6.1.5 FIRPTA Affidavit. Executed copies of an affidavit in the form of
Exhibit U, with respect to the Foreign Investment in Real Property Tax Act.
6.1.6 State Transfer Tax Form. An executed and acknowledged New York
State Combined Real Estate Transfer Tax Return and Credit Line Mortgage
Certificate (TP-584) together with all taxes shown due thereon.
6.1.7 City Transfer Tax Form. An executed and acknowledged New York
City Real Property Transfer Tax Return (RPT) together with all taxes shown
due thereon.
6.1.8 Closing Statement. An executed settlement statement reflecting
the adjustments and prorations required under this Agreement.
6.1.9 Cash - Prorations. The amount, if any, required of Seller under
this Agreement.
6.1.10 Estoppel Certificates. The Estoppel Certificates (and, if
applicable, the Landlord's Estoppel(s)).
6.1.11 Letters of Credit. Originals of any letters of credit
(collectively, "Letters of Credit") identified on the Rent Roll (as
hereinafter defined) which are held by Seller as security deposits for the
account of those Tenants listed on the Rent Roll, if such Letters of Credit
in their present form (including amendments thereto) permit Purchaser to
exercise the rights of beneficiary thereunder without amendment of such
Letters of Credit; provided, however, that as for those Letters of Credit
that require amendment in order to enable Purchaser to exercise the rights
of beneficiary thereunder, copies thereof shall be delivered to Purchaser
at Closing and Seller and Purchaser shall cooperate and expend commercially
reasonable efforts to obtain such amendments after the Closing, for the
benefit of and delivery to Purchaser. Should the issuer of any such Letter
of Credit charge for such amendment, Seller shall pay all costs in
connection therewith and Purchaser and/or Seller shall seek recovery of
such costs from the Tenants who delivered the Letters of Credit if required
to be paid by such Tenant, which amounts when received shall be paid to
Seller. This Section 6.1.11 shall survive the Closing.
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6.1.12 Title Company Requirements. Any and all reasonable and
customary documents and/or affidavits executed and delivered by Seller,
and/or Purchaser required by the Title Company.
6.1.13 Assignment - Warranties/Guarantees. An Assignment in favor of
Purchaser in the form attached hereto as Exhibit V of any unexpired
warranties and guarantees in Seller's possession to the extent assignable,
relating to the construction, operation and/or repair of the Property,
together with original copies of any such warranties and guarantees in
Seller's possession or control.
6.1.14 Keys. Keys to all locks on the Property, except secured areas
of Tenants to the extent such areas are permitted under Leases.
6.1.15 Licenses and Permits. Licenses and Permits (as hereinafter
defined), plans and specifications, technical manuals, originals of all
Tenant files and correspondence and any similar materials for the Property
to the extent same have not been previously delivered to Purchaser and to
the extent in Seller's possession or control and, to the extent originals
are not available, copies of the foregoing.
6.1.16 Resolutions. A resolution of each of the Seller Pool Companies
with respect to Agent's authority to act on such entities' behalf and
authorizing each Seller Pool Company to enter into this Agreement and to
consummate this transaction and binding each such entity to the obligations
set forth in this Agreement, together with such other documentation as may
be reasonably required by the Title Company or Purchaser in order to
evidence Seller's due authorization.
6.1.17 Required Items. All other items or amounts required by the
terms of this Agreement to be delivered at or prior to Closing by a party,
which shall include originals of all Due Diligence Materials which shall be
delivered to Purchaser, to the extent Seller or its managing agent has such
originals, and to the extent originals are not available, copies of such
Due Diligence Materials shall be delivered.
6.1.18 Rent Roll. A Rent Roll that has been updated as of a date not
more than two (2) days before the Closing Date shall be delivered to
Purchaser.
6.1.19 Utility Bills. All water, sewer and utility bills and copies of
all operating statements relating to the Property, to the extent available
and in Seller's possession, for the calendar year ending 12/31/99 and the
period from 1/1/00 through the month prior to the month in which the
Closing Date occurs.
6.1.20 Guarantee. The Guarantee.
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6.1.21 Updated Representation Certificate. A certificate of Seller
updating the representations and warranties set forth herein.
6.1.22 Terminated Contracts. To the extent that any Contracts
(including, without limitation, the management agreement which shall be
terminated at or prior to Closing) have been canceled or terminated on or
before the Closing Date (other than termination by expiration of time),
Seller shall deliver evidence of such cancellation or termination.
6.1.23 Assignment and Assumption of Contracts for Work in Progress. To
the extent any work required to be completed by Seller under Prior
Agreements or contracts approved by Purchaser pursuant to Section 4.1.1.1
has not been completed, an Assignment in favor of Purchaser in the form
attached hereto as Exhibit O of any such contracts.
6.1.24 G.S. Waiver. The Original waiver by GS of its right, pursuant
to Article 37 of the GS Lease, to purchase the Property (the "GS Waiver").
6.1.25 Lien Waivers. Original Lien waivers in recordable form for any
Work listed on Exhibit H and Exhibit I completed prior to the Closing, or,
to the extent Seller shall be unable, using commercially reasonable efforts
to obtain such lien waivers, other evidence, reasonably satisfactory to
Purchaser and the Title Company, that Seller has paid for any portion of
the Work listed on Exhibit H or Exhibit I that has been completed prior to
Closing.
6.1.26 The 27th Floor Lease. The 27th Floor Lease executed by The
Continental Insurance Company.
6.1.27 The 27th Floor Lease Guarantee. The 27th Floor Lease Guaranty
executed by the Guarantor.
ARTICLE VII
BROKERS AND ADVISORS
7.1 Brokers and Advisors. Purchaser and Seller acknowledge and represent to
one another than no investment banker, advisor, or brokers have been involved in
this transaction on behalf of either of them other than The Georgetown Group
("Georgetown") and Newmark & Company Real Estate, Inc. ("Newmark"). Seller shall
pay all brokerage commissions due to Georgetown and Purchaser shall pay all
brokerage commissions due to Newmark. Seller agrees to indemnify and hold
Purchaser harmless from and against all loss, liability or expense (including,
without limitation, reasonable attorneys fees and disbursements) arising out of
any claim or claims by Georgetown and any other broker, finder or similar agent
(excluding Newmark) for commissions, fees or
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other compensation in connection with this transaction, which claims are based
on contracts between Seller and such other broker, finder or similar agent and
are not based on any dealings between Purchaser and any other broker, finder or
similar agent. Purchaser agrees to indemnify and hold Seller harmless from and
against all loss, liability or expenses (including, without limitation,
reasonable attorneys fees and disbursements) arising out of any claim or claims
by Newmark and any broker, finder or similar agent (excluding Georgetown) for
commissions, fees or other compensation in connection with this transaction,
which claims are based on contracts between Purchaser and such other broker,
finder or similar agent and are not based on any dealings between Seller and any
other broker, finder or similar agent. This Section shall survive the Closing or
termination of this Agreement.
ARTICLE VIII
THE CLOSING
8.1 Date and Manner of Closing. The closing of the transaction contemplated
herein (the "Closing") shall occur at the offices of Debevoise & Plimpton, 875
Third Avenue, New York, New York or, at Purchaser's election, at the offices in
Manhattan of Purchaser's lender or their counsel on January 16, 2001 (the "Final
Closing Date"), time being of the essence, subject only to (i) Seller's
adjournment rights with respect to New Exceptions or Major Tenant Estoppels, in
which event Seller will give Purchaser not less than three business days' notice
of the date of the Closing and (ii) Purchaser's and Seller's right,
respectively, to extend the Closing Date on three business days' notice, to not
later than January 31, 2001, time being of the essence (subject to Purchaser's
right to an additional fifteen days' if Seller adjourns in accordance with (i)
above.)
8.1.1 Funds and Documents. At the Closing all funds and instruments
required to be delivered pursuant to Articles V and VI shall be or shall
have been so delivered.
8.1.2 Title Insurance. The Title Company shall issue a standard 1992
form of American Land Title Association owner's policy of title insurance
and a standard form of Lender's policy of title insurance (collectively,
the "Title Policy") with liability in the amount of the Purchase Price or
mortgage, as applicable, insuring that fee title to the Real Property vests
in Purchaser or the priority of the mortgage, as applicable, subject only
to the Permitted Encumbrances.
8.2 Additional Title Insurance. Purchaser may, at Purchaser's option,
direct the Title Company to issue additional title insurance endorsements, at
Purchaser's cost, provided that the Title Company's failure to issue any such
additional endorsements shall not affect Purchaser's obligations under this
Agreement.
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ARTICLE IX
PRORATION, FEES, COSTS AND ADJUSTMENTS
9.1 Prorations. At or prior to the Closing, the parties shall prorate, as
of 11:59 p.m. the day prior to the Closing, all income and expenses with respect
to the Property and payable to or by the owner of the Property, including,
without limitation: (i) all real property taxes on the basis of the fiscal
period for which assessed (if the Closing shall occur before the tax rate is
fixed, the apportionment of taxes shall be based on the tax rate for the
preceding period applied to the latest assessed valuation; (ii) "BID" payments
required as a result of the Property being in a Business Improvement District;
(iii) rents and other tenant payments and tenant reimbursement, if any, received
under the Leases as provided in this Article; (iv) charges for water, sewer,
electricity, gas, fuel, steam, vault taxes and other utility charges (other than
those charges required to be paid directly to the utility company by a Tenant)
all of which shall be read promptly before the Closing, unless Seller elects to
close its own applicable account, in which event Purchaser shall open its own
account and the respective charges shall not be prorated; (v) amounts prepaid
and amounts accrued but unpaid on Contracts which are to be assumed by
Purchaser; (vi) periodic fees for licenses, permits or other authorizations with
respect to the Property; (vii) salaries, wages and fringe benefits with respect
to Employees that Purchaser will employ after the Closing, and (viii) all other
items customarily prorated in connection with transactions of the type
contemplated by this Agreement. A further proration of (i) above shall be made
between the parties when the final tax bill for the tax year in which the
Closing occurs becomes available. Seller shall pay any taxes or fees assessed
for periods prior to the Closing with respect to emergency generators and fuel
tanks which are the property of Seller and are located on the Property. In
conjunction with such prorations, Seller will assign to Purchaser all utility
deposits which are assignable (and Seller shall be credited with such amounts)
and notify, or cause to be notified, all utilities servicing the Property of the
change in ownership and direct that all future billings be made to Purchaser at
the address of the Property with no interruption of service.
9.1.1 Leasing Costs Credited to Purchaser. Seller shall credit
Purchaser with an amount equal to any then outstanding tenant improvement
allowance, landlord work obligations, leasing commissions, free rent
periods, or any other monetary obligations with respect to executed leases
or extensions, expansions or modifications thereof as of the date hereof
and with respect to the Ricker Amendment, the GS 27th Floor Amendment, and
the 27th Floor Lease, regardless of when the same shall be due as set forth
on Exhibit EE. Notwithstanding the foregoing, the 25th floor of the
Building has been leased to GS for a term to commence upon the expiration
or sooner termination of the Lease to ASARCO Incorporated, the existing
tenant of the 25th Floor, on the terms set forth on Exhibit W and otherwise
in form and substance satisfactory to Purchaser, and
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Purchaser shall be responsible for the tenant improvement allowance and
landlord work obligations due under such lease amendment to the extent set
forth on Exhibit W. The credit for any amounts accruing or payable more
than thirty (30) days after the Closing shall be discounted to a net
present value at an annual discount rate of 6%.
9.1.2 Leasing Costs During Contract Period. Subject to the provisions
of Section 9.1.1 with respect to the Ricker Amendment, the GS 27th Floor
Amendment, the 27th Floor Lease and the lease of the 25th Floor of the
Building to GS, the amount of any Tenant improvement allowances, landlord
work obligations, leasing commissions, free rent periods and any other
monetary obligations, if any, due in respect of Leases or modifications,
renewals, extensions or expansions of Leases entered into after the date
hereof and prior to Closing (the "Contract Period") in accordance with
Article 15 shall be the responsibility of Purchaser and shall be paid by
Purchaser, (other than any free rent for any period prior to Closing which
shall be for the account of Seller) as and when due, except that to the
extent Seller has paid all or any part of such leasing commissions, tenant
allowances, or other similar monetary payments for which Purchaser is
responsible Seller shall provide Purchaser to its reasonable satisfaction
with evidence of such payment and Purchaser shall reimburse Seller for such
payments at Closing.
9.1.3 Taxes. If any proceeding for certiorari or other proceeding to
determine the assessed value of the Property or the real property taxes
payable with respect to the Property shall have been commenced prior to,
and is pending as of, the Closing Date (a "Tax Protest"), Purchaser and
Seller hereby agree that Joel Marcus of Pottish, Freyburg, Marcus &
Velasquez shall be designated at Closing as the certiorari counsel who
shall continue the prosecution of such proceeding or proceedings to
completion. Purchaser shall have the authority to settle or compromise any
claim relating to the 2000/2001 fiscal tax years without Seller's consent.
With respect to any fiscal tax year prior to the 2000/2001 fiscal tax year,
Seller shall have the authority to settle or compromise any claim relating
to such period using Seller's certiorari counsel. The parties agree to
cooperate with each other, and to execute any and all documents reasonably
requested by the other party, in furtherance of the foregoing. Real
property tax refunds and credits received after the Closing which are
attributable to a fiscal tax year prior to the Closing shall belong to
Seller and shall be paid promptly to Seller when received by Purchaser, net
of reasonable out-of-pocket expenses of collection thereof and amounts owed
Tenants. Any such refunds and credits attributable to the fiscal tax year
during which the Closing occurs shall be apportioned between Seller and
Purchaser after deducting the reasonable out-of-pocket expenses of
collection thereof and payments required to be made to Tenants. This
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apportionment obligation shall survive the Closing. Any such refunds and
credits attributable to the fiscal tax year after the Closing shall belong
to Purchaser.
9.1.4 Security and Other Deposits. At the Closing, Seller shall (i)
credit to Purchaser with the amount of all refundable security deposits
(plus interest accrued thereon to the extent required to be paid by the
applicable Lease or applicable law) and (ii) deliver to Purchaser all
Letters of Credit as required in Section 6.1.11.
9.1.5 Rent. Basic rents and payments or reimbursements for taxes,
utilities and operating expenses and all other charges or reimbursables as
and when collected under the Leases including without limitation charges
for any special services provided to any Tenant, overtime HVAC or special
cleaning (collectively, the "Rents") shall be prorated; provided, however,
that all Rents collected after the Closing under the Leases shall be
applied, on a Lease by Lease basis, first, to satisfy obligations
attributable to the payment period in which Closing occurs, second, in
payment of all current Rents due and payable for the period after the
Closing, third, after Rents for all current periods have been satisfied in
full in payment of Rents in arrears for the periods prior to the payment
period in which the Closing occurs. At Closing, Seller shall assign to
Purchaser all of its claims or causes of action against existing Tenants,
if any. If at the time of Closing (as reflected in a Schedule to be
delivered by Seller at Closing of all amounts known to Seller as due and
payable by any Tenant for the period prior to Closing but uncollected as of
Closing, whether or not past due) or thereafter there are Rents owed by
Tenants to Seller, then Purchaser will make commercially reasonable
efforts, without suit, to collect the same for the account of Seller and
any such Rents, if received, shall have been received by Purchaser for the
account of Seller and will be remitted by Purchaser to Seller within 15
days of receipt. Seller expressly agrees that if Seller receives any Rents
directly from Tenants after the Closing Date, Seller shall remit same to
Purchaser within 15 days after receipt thereof and Purchaser shall deliver
to Seller the amount thereof, if any, to which Seller is entitled pursuant
to the terms hereof within 15 days after receipt thereof. All prepaid Rents
and charges for the period following the Closing shall be paid over (or
credited) by Seller to Purchaser at Closing. After the Closing, Seller
shall not be entitled to collect or attempt to collect Rents from Tenants
due and owing to Seller, except those whose Lease or right to possession
under the Lease has been terminated and in connection with which the Tenant
has either vacated its premises or summary proceedings have been
instituted.
9.1.6 Additional Rent. Charges to or contributions by Tenants under
the Leases for the period under such Leases which includes the Closing
Date, including without limitation, payments or reimbursements, whether for
taxes, utilities, other operating expenses or otherwise, shall be
apportioned on the basis
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of the ratio which the expenses actually paid by each party for such period
bears to the total of all expenses with respect to such period for which
such payment was made by the Tenant. Such apportionments shall be adjusted
as soon as practicable after the end of the current lease year in which the
Closing occurs, and at such time Purchaser shall furnish Seller with
statements in reasonable detail showing the calculation of such
apportionments, rents and payments, and any adjustments shall be allocated
for the portion to which it applies. If either Seller or Purchaser shall
have collected more than its share of such amounts payable under any Lease
pursuant to this Section, such party shall promptly remit to the other the
amount of such excess. If any Tenant is entitled to refunds of any such
rents or charges, such refunds shall be paid by the party hereto that
received such rents or charges, provided, however, that any amounts
collected by Seller to which Tenants are entitled shall be paid to
Purchaser who shall remit such amounts to Tenants entitled thereto.
Purchaser shall indemnify Seller from and against any claims by Tenants for
amounts remitted by Seller to Purchaser pursuant to this Section.
Purchaser shall prepare and deliver to Seller for its review and
approval the operating expense and real estate tax escalation statements
and adjustments for the calendar year 2000 no later than March 31, 2001.
The reasonable costs incurred by Purchaser or its accountants in preparing
such statements (including without limitation the costs of an audit) shall
be paid by Seller. Upon Seller's approval of the same, Purchaser shall
invoice Tenant's for the amounts set forth thereon. If Seller does not
approve the same and Purchaser and Seller are unable to agree on the
amounts to be billed to the Tenants within fifteen (15) days after Seller's
receipt of Purchaser's initial statements, Purchaser may invoice Tenants
for the amounts it in good faith determines to be correct and any dispute
between Seller and Purchaser shall be resolved in good faith between the
parties.
Purchaser shall prepare and deliver to Seller for its review
statements for the calendar year 2001 no later than March 31, 2002 and
Seller and Purchaser shall follow the same procedures as described above.
Seller hereby agrees, that provided Purchaser follows the procedures
described in this Section 9.1.6, Seller shall have no claim against
Purchaser in connection with any matter related to the escalation
statements prepared by Purchaser in accordance with this Section.
At least three (3) business days prior to Closing, Purchaser and
Seller jointly shall prepare a closing statement, subject to and in
accordance with the terms hereof, indicating the net amount due to either
party as a result of the adjustments and prorations provided for herein.
Any errors in the calculation of apportionments shall be corrected or
adjusted as soon as practicable (but not more
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often than monthly) after the Closing Date. If it is impracticable to
apportion certain items hereunder on the Closing Date, such items shall be
apportioned and paid as soon as practicable thereafter. Purchaser agrees to
take necessary actions after Closing in a timely manner in order to make
the adjustments and prorations provided for hereunder, including, without
limitation, billings to Tenants. The provisions of this Section 9.1
(including, without limitation, Sections 9.1.1 through 9.1.6) shall survive
Closing.
9.2 Seller's Closing Costs. Seller shall pay (i) the New York City and New
York State transfer taxes in the amount required by law, (ii) Seller's own
attorneys' fees and (iii) any brokerage or investment banking fee payable to
Georgetown.
9.3 Purchaser's Closing Costs. Purchaser shall pay (i) all recording fees,
and all mortgage recording taxes, (ii) the cost of the Title Report, the title
premium for the Title Policy and any lender's title policy and the cost of any
other title insurance endorsements ordered by Purchaser, (iii) survey costs,
(iv) Purchaser's due diligence expenses, including all professional fees, (v)
Purchaser's own attorneys' fees, and (vi) any brokerage or investment banking
fees payable to Newmark in connection with this transaction.
ARTICLE X
ESCROW
10.1 Escrow. TitleServ Agency of New York will act as Escrow Agent pursuant
to the agreement attached hereto as Exhibit X which shall be executed
simultaneously with this Agreement.
ARTICLE XI
RETURN OF DOCUMENTS AND FUNDS UPON TERMINATION
11.1 Return of Seller's Documents. If this Agreement is terminated for any
reason (other than the material default of Seller), Purchaser shall, within five
days following such termination, deliver to Seller all documents and materials
relating to the Property previously delivered to Purchaser by Seller, copies
made by or on behalf of Purchaser of any documents during the Due Diligence
Period or the Contract Period and copies of all reports, studies, documents and
materials obtained by Purchaser from third parties in connection with the
Property and Purchaser's investigation thereof. Such items shall be delivered
without representation or warranty as to accuracy or completeness and with no
right of Seller to rely thereon without the consent of the third party.
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11.2 Deposit. If this Agreement is terminated for any reason other than
Purchaser's default, which defaults shall be governed by Article XII, (i) then
Purchaser shall be entitled to obtain the return of the Deposit or so much
thereof as Purchaser has previously deposited with Escrow Agent.
11.3 No Effect on Rights of Parties; Survival. The return of documents and
monies as set forth above shall not affect the right of either party to seek
such legal or equitable remedies as such party may have under Article XII or
otherwise hereunder with respect to the enforcement of this Agreement. The
obligations under this Article XI shall survive termination of this Agreement.
ARTICLE XII
DEFAULT
12.1 Seller's Remedies. If, (i) at the closing, Seller is ready, willing
and able to convey the Property to Purchaser in accordance with the terms hereof
and Purchaser does not deliver the Purchase Price to Seller in accordance with
the provisions of Section 2.1.2 or refuses to execute and deliver a closing
document required to be executed and delivered to Seller or (ii) Purchaser takes
any action that makes it impossible for Seller to fulfill any obligations
required to be fulfilled by Seller prior to the Closing, then Seller may
terminate this Agreement upon written notice to Purchaser and Seller may retain
the Deposit as liquidated damages. Seller and Purchaser agree that upon the
occurrence of one of the events listed in subclause (i) or (ii) of the preceding
sentence it would be extremely impracticable and difficult to estimate any and
all damage and harm, losses and expenses which Seller would suffer due to such
failure, and insofar as a reasonable estimate of the total net detriment that
Seller would suffer from such failure is the amount of the Deposit, Seller shall
be entitled to retain the Deposit, which amount is not intended to be and is not
a penalty, and which shall be Seller's sole remedy for damages arising from
Purchaser's failure to complete the acquisition.
12.2 Purchaser's Remedies. If the sale and purchase of the Property is not
completed as herein provided solely by reason of any material default of Seller,
Purchaser shall be entitled to (i) terminate this Agreement by delivering notice
to Seller and to obtain the return of the Deposit or (ii) treat this Agreement
as being in full force and effect and pursue only the remedy of specific
performance of this Agreement. Purchaser waives any right to pursue any other
remedy at law or equity for such default of Seller, including, without
limitation, any right to seek, claim or obtain damages, other than in the case
of Seller's fraud, but in no case shall Purchaser seek punitive damages or
consequential damages. Notwithstanding the foregoing, if Seller shall willfully
default in any of its obligations under this Agreement that are solely within
the control of Seller or one of its Affiliates (i.e. those obligations not in
any manner involving third party execution or delivery of documents or
cooperation), then Purchaser may seek damages
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on account of such willful breach from Seller (not to exceed Fifteen Million
Dollars ($15,000,000) in the aggregate), regardless of whether Purchaser has
elected to acquire the Property. This provision shall survive Closing or
termination of this Agreement provided however that any action must be commenced
within one year of the scheduled Closing Date.
ARTICLE XIII
REPRESENTATIONS AND WARRANTIES
13.1 Seller's Warranties and Representations. The matters set forth in this
Section 13.1 constitute representations and warranties by Seller which are now
and (subject to actions taken by Seller in accordance with the provisions of
Article IV and Article XV) shall, in all material respects, at the Closing be
true and correct as restated on the Closing Date. If Seller learns of, or has a
reason to believe that any of the following representations and warranties may
cease to be true, Seller shall give prompt notice to Purchaser (which notice
shall include copies of the instrument, correspondence, or document, if any,
upon which Seller's notice is based). As used in this Section 13.1, the phrase
"to the extent of Seller's actual knowledge" or "actually known to Seller" shall
mean the actual knowledge of Tara Molnar, Assistant Vice President, National
Property Management, CNA, the asset manager responsible for the Property and
Michael Versace, on-site property manager employed by Cushman & Wakefield, Inc.
("C&W") There shall be no duty imposed or implied to investigate, inspect, or
audit any such matters, and there shall be no personal liability on the part of
such individuals.
13.1.1Power and Authority. Each of the Seller Pool Companies has the
legal power, right and authority to enter into this Agreement and to
consummate the transactions contemplated hereby, and each is duly formed,
validly existing and in good standing under the Laws of the State of each
of its respective formation/organization/incorporation and is authorized to
do business in the State of New York; each has granted Seller and Agent
full power and authority to act on its behalf and has authorized Seller and
Agent to consummate this transaction and bind each of them to the
obligations set forth in this Agreement (and shall be liable, jointly and
severally, for all of the obligations of Seller hereunder). Agent is a
Delaware corporation, duly organized and validly existing and in good
standing under the laws of the State of Delaware and has the requisite
power and authority to carry on its business in the State of New York as it
is now being conducted. This Agreement constitutes the legal, valid and
binding obligation of Seller enforceable in accordance with its terms and
Seller has the legal power, right and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. Each of
the persons signing this Agreement on behalf of Seller is authorized to do
so.
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13.1.2 Proceedings. There is no pending or, to the extent of Seller's
actual knowledge threatened condemnation or similar proceeding affecting
any part of the Real Property.
13.1.3 Contravention. Neither Seller nor any Seller Pool Company nor
Agent is prohibited from consummating the transactions contemplated by this
Agreement or from executing or delivering this Agreement by any Law, or any
agreement to which Seller or any Seller Pool Company or Agent is a party or
by which it is bound.
13.1.4 Leases and Contracts. The Leases, listed on the Rent Roll and
Contracts comprise all of the leases and contracts which will affect the
Property on the Closing, true, correct and complete copies of which have
been delivered to Purchaser, other than those leases and contracts entered
into in accordance with Article XV. Except as disclosed in the Rent Roll
attached hereto as Exhibit Y, which lists the tenants name, space, all
leases, amendments, letter agreements and assignments and the dates thereof
the expiration date of the lease and current rent and charges tenant
security deposits, prepaid rent and arrearages, base year and base year
amounts on account of operating expenses and real estate taxes (the "Rent
Roll"), no base rent or additional rent or other fees or charges due under
the respective Leases has been paid more than one (1) month in advance by
any Tenant. Base Year and base year amounts on account of operating
expenses and taxes are listed for information only and no representation
and warranty is made with respect thereto. The Rent Roll lists all of the
Leases as of the date of this Agreement. Except as otherwise set forth in
the Rent Roll, all of the Leases are in full force and effect and none of
them has been modified, amended, supplemented or extended. Except as
otherwise set forth in the Rent Roll, as of the date hereof, no Tenant is
in arrears in the payment of rent and Seller has not sent written notice to
any Tenant claiming that such Tenant is in default, which default remains
uncured. Except as otherwise disclosed to Purchaser as set forth on the
Rent Roll, as of the date hereof, Seller has received no written notice of
any claim by a Tenant against Seller or any prior landlord that has not
been resolved for any security deposit or of any Tenant defense or off-sets
to rent or additional rent. To the knowledge of Seller, Seller is not in
default of any of its monetary obligations or in default of any material
obligation as landlord under any Lease. No action or proceeding instituted
against Seller by any Tenant is currently pending in any court with respect
to the Property. There are no security deposits not set forth in the Rent
Roll that have been paid (or, with respect to Letters of Credit, delivered)
to Seller by or on behalf of any Tenant, or with respect to any of the
Leases. Seller has not received any written notice from any Tenant claiming
that Seller is in monetary or other material default under the Lease with
such Tenant, which default remains uncured.
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Exhibit S lists all of the Contracts in effect as of the date hereof
with respect to the Property and there are no service, maintenance, supply
or management contracts or similar agreements affecting the Property,
either written or oral, which will remain in effect beyond the Closing,
except for those described in Section 4.1.1.1 and except for contracts that
can be cancelled on not more than 30 days' notice without penalty or fee
except for penalty or fee which Seller agrees to pay; there are no
agreements which will bind the Property (including all amendments,
modifications and supplements thereto) after the Closing other than the
Permitted Encumbrances. To Seller's knowledge, all of the Contracts are in
full force and effect as of the date of this Agreement, (ii) no action or
proceeding instituted against Seller by any party to a Contract (each, a
"Contract Party") is presently pending in any court and Seller has not
received any written notice from any Contract Party claiming that Seller is
in monetary or other material default under the Contract with such Contract
Party, which default remains uncured, (iii) to Seller's knowledge, Seller
has paid all sums currently due and payable under the Contracts except for
sums which are not more than 30 days' past due, (iv) Seller has delivered
to Purchaser true, correct and complete copies of all Contracts and (v)
except as set forth on Exhibit S, all Contracts are terminable upon not
more than 30 days' notice without penalty or fee except for fees or
penalties which Seller is willing to pay.
13.1.5 Compliance. Except as listed on Exhibit Z, Seller has not
received written notice from any Governmental Authority that the Property
is not in material compliance with all applicable Laws, except for such
failures to comply, if any, which have been remedied.
13.1.6 Employees. Seller represents that the employees listed on
Exhibit AA (the "Employees") are the only employees employed at the
Property all of whom are employed by C&W and not by Seller, and that with
the exception of the Property Manager, the Secretary and the
Accountant/Bookkeeper, (collectively, the "Non-Union Employees"), all
employees on Exhibit AA are Union Employees. Exhibit BB contains a true,
correct and complete list of all the Union Contracts with respect to the
Employees and to Seller's knowledge, all of the Union Contracts are in full
force and effect. "Union Contracts" shall mean all contracts, agreements,
collective bargaining agreements and union agreements related to all
Employees. Purchaser agrees to assume or cause a company with whom it has a
contractual relationship ("Employer Company") to assume the Union Contracts
with respect to such Employees and to comply with the terms thereof with
respect to the Employees from and after the Closing. Purchaser shall offer
to hire or cause the Employer Company to offer to hire the Employees, other
than the Non-Union Employees, commencing on the date of the Closing and
shall assume all liabilities and obligations to such Employees accruing
from and after the Closing under the Union Contracts, including, without
limitation, all salaries
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and wages, payable thereunder, all severance pay and other obligations as a
result of any termination by Purchaser or the Employer Company of any of
such Employees after the Closing and any liabilities or obligations under
any employee benefit plans as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended, maintained by Purchaser
and with respect to any employee benefit or fringe benefit plans or
arrangements maintained by Purchaser, in each case, to the extent such
payments or benefits are required to be made or provided pursuant to the
Union Contracts. Seller represents that (i) it has not entered into any
voluntary modifications of the Union Contracts and (ii) it has made all
payments required by the Union Contracts prior to the date of Closing.
Seller will cause C &W to request from each of the Unions listed on Exhibit
BB a letter dated prior to Closing stating the amount of any underfunded
obligation, if any. Purchaser shall indemnify, defend and hold harmless
Seller from and against any and all claims, liabilities, damages, costs and
expenses (including, without limitation, reasonable attorneys' fees and
disbursements) arising from Purchaser's or the Employer Company's failure
to pay and perform its obligations with respect to the Employees hired by
Purchaser accruing from and after the Closing under this Section 13.1.6.
Seller shall indemnify, defend and hold harmless Purchaser from and against
any and all claims, liabilities, damages, costs and expenses (including,
without limitation, reasonable attorneys' fees and disbursements) arising
from any failure by Seller to pay or perform any obligations to the
Employees accruing prior to the Closing, provided, however, that Seller
shall not be liable for payment of any severance pay, employee benefit plan
obligations or other obligations (whether nor not relating to any period
prior to the Closing) to or for the benefit of any of the Employees hired
by Purchaser arising as a result of any termination of any such Employees
by Purchaser or the Employer Company after the Closing. The indemnities set
forth in this Section 13.1.6 shall survive the Closing.
13.1.7 Litigation. There is no pending litigation affecting the
Property except for litigation which, to Seller's knowledge, is covered by
insurance. Seller has not received written notice from any insurance
company that it has denied coverage in any such insured litigation. Seller
does not have any knowledge of any threatened material litigation.
13.1.8 Notice of Violations. Seller has not received any written
notice from any governmental agency, lender or any Tenant that the Property
(or any portion thereof) is in violation (which has not heretofore been
corrected or otherwise satisfied and in connection with which all penalties
have been paid) of (1) any of the requirements of restrictive covenants or
other encumbrances affecting the Property (or any portion thereof) except
as set forth on Exhibit CC and (2) any Laws bearing on the ownership,
operation or use of the Property, including, without limitation, those
relating to health, safety, building, fire,
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zoning, accessibility, and land use except as set forth on Exhibit Z. No
casualty has occurred with respect to the Property within eighteen (18)
months preceding the date hereof that has not heretofore been repair or
restored.
13.1.9 Licenses and Permits. Exhibit DD contains a list of all permits
and licenses and applications for permits (including, but not limited to, a
certificate of occupancy relating to the Improvements) from Governmental
Authorities currently maintained by Seller in connection with its ownership
of the Property (collectively, the "Licenses and Permits"), all of which
Licenses and Permits (i) have been issued, or duly transferred, to Seller
(to the extent assignable), (ii) have been paid for in full and (iii)
Seller has not received any written notice revoking or threatening to
revoke or terminating any License or Permit except that as of the date
hereof, the Public Assembly Permit for the Ricker Auditorium has expired
and although Seller has made timely application for renewal and has paid
all application fees required to be paid in connection with the renewal,
the current Public Assembly Permit has not been issued. Any fines or
penalties imposed by any Governmental Authority in connection with the
expired Public Assembly Permit shall be Seller's obligation to pay. This
obligation of Seller shall survive Closing. Seller has delivered to
Purchaser true, correct and complete copies of all of the Licenses and
Permits.
13.1.10 Allowances; Leasing Commissions. Except as otherwise set forth
on Exhibit EE attached hereto, Seller has paid or provided for all
construction allowances, brokerage commissions, leasing commissions,
takeover obligations or similar tenant inducements required to be paid,
provided or credited with respect to the current lease term of any Lease
(as opposed to any renewal, extension or expansion term of any Lease).
Initial installations by Seller for Tenants required with respect to the
current term of their respective Leases, except as set forth in Exhibit FF,
have been completed in all material respects and Seller has performed all
other material work required to be performed by the Seller under the Leases
up to the date of the Closing. Except as otherwise set forth on Exhibit H
and Exhibit I, Seller is not performing any ongoing construction work in,
on or about the Property other than normal maintenance being performed by
Seller in the ordinary course of business. Except as set forth in the
Leases, there are no takeback or takeover obligations under any of the
Leases or which would otherwise be enforceable against the owner of the
Property after the Closing.
13.1.11 Tax Proceedings. Except as set forth on Exhibit GG , there are
no tax reduction proceedings pending with respect to all or any portion of
the Property. Except as disclosed on the tax bills with respect to the Real
Property, Seller has no knowledge of, any tax abatements, deferrals or
exemptions in effect with respect to the Property and Seller has received
no written notice of any
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proposed increase in the assessed value of the Property or of any proposed
public improvement assessments.
13.1.12 Insurance. Exhibit HH attached hereto is a true, correct and
complete list of the types and amounts of insurance coverage maintained by
Seller and in force with respect to the Property. Except as otherwise set
forth on Exhibit HH , Seller has not received any written notice from any
of the insurers of the Improvements of any physical condition of the
improvements with respect to which such insurer has required correction or
change which has not been corrected or changed.
13.1.13 Personal Property. Except as set forth on Exhibit C, all of
the Personal Property, if any, to be transferred by Seller to Purchaser has
been paid for in full and is free of all liens, claims and encumbrances.
13.1.14 Environmental and Engineering Reports. Exhibit II is a list of
environmental and engineering reports in Seller's possession or control
relating to the Property, and true and complete copies of same have
heretofore been delivered by Seller to Purchaser.
13.1.15 Utilities. Seller has received no written notice from any
utility company or governmental or quasi-governmental entity of any fact or
condition which could result in the discontinuation of presently available
public utilities for the Property.
13.1.16 Business Improvement District. The Property is located in and
subject to assessments imposed by a Business Improvement District. Seller
has furnished to Purchaser copies of the current bills for assessments
required to be paid in connection with the Business Improvement District.
13.1.17 Non-Foreign Person. Seller is a "United States Person" within
the meaning of Section 1445(f)(3) and 7701(a)(30) of the Internal Revenue
Code of 1986, as amended.
13.1.18 Access to Documents. To Seller's knowledge, Seller has
provided Purchaser with access to any and all Leases, Contracts, Licenses
and Permits, books and records, plans, documents and information relating
to the Property and the ownership and operation thereof which are in the
possession or control of Seller.
13.1.19 Brokerage Agreements. The only brokerage or leasing agreements
relating to the Leases existing on the date hereof or that will be binding
on Purchaser after the Closing are those set forth on Exhibit JJ (the
"Brokerage Agreements"). Seller has delivered or caused to be delivered to
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Purchaser true, correct and complete copies of each Brokerage Agreement
listed on Exhibit JJ.
13.1.20 Work. Exhibit H and Exhibit I contains a list of all material
work in progress by Seller at the Property, the Contracts or agreements
entered into with respect to such work, a description of such work, an
estimate of the percentage of such work which is complete and an estimate
of the cost to complete.
13.1.21 Rezoning. There is no pending request by Seller for a rezoning
of the Property or any other variance for the Property.
13.1.22 Financial Statements. Seller has delivered to Purchaser its
audited Financial Statements for the period 1997 to 1999. Expenses in
connection with the operation and ownership of the Property (other than
with respect to the Ricker Auditorium and Fitness Center and the
Continental Club) are shown on the books and records of Seller delivered to
Purchaser and not instead on the books and records of any other entity
(except in accordance with accounting, regulatory or reporting matters), it
being understood that the foregoing representation is not a representation
or warranty as to the amount of any such expenses.
13.2 Purchaser's Warranties and Representations. The matters set forth in
this Section 13.2 constitute representations and warranties by Purchaser which
are now and shall, at the Closing, be true and correct.
13.2.1 Power and Authority. Purchaser is a Delaware corporation, duly
organized and validly existing and in good standing under the laws of the
State of Delaware and has the requisite power and authority to carry on its
business in the State of New York as it is now being conducted. This
Agreement constitutes the legal, valid and binding obligation of Purchaser
enforceable in accordance with its terms; Purchaser has the legal power,
right and authority to enter into this Agreement and to consummate the
transactions contemplated hereby.
13.2.2 Execution and Delivery. The execution and delivery of this
Agreement and the performance by Purchaser of its obligations hereunder are
not and will not violate any law, rule, judgment, regulation, order, writ,
injunction or decree of any court or the United States of America or the
State of New York or any political subdivision of either of the foregoing,
to the extent any of the foregoing have jurisdiction over the Purchaser or
the Property, or any decision or ruling of any arbitrator to which
Purchaser is a party or by which Purchaser or the Property is bound or
affected, such that Purchaser's performance hereunder would be materially
and adversely impacted on account of such violation.
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13.2.3 Independent Investigation. The consummation of this transaction
shall constitute Purchaser's acknowledgment that it has independently
inspected and investigated the Property and has made and entered into this
Agreement based upon such inspection and investigation and its own
examination of the condition of the Property and the representations and
warranties of Seller set forth herein.
13.2.4 Purchaser Reliance. Purchaser is experienced in and
knowledgeable about the ownership and management of commercial real estate
properties, and it has relied and will rely exclusively on its own
consultants, advisors, counsel, employees, agents, principals and/or
studies, investigations and/or inspections with respect to the Property,
its condition, value and potential except as expressly set forth in Section
13.1 or elsewhere herein. Purchaser agrees that, notwithstanding the fact
that it has received certain information from Seller or its agents or
consultants, Purchaser has relied solely upon and will continue to rely
solely upon its own analysis and will not rely on any information provided
by Seller or its agents or consultants, except as expressly set forth in
Section 13.1.
13.3 No Other Warranties and Representations. Except as specifically set
forth in this Article XIII or elsewhere herein, neither Seller nor Purchaser
have made, make or have authorized anyone to make, any warranty or
representation as to the Leases, the Contracts, any written materials delivered
to Purchaser or the persons preparing such materials, the present or future
physical condition, development potential, zoning, building or land use law or
compliance therewith (including, without limitation, the Americans with
Disabilities Act),operation, income generated by, or any other matter or thing
affecting or relating to the Property or any matter or thing pertaining to this
Agreement. Purchaser expressly acknowledges that no such warranty or
representation has been made and that Purchaser is not relying on any warranty
or representation whatsoever other than as is expressly set forth in this
Article XIII or elsewhere herein. Purchaser shall accept the Property "as is"
and in its condition on the date hereof subject only to the express provisions
of this Agreement and ordinary wear and tear.
13.3.1 No Environmental Representations. Seller makes no
representations or warranties as to whether the Property contains asbestos,
radon or any hazardous materials or harmful or toxic substances, or
pertaining to the extent, location or nature of same, if any. Further, to
the extent that Seller has provided to Purchaser information from any
inspection, engineering or environmental reports concerning asbestos, radon
or any hazardous materials or harmful or toxic substances, Seller makes no
representations or warranties with respect to the accuracy or completeness,
methodology of preparation or otherwise concerning the contents of such
reports.
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13.3.2 Release of Claims. Purchaser acknowledges and agrees that
Seller makes no representation or warranty as to, and Purchaser waives and
releases Seller from any present or future claims arising from or relating
to, the presence or alleged presence of asbestos, radon or any hazardous
materials or harmful or toxic substances in, on, under or about the
Property, including without limitation any claims under or on account of
(i) the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as the same may have been or may be amended from time to time,
and similar state statutes, and any regulations promulgated thereunder,
(ii) any other federal, state or local law, ordinance, rule or regulation,
now or hereafter in effect, that deals with or otherwise in any manner
relates to, environmental matters of any kind, (iii) this Agreement, or
(iv) the common law. The provisions of this Section 13.3.2 shall not be
deemed to limit the right of Purchaser to name Seller as a party defendant
in any action brought by any third party including any governmental entity
for damages which such third party alleges have been caused by
environmental conditions affecting or related to the property which existed
prior to the Closing.
ARTICLE XIV
CASUALTY AND CONDEMNATION
14.1 Insured Casualty. Promptly upon learning thereof, Seller shall give
Purchaser written notice of any damage or destruction of the Property occurring
prior to the Closing. If prior to the Closing the Property is materially damaged
or destroyed, which damage or destruction is covered by insurance, Purchaser
shall have the option of either (i) applying the proceeds of payment under any
insurance policies toward the payment of the Purchase Price to the extent
insurance payments have been received by Seller, receiving from Seller an amount
equal to any applicable deductible under any such insurance policy and receiving
an assignment from Seller of Seller's right, title and interest in any such
awards or payments, or (ii) terminating this Agreement by delivering written
notice of such termination to Seller within 30 days after Purchaser has received
written notice from Seller of such material damage or destruction in which event
this Agreement shall terminate immediately and Purchaser shall receive the
return of the Deposit and thereafter neither party shall have any further rights
or obligations hereunder except those specifically stated to survive a
termination of this Agreement. If prior to the Closing an immaterial portion of
the Property is damaged or destroyed, which damage or destruction is covered by
insurance, then Purchaser shall have the option to either (i) cause Seller to
commence to repair or replace such damage to or destruction of the Property or
the applicable portion thereof or (ii) proceed to Closing with, the proceeds of
any insurance policies and any applicable deductible under any insurance
policies being applied toward the payment of the Purchase Price to the extent
such insurance payments have been received by Seller and Seller shall assign to
Purchaser all of Seller's right, title and interest in any such awards or
payments. For purposes of this Section, the word
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"material" shall mean any damage or destruction which Seller and Purchaser, in
its respective reasonable judgment, believes will cost more than $10,000,000 to
repair and/or replace.
14.2 Uninsured Casualty. In the event of any uninsured damage to or
destruction of the Property or any portion thereof (notice of which shall be
given to Purchaser by Seller promptly following its occurrence) prior to the
Closing, which damage or destruction can, in Purchaser's reasonable judgment
based upon the written advice of engineers and/or architect be repaired or
replaced for a cost not to exceed $10,000,000. at Purchaser's option, Seller
shall either (i) commence to repair or replace such damage to or destruction of
the Property or the applicable portion thereof or (ii) proceed to Closing,
whereupon Purchaser will accept the Property as it is together with a reduction
of the Purchase Price in the amount of the engineer/architect's estimate of the
cost to replace the damaged portion of the Property. If the cost of such repair
or replacement exceeds $10,000,000, as reasonably determined by Purchaser then
Purchaser may, at its option, by notice to Seller given within thirty (30) days
after the date that the cost to repair or replace such damage is determined,
unilaterally terminate this Agreement, in which event this Agreement shall
terminate immediately, the Deposit shall be returned to Purchaser and thereafter
neither party shall have any further rights or obligations hereunder except
those expressly stated to survive a termination hereof. If Purchaser does not
elect to terminate this Agreement as provided in this Section 14.2 , then this
Agreement shall continue between Purchaser and Seller and Purchaser shall
receive a credit, at Closing, in an amount equal to the estimated cost of such
restoration as reasonably determined by Purchaser.
14.3 Condemnation. Promptly upon learning thereof, Seller shall give
Purchaser written notice of any threatened or commenced or consummated
condemnation. If prior to the Closing, a material portion (as hereinafter
defined) of the Property is condemned, Purchaser may, at its option, by notice
to Seller given thirty (30) days after Purchaser is notified of such actual or
possible proceedings, terminate this Agreement, in which event the Deposit shall
be returned to Purchaser and thereafter neither party shall have any further
rights or obligations hereunder, except those expressly stated to survive the
termination hereof. If Purchaser fails to do so, Purchaser shall be deemed to
have elected to continue this Agreement, in which event Seller shall, at the
Closing, assign to Purchaser its entire right, title and interest in and to any
condemnation award (and Seller shall pay to Purchaser any such compensation and
damages already received) and Purchaser shall have the sole right from the date
thereof through the Closing to negotiate and otherwise deal with the condemning
authority in respect of such matter. In the event that less than a material
portion of the Property is condemned, this Agreement shall continue and Seller
shall, at the Closing, assign to Purchaser its entire right, title and interest
in and to any condemnation award (and Seller shall pay to Purchaser any such
compensation and damages already received) and Purchaser shall have the sole
right from the date hereof through the Closing to negotiate and otherwise deal
with the condemning
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authority in respect of such matter. For purposes of this Section 14.3,
"material" shall mean a condemnation which Seller and Purchaser, in its
respective reasonable judgment, believes effects more than five percent (5%) of
the Building or affects access to or the ability to use the Property as
presently used or has a material adverse effect on the income from the Property.
14.4 Purchaser's Right to Participate and/or Consent. In the event that
there is a casualty or condemnation as set forth in Section 14.1-14.3 above and
Purchaser does not terminate this Agreement, Purchaser shall (i) in the event of
an insured casualty, have the right to participate in any insurance settlement
and, if Purchaser elects to have Seller repair or replace such damage, approve
(which approval shall not be unreasonably withheld or delayed) all plans and
specification, contractors and material terms of any contracts for such repair
or replacement, (ii) in the event of an uninsured casualty, if Purchaser elects
to have Seller repair or replace such damage, have the right to approve (which
approval shall not be unreasonably withheld or delayed) all plans and
specifications, contractors and material terms of any contracts for such repair
or replacement and (iii) in the event of a condemnation, have the right to
participate in any condemnation award proceeding.
14.5 General Obligations Law. The parties understand and agree that the
provisions of this Article XIV shall govern and supersede the provisions of
Section 5-1311 of the General Obligations Law of the State of New York.
ARTICLE XV
CONDUCT PRIOR TO THE CLOSING
15.1 Conduct by Seller. Seller hereby covenants and agrees with Purchaser
that during the Contract Period, Seller shall operate the Property in a first
class manner in accordance with its past business practices. Without limiting
the foregoing, Seller shall:
(i) maintain in full force and effect the insurance policies described
in Exhibit HH;
(ii) between the date hereof and the Closing, Seller will advise
Purchaser of any written notice Seller receives after the date hereof from
any Governmental Authority relating to the violation of any Law regulating
the condition or use of the Property; and
(iii) reasonably cooperate with Purchaser's attempts to obtain
subordination and/or non-disturbance and attornment agreements from Tenants
to the extent requested by Purchaser's lender.
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15.2 Actions Prohibited. During the Contract Period Seller shall not,
without the prior written approval of Purchaser:
(i) make any unreimbursed capital expenditures in an amount not to
exceed $30,000 in the aggregate with respect to the Property other than (a)
in the ordinary course of operating the Property, (b) required for
maintenance and repair, (c) required by any of the Leases or the Contracts
or by governmental requirements affecting the Property, (d) required by
Section 4.1.1.1 or (e) required by Section 4.1.1.3 all of which shall be
made at Seller's expense unless otherwise set forth in Section 4.1.1.1 and
Section 4.1.1.3;
(ii) sell, transfer, encumber or change the status of title of all or
any portion of the Property;
(iii) change or attempt to change, directly or indirectly, the current
zoning of the Real Property;
(iv) cancel, amend or modify any Licenses and Permits held by Seller
with respect to the Property or any part thereof which would be binding
upon Purchaser after the Closing.
(v) grant any consent of landlord under a Lease unless such consent is
for a de minimis matter or unless required by the terms of the Lease;
(vi) bring (or permit, to the extent within Seller's knowledge and
control, to be brought) Hazardous Materials or substances on or into the
Property in violation of Environmental Laws;
(vii) remove or dispose of (or permit, to the extent within Seller's
knowledge and control, to be removed or disposed of) any Hazardous
Materials or substances existing on or in the Property in violation of
Environmental Laws;
(viii) remove (unless the same are replaced with similar or comparable
items of at least equal quality prior to the Closing) any fixtures,
equipment or Personal Property included hereunder;
(ix) create any encumbrances affecting title to the Land or sell or
transfer any portion of or interest in the Property;
(x) unless and until this Agreement shall be terminated in accordance
with the terms hereof, Seller shall not solicit or pursue or entertain any
offers to purchase the Property, nor shall Seller enter into any
negotiations with third parties with respect to a sale of the Property;
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(xi) enter into, amend, modify or terminate any Union Contract; or
(xii) terminate the lease dated May 1, 1992 between Seller, as
landlord, and ASARCO Incorporated, as tenant, as amended from time to time
(the "ASARCO Lease") for the entire 25th Floor unless and until Seller has
entered into an amendment of the GS Lease to include the 25th Floor or a
new lease for such space has been entered into with GS; provided that such
amendment or lease with GS (i) commences upon the expiration of the ASARCO
Lease with respect to the 25th Floor, (ii) is on the same terms and
conditions set forth on Exhibit W and (iii) is otherwise in form and
substance reasonably acceptable to Purchaser.
15.3 Leases and Contracts During Due Diligence Period. Prior to the end of
the Due Diligence Period, Seller may not enter into, cancel, amend, or modify
any Contracts or any Leases without approval by Purchaser which approval will
not be unreasonably withheld or delayed. In addition, Seller shall not consent
to any assignment or sublease in connection with any Lease, unless required to
do so pursuant to the terms of the Lease. To the extent that any Contracts
(including, without limitation, the management agreement) have been canceled or
terminated on or before the Closing Date (other than termination by expiration
of time), Seller shall deliver evidence of such cancellation or termination to
Purchaser at the Closing.
15.4 After Due Diligence Period. After the Due Diligence Period, if
Purchaser does not terminate this Agreement, Seller may not enter into any new
lease or contract (unless such contracts are terminable on thirty (30) days'
notice) or cancel, amend or modify any Contracts or any Leases without
Purchaser's consent, which consent may be withheld by Purchaser in its sole and
absolute discretion. In addition, Seller shall not consent to any assignment or
sublease in connection with any Lease unless required to do so pursuant to the
terms of the Lease, subject to Purchaser's consent based on the standard for
consent set forth in the relevant Lease. To the extent that any Contracts
(including, without limitation, the management agreement) have been canceled or
terminated on or before the Closing Date (other than termination by expiration
of time), Seller shall deliver evidence of such cancellation or termination to
Purchaser at the Closing. Notwithstanding the preceding sentence, Seller may
enter into any new contracts without Purchaser's consent if doing so is in the
ordinary course of operating the Property and the contract (i) will not be
binding on Purchaser or (ii) is cancelable on 30 days or less notice without
penalty or premium.
If Seller shall request Purchaser's approval to any of the foregoing
matters, Purchaser shall have ten days from its receipt of such request to give
Seller notice of its approval or disapproval of such matter. If Purchaser does
not give such notice, such matter shall be deemed approved by Purchaser. Any
unreimbursed capital expenditure approved by Purchaser or deemed approved by
Purchaser shall be at Purchaser's expense.
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15.5 Conduct by Purchaser. No later than 75 days prior to Closing,
Purchaser shall notify Seller in writing of any Contract that Purchaser does not
desire to assume. Seller shall pay all costs associated with such termination(s)
and terminate the same prior to Closing and provide written evidence of such
termination to Purchaser at Closing.
15.6 Confidentiality. Seller and Purchaser shall, prior to the Closing,
maintain the confidentiality of this sale and purchase and shall not, except as
required by law or governmental regulation applicable to Seller or Purchaser,
which, with respect to Seller, shall include Standard & Poor's and insurance
regulators, disclose the terms of this Agreement or of such sale and purchase to
any third parties whomsoever other than the principals of Georgetown, Newmark,
the Title Company and such other persons whose assistance is required in
carrying out the terms of this Agreement including, without limitation, any
potential or actual lenders or partners of Purchaser. Neither Seller nor
Purchaser shall at any time issue a press release or otherwise communicate with
media representatives regarding this sale and purchase unless such release or
communication has received the prior approval of the other party hereto.
Purchaser agrees that the Confidentiality Agreement, dated as of June 23, 2000
from Purchaser for the benefit of Seller is in effect, that all documents and
information regarding the Property of whatsoever nature made available to it by
Seller or Seller's agents and the results of all tests and studies of the
Property (collectively, the "Proprietary Information") are confidential and
Purchaser shall not disclose any Proprietary Information to any other person
except those assisting it with the analysis of the Property and any potential or
actual lenders or partners of Purchaser, and only after procuring such person's
agreement to abide by these confidentiality restrictions. This Section 15.5
shall survive the Closing or termination of the Agreement.
ARTICLE XVI
NOTICES
All notices, demands or other communications given hereunder shall be in
writing and shall be deemed to have been duly delivered upon the receipt by
facsimile transmission as evidenced by receipt transmission report, or upon the
delivery by overnight express delivery service or by hand or 3 business days
after mailing by certified mail postage prepaid, return receipt requested,
addressed as follows:
If to Purchaser, to:
PGI-WvF 180, L.P.
c/o Paramount Group, Inc.
1633 Broadway, Suite 1801
New York, New York, 10019
Attention: Albert P. Behler
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Phone: 212-237-3110
Fax: 212-974-6435
Paramount Group, Inc.
1633 Broadway, Suite 1801
New York, New York, 10019
Attention: Daniel A. Lauer
Phone: 212-237-3109
Fax: 212-237-3197
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Attention: Eugene A. Pinover, Esq.
Phone: 212-728-8254
Fax: 212-728-8111
If to Seller, to:
Margaret M. Steck
Vice President
CNA
CNA Plaza - 14 North
Chicago, IL 60685
and
Thomas Pontarelli
Senior Vice President
CNA
CNA Plaza - 40 South
Chicago, IL 60685
and
Jacquelyne Belcastro, Esq.
CNA
CNA Plaza - 43 South
Chicago, IL 60685
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with a copy to:
Barry Mills, Esq.
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
or to such other address or to such other person as any party shall designate to
the others for such purpose in the manner hereinabove set forth.
ARTICLE XVII
TRANSFER OF TITLE AND POSSESSION
17.1 Transfer of Possession. Possession of the Property shall be
transferred to Purchaser at the Closing subject to the Permitted Encumbrances.
17.1.1 Delivery of Documents at Closing. At the Closing, Seller shall
deliver to Purchaser originals or copies of any additional documents,
instruments or records in the possession of Seller or its agents which are
necessary for the ownership and operation of the Property.
ARTICLE XVIII
GENERAL PROVISIONS
18.1 Captions. Captions in this Agreement are inserted for convenience of
reference only and do not define, describe or limit the scope or the intent of
this Agreement or any of the terms hereof.
18.2 Exhibits. All Exhibits referred to herein and attached hereto are a
part hereof.
18.3 Entire Agreement. This Agreement contains the entire agreement between
the parties relating to the transaction contemplated hereby and all prior or
contemporaneous agreements, including without limitation, the LOI,
understandings, representations and statements, oral or written, are merged
herein.
18.4 Modification. No modification, waiver, amendment, discharge or change
of this Agreement shall be valid unless the same is in writing and signed by the
party against which the enforcement of such modification, waiver, amendment,
discharge or change is or may be sought.
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18.5 Attorneys' Fees. Should any party hereto employ an attorney for the
purpose of enforcing or construing this Agreement, or any judgment based on this
Agreement, in any legal proceeding whatsoever, including insolvency, bankruptcy,
arbitration, declaratory relief or other litigation, the prevailing party shall
be entitled to receive from the other party or parties thereto reimbursement for
all reasonable attorneys' fees and all costs, including but not limited to
service of process, filing fees, court and court reporter costs, investigative
costs, expert witness fees and the cost of any bonds, whether taxable or not,
and such reimbursement shall be included in any judgment, decree or final order
issued in that proceeding. The "prevailing party" means the party in whose favor
a judgment, decree, or final order is rendered. This provision shall survive
Closing.
18.6 Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of New York, subject to any adjournment
rights set forth in this Agreement.
18.7 Time of Essence. Time is of the essence to this Agreement and to all
dates and time periods set forth herein.
18.8 Survival of Warranties. Except as otherwise specifically set forth in
this Agreement, only the warranties and representations contained in Sections
13.1 and 13.2 and the provisions of Section 13.3 shall survive the Closing, the
delivery of the Deed and the payment of the Purchase Price, provided that (i)
the representations and warranties set forth in Sections 13.1.1-13.1.3, 13.2.1,
13.2.2 and 13.1.17 shall survive indefinitely and all other representations and
warranties set forth in Article 13 shall survive for a period of 12 months after
the Closing, except to the extent that Purchaser or Seller, as the case may be,
shall have commenced, on or before such 12 month anniversary (the "Warranty
Period"), a legal proceeding based on the breach thereof as of the date of the
Closing, and (ii) the maximum total liability for which Seller shall be
responsible with respect to all representations and warranties and each Landlord
Estoppel shall not exceed Seven Million Five Hundred Thousand Dollars
($7,500,000) in the aggregate, and no claim for breach of representation or
warranty may be made unless the claims, individually or in the aggregate, shall
be in excess of $100,000 after taking account all prior claims, and if such
claims in the aggregate exceed $100,000, Purchaser may make claims for all
breaches without regard to the $100,000 deductible. Unless otherwise expressly
herein stated to survive, all other representations, covenants, conditions and
agreements contained herein shall merge into and be superseded by the various
documents executed and delivered at the Closing and shall not survive the
Closing. The liability of the Seller to Purchaser for any matter disclosed by
Seller or learned by Purchaser prior to the Closing shall be governed by Section
3.8. At Closing, Seller shall deliver to Purchaser a guarantee in the form of
Exhibit J from the Guarantor agreeing to guarantee the obligations of Seller
with respect to representations and warranties of Seller set forth herein and
Seller's statements in the Landlord Estoppels up to the amount of $7,500,000.
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The liability of Seller pursuant to this Section 18.8 is in addition to and
independent of any liability of Seller pursuant to Section 3.8.
18.9 Assignment by Purchaser. Purchaser may not assign its rights under
this Agreement except to an Affiliate (as herein defined) provided, that any
such Affiliate shall expressly assume, in writing, the covenants, undertakings,
warranties, representations and all other obligations of Purchaser under this
Agreement, whether before or after Closing and upon such assignment Purchaser
shall be released from its obligations hereunder.
18.10 Severability. If any term, covenant, condition, provision or
agreement herein contained is held to be invalid, void or otherwise
unenforceable by any court of competent jurisdiction, the fact that such term,
covenant, condition, provision or agreement is invalid, void or otherwise
unenforceable shall in no way affect the validity or enforceability of any other
term, covenant, condition, provision or agreement herein contained.
18.11 Successors and Assigns. All terms of this Agreement shall be binding
upon, inure to the benefit of and be enforceable by, the parties hereto and
their respective legal representatives, successors and assigns (subject to
Section 18.9).
18.12 Interpretation. Seller and Purchaser acknowledge each to the other
that both they and their counsel have reviewed and revised this Agreement and
that the normal rule of construction to the effect that any ambiguities are to
be resolved against the drafting party shall not be employed in the
interpretation of this Agreement or any amendments or Exhibits hereto.
18.13 Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed original; such
counterparts shall together constitute but one agreement.
18.14 Recordation. This Agreement may not be recorded and any attempt to do
so shall be of no effect whatsoever.
18.15 Limitation on Liability. In any action brought to enforce the
obligations of Seller under this Agreement, the judgment or decree shall be
enforceable against Seller only to the extent of its interest in the Property,
including any proceeds thereof, and no other property or assets of Seller shall
be subject to levy, execution or lien for the satisfaction of any remedies
against Seller unless Seller has committed fraud, in which event there shall be
no limit to the liability of Seller. This provision shall survive the Closing.
18.16 WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY EXPRESSLY WAIVE ANY
RIGHT TO TRIAL BY JURY OF ANY CLAIM,
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DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER THIS AGREEMENT OR THE OTHER
AGREEMENTS, INCLUDING, WITHOUT LIMITATION, ANY PRESENT OR FUTURE MODIFICATION
THEREOF OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR
THE OTHER AGREEMENTS (AS NOW OR HEREAFTER MODIFIED) OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE
TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SUCH CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION IS NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND THE PARTIES HEREBY AGREE AND
CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF ANY RIGHT THEY
MIGHT OTHERWISE HAVE TO TRIAL BY JURY. THIS SECTION SHALL SURVIVE CLOSING OR
TERMINATION OF THIS AGREEMENT.
18.17 Further Assurances. Seller, Agent and Purchaser each agree to do such
further acts and things and to execute and deliver such additional agreements
and instruments as the other may reasonably require to consummate, evidence or
confirm the sale or any other agreement contained herein in the manner
contemplated hereby. This Section shall survive the Closing.
18.18 Non-Waiver of Rights. No failure or delay of either party in the
exercise of any right given to such party hereunder shall constitute a waiver
thereof unless the time specified herein for exercise of such right has expired,
nor shall any single or partial exercise of any right preclude other or further
exercise thereof or of any other right. The waiver of any breach hereunder shall
not be deemed to be a waiver of any other or any subsequent breach hereof.
18.19 Mortgage Transactions. Notwithstanding anything to the contrary set
forth herein, Purchaser may, if it so elects, take such steps as Purchaser shall
deem necessary or desirable to encumber the Property at or immediately prior to
the Closing with a mortgage (the "Mortgage") that encumbers other premises
located in the City and State of New York (a "Mortgage Transaction"). Seller
shall use reasonable efforts to cooperate (which cooperation shall be at
Purchaser's sole cost and expense) in so effecting a Mortgage Transaction, if so
desired by Purchaser, provided that such structuring shall not increase Seller's
liabilities or obligations hereunder or adversely affect Seller's rights
hereunder and provided further that the following conditions shall be satisfied
prior to the Mortgage encumbering the Property: (i) there shall only be one
Mortgage and one
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Mortgage lender (" Mortgagee"), (ii) the Mortgage shall be prepayable at any
time, (iii) Purchaser shall deposit with Agent an irrevocable Letter of Credit
acceptable to Seller, drawn on a Bank acceptable to Seller in its sole
discretion, in an amount equivalent to 125% of the Mortgage, naming Agent as
beneficiary and giving Agent the absolute right to draw down the Letter of
Credit on the date following the date of Closing (the "Pay-off Date"), if the
Closing does not occur, (iv) Purchaser shall deliver a pay-off letter from the
Mortgagee stating the full amount required to satisfy the Mortgage on the
Pay-off Date, and the per diem amount required for each day thereafter, and, (v)
Purchaser shall deliver to Seller a cash deposit in an amount sufficient to pay
the first two monthly installments due on the note secured by the Mortgage. In
providing such assistance, Seller shall execute such documents, if any, as may
be reasonably required by Purchaser to effectuate such encumbrance ("Mortgage
Documents") and otherwise comply with the provisions of this Section 18.19,
provided that the Mortgage Transaction and the Mortgage Documents shall not (a)
require Seller to execute any contract, make any commitment, or incur any
obligations, contingent or otherwise, to third parties which are not fully
released as part of the Closing, (b) delay the Closing, and (c) otherwise be
contrary to or inconsistent with the terms of this Agreement. Any Mortgage
Document that Purchaser shall request Seller to execute shall be prepared and
submitted to Seller at least five (5) business days prior to the date that
Seller's execution thereof is requested. Seller shall execute any such Mortgage
Document only if it conforms in all respects to the provisions of this Agreement
relating to a Mortgage Document. Purchaser hereby agrees to indemnify, defend
and hold Seller, its respective partners and the heirs, successors and assigns
thereof, harmless from, against and in respect of, and shall on demand reimburse
Seller, its respective partners and the heirs, successors and assigns thereof
for, any and all loss, liability, damage or expense, including but not limited
to reasonable attorneys' fees and disbursements, arising out of or in any way
connected with the Mortgage Transaction or any Mortgage Document which would not
have been incurred if there was no Mortgage Transaction.
18.20 Credit Lyonnaise Rouse (USA) ("Credit Lyonnaise") Transaction. Prior
to Closing, Seller may (i) enter into an agreement with Credit Lyonnaise
pursuant to which Credit Lyonnaise will agree to surrender its leasehold
interest on a portion of the 19th floor of the Property on or prior to December
31, 2000, (the "Credit Lyonnaise Surrender") and otherwise on terms and
conditions reasonably acceptable to Purchaser and Seller and (ii) enter into an
amendment to the GS Lease (the "19th Floor Amendment") pursuant to which GS will
agree to lease the portion of the 19th floor surrendered by Credit Lyonnaise on
terms and conditions set forth on Exhibit LL and otherwise reasonably acceptable
to Purchaser. Seller's right to enter into the Credit Lyonnaise Surrender or the
19th Floor Amendment shall be contingent upon Seller's entering into the other
such agreement. In the event that the Credit Lyonnaise Surrender and the 19th
Floor Amendment have not both been executed prior to Closing, Purchaser shall
receive a credit at Closing in the amount of One Million One Hundred Ninety Two
Thousand ($1,192,000) Dollars and shall be required to close. In the event that
the
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Credit Lyonnaise Surrender and the 19th Floor Amendment are in full force and
effect at Closing, but the Fixed Rent pursuant to the 19th Floor Amendment is
not payable by GS on the Closing Date, Seller shall pay to Purchaser (or credit
against he Purchase Price) the difference between (x) the per diem Fixed Rent
that would be payable by GS pursuant to the 19th floor Amendment and (y) the per
diem fixed rent that is payable by Credit Lyonnaise, from the Closing Date until
the date that GS is required to begin paying Fixed Rent, or, in the event that
the Credit Lyonnaise lease is terminated prior to the Closing Date and the GS
obligation to pay Fixed Rent has not commenced, the amount of Fixed Rent that GS
would be obligated to pay pursuant to the 19th Floor Amendment from the Closing
Date until the date that Fixed Rent is payable by GS pursuant to the 19th Floor
Amendment. If the amount of the payment or credit cannot be calculated at
Closing, Seller shall make such payments to Purchaser monthly and such payment
obligations shall survive Closing and shall be covered by the Guarantee.
18.21 Indemnity by Seller. Seller shall indemnify, defend, and hold
Purchaser harmless from and against any and all loss, cost, expense (including
reasonable attorneys' fees and disbursements), damage or liability arising out
of, directly or indirectly, (a) tort claims, (including those for bodily injury,
wrongful death, or property damage) against Purchaser or the Property based on
causes of action which arose, accrued or relate to facts occurring prior to the
Closing, not caused by Purchaser, its agents, contractors and other
representatives and (b) claims by Tenants (including, without limitation, claims
with respect to overcharges of rent or additional rent but only to the extent of
amounts received by Seller from Tenants), employees, contractors or parties
under the Contracts and utility companies, with respect to matters that occurred
or obligations which accrued prior to the Closing. The provisions of this
Section 18.21 shall survive the Closing for the statute of limitation with
respect to each specific claim.
18.22 Indemnity by Purchaser. Purchaser shall indemnify, defend, and hold
Seller harmless from and against any and all loss, cost, expense (including
reasonable attorneys' fees and disbursements), damage or liability arising out
of, directly or indirectly, (a) tort claims, (including those for bodily injury,
wrongful death, or property damage) against Seller or the Property based on
causes of action which arose, accrued or relate to facts occurring after the
Closing not caused by Seller, its agents, contractors and other representatives
and (b) claims by Tenants, employees, contractors under the Contracts, utility
companies, and the holder of any mortgage on the Property (or any portion
thereof), with respect to matters that occurred or obligations which accrued
after the Closing. The provisions of this Section 18.22 shall survive the
Closing for the statute of limitations with respect to each specific claim.
18.23 Counterparts. This Agreement may be executed in any number of
counterparts, and each counterpart hereof shall be deemed an Original
instrument. But all counterparts together shall constitute but one agreement.
Facsimile signatures shall be deemed originals.
44
<PAGE>
18.24 Indemnification. If, pursuant to this Agreement, Seller has agreed to
indemnify Purchaser with respect to a particular matter, Seller shall be deemed
to have agreed to indemnify Purchaser for all losses, costs, liabilities,
damages and expenses (including, without limitation (provided Purchaser shall
prevail in the enforcement of the indemnity in connection with such matter)
reasonable attorneys' fees and disbursements, court costs and enforcement costs)
suffered or incurred by Purchaser with respect to such matter, provided,
however, that in no event shall Seller's liability exceed the maximum amounts,
if any, provided for in this Agreement, including, without limitation, in
Section 3.8, and 18.8.
18.25 Definitions. The following terms used but not otherwise defined
herein shall have the following meanings.
"Affiliate" as used with respect to Seller or any other Person, shall mean
any Person controlled, controlled by or under common control with Seller. The
term "control" and the correlative terms controlled, controlled by and under
common control with shall mean the power to direct the management and policies
of such Person.
"Affiliate" as used with respect to Purchaser, shall mean (i) Werner Otto
and/or his direct descendants, (ii) Wilhelm von Finck, Sr., Wilhelm von Finck,
Jr. and their descendants (iii) trusts for the benefit of any person(s)
described in clauses (i) and (ii) and (iv) entities which one or more of the
persons or entities described in clauses (i), (ii) or (iii) control. As used
herein, "descendants" shall include legally adopted persons; and "control" shall
mean the ability to direct the management and operation of the entity and the
ability of another party to approve management decisions shall not be deemed a
lack of control.
"business day" shall mean any day other than a Saturday, Sunday or other
day on which commercial banks are permitted or required to be closed in the
State of New York.
"Closing Date" shall mean the date on which the Closing occurs as provided
in Section 8.1.
"Environmental Laws" mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Resource Conservation and Recovery
Act of 1976, each as amended, together with all other applicable laws (including
rules, regulations, codes, plans, contaminant levels, clean-up levels,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof)
concerning pollution or protection of the environment, including laws relating
to emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic or other materials or
wastes into ambient air, surface water, ground water, or lands or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal,
45
<PAGE>
transport, or handling of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic or other materials or wastes; all to the extent applicable
to the Property or any operations conducted thereat.
"Governmental Authority" means any agency, bureau, commission, court,
department, official political subdivision, tribunal or other instrumentality of
any government whether federal, state, local, domestic or foreign.
"Hazardous Materials" means any substance, material, waste, gas or
particulate matter which (i) is regulated by the United States Government, the
State of New York, any other state with jurisdiction, or any local governmental
authority, or (ii) the exposure to, or manufacture, possession, presence, use,
generation, storage, transportation, treatment, release, disposal, abatement,
cleanup, removal, remediation or handling of is prohibited, controlled or
regulated by any Environmental Law, or (iii) requires investigation or
remediation under any Environmental Law or common law; provided, however, that
solvents, paints, cleaning materials and any other substances commonly used in
connection with the operation and/or maintenance of the Property shall not be
included in the foregoing definition so long as such materials are used, stored
and disposed of in accordance with Environmental Laws.
"Laws" shall mean any applicable law, rule, regulation (including, without
limitation, the Americans with Disabilities Act) or municipal ordinances, orders
or requirements that have been noted in or issued by any federal, state or
municipal department with competent jurisdiction.
"Person" shall mean an association, corporation, stock company, estate,
general partnership (including any Registered Limited Liability Partnership or
Foreign Limited Liability Partnership), limited association, limited liability
company, foreign limited liability company, joint venture, limited partnership,
natural person, real estate investment trust, business trust or other trust,
custodian, nominee or other individual in its own or any representative
capacity. In addition, the term means the heirs, executors, administrators,
legal representatives, successors and assigns of that "Person" where the context
so permits.
SIGNATURE PAGES TO FOLLOW
46
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
set forth above.
SELLER POOL COMPANIES:
BOSTON OLD COLONY INSURANCE COMPANY
By: _________________________
Name:
Title:
THE BUCKEYE UNION INSURANCE COMPANY
By: _________________________
Name:
Title:
COMMERCIAL INSURANCE COMPANY OF NEWARK, N.J.
By: _________________________
Name:
Title:
THE CONTINENTAL INSURANCE COMPANY
By: _________________________
Name:
Title:
47
<PAGE>
THE CONTINENTAL INSURANCE COMPANY OF
NEWARK, NEW JERSEY
By: _________________________
Name:
Title:
THE FIDELITY AND CASUALTY INSURANCE
COMPANY OF NEW YORK
By: _________________________
Name:
Title:
FIREMEN'S INSURANCE COMPANY OF NEWARK,
NEW JERSEY
By: _________________________
Name:
Title:
THE GLENS FALLS INSURANCE COMPANY
By: _________________________
Name:
Title:
KANSAS CITY FIRE AND MARINE INSURANCE
COMPANY
By: _________________________
Name:
Title:
48
<PAGE>
THE MAYFLOWER INSURANCE COMPANY, LTD.
By: _________________________
Name:
Title:
NATIONAL BEN FRANKLIN INSURANCE COMPANY
OF ILLINOIS
By: _________________________
Name:
Title:
NIAGARA FIRE INSURANCE COMPANY
By: _________________________
Name:
Title:
PURCHASER:
PGI-WvF 180, L.P.
By: _________________________
Name:
Title:
<PAGE>
49
FIRST AMENDMENT TO SALE AND PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO SALE AND PURCHASE AGREEMENT (this "Amendment"),
dated as of the 26th day of January, 2001, is made by the SELLER POOL COMPANIES
listed on Exhibit A attached hereto having an office at CNA Plaza, 333 South
Wabash Avenue, Chicago, Illinois 60685 ("Seller") and MAIDEN LANE, L.P. a New
York limited partnership having an office at c/o Paramount Group, Inc, 1633
Broadway, Suite 1801, New York, New York 10019 ("Purchaser").
W I T N E S S E T H:
WHEREAS, Seller and PGI-WvF 180, L.P., a New York limited partnership,
entered into a Sale and Purchase Agreement (as the same may be amended from time
to time, referred to hereinafter as the "Sale Agreement") for the sale of that
certain premises (the "Property") known as 180 Maiden Lane, New York, New York;
WHEREAS, PGI-WvF 180, L.P. has changed its name to Paramount 180, L.P.
pursuant to that Second Amendment to Limited Partnership Agreement of PGI-WvF
180, L.P., dated as of December 15, 2000;
WHEREAS, Paramount 180, L.P. has assigned its interest in the Sale
Agreement to Purchaser pursuant to that certain Assignment and Assumption of
Sale and Purchase Agreement dated as of January 4 2001;
WHEREAS, Purchaser has elected to extend the Closing Date until
January 30, 2001 pursuant to Section 8.1(ii) of the Sale Agreement; and
WHEREAS, Seller and Purchaser desire to amend and modify the Sale Agreement
as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller and Purchaser agree that the Sale Agreement is hereby
amended as follows:
1. All capitalized terms used but not otherwise defined herein shall have
the meanings ascribed to them in the Sale Agreement.
2. Exhibit A of the Sale Agreement is hereby deleted in its entirety, and
Exhibit A attached hereto is hereby substituted therefor, as Exhibit A to the
Sale Agreement.
3. Each of the entities executing this Amendment hereby agrees that it is
the Seller pursuant to the Sale Agreement and hereby ratifies, confirms and
agrees to be bound by the terms of the Sale Agreement, as modified by this
Amendment.
4. Each entity constituting Seller hereby agrees that upon request of
Purchaser it shall execute any documents, instruments, agreements or
certificates which Purchaser, in its reasonable discretion, deems necessary or
advisable in order to correct any document, instrument, agreement or certificate
executed by Seller at or prior to Closing in connection with the Sale Agreement
or in order to consummate the transaction contemplated by the Sale Agreement, as
modified by this Amendment.
<PAGE>
5. Each entity constituting Seller hereby jointly and severally agrees to
indemnify, defend and hold harmless Purchaser, its partners and their respective
officers, directors, members, partners and affiliates from and against any and
all loss, cost, damage, liability or expense (including, without limitation,
reasonable attorneys fees and disbursements) suffered or incurred by such entity
as a result of any discrepancies between the legal and valid names of any entity
constituting Seller and the name of any entity constituting or purporting to
constitute a Seller as shown in the Sale Agreement, this Amendment or any
document, instrument, agreement or certificate executed by any entity
constituting or purporting to constitute a Seller at or prior to Closing.
6. The terms "this Agreement" or "Sale Agreement" as used herein or in the
Sale Agreement prior to the execution of this Amendment shall mean the Sale
Agreement as modified hereby.
7. Except as amended hereby, the terms and provisions of the Sale Agreement
remain unmodified and in full force and effect and are hereby in all respects
ratified and confirmed.
8. This Amendment may be executed in any number of counterparts, each of
which shall be an original, but all of such counterparts together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, Seller and Purchaser have caused this Amendment to be
executed as of the day and year first above written.
SELLER:
BOSTON OLD COLONY INSURANCE COMPANY
THE BUCKEYE UNION INSURANCE COMPANY
COMMERCIAL INSURANCE COMPANY OF NEWARK, N.J.
THE CONTINENTAL INSURANCE COMPANY
THE CONTINENTAL INSURANCE COMPANY OF NEW JERSEY
THE FIDELITY AND CASUALTY COMPANY OF NEW YORK
FIREMEN'S INSURANCE COMPANY OF NEWARK, NEW JERSEY
THE GLENS FALLS INSURANCE COMPANY
-2-
<PAGE>
KANSAS CITY FIRE AND MARINE
INSURANCE COMPANY
THE MAYFLOWER INSURANCE COMPANY, LTD.
NATIONAL-BEN FRANKLIN INSURANCE
COMPANY OF ILLINOIS
NIAGARA FIRE INSURANCE COMPANY
By:
Name: Margaret M. Steck
as Vice President of each of the
companies listed above
PURCHASER:
MAIDEN LANE, L.P.
By: Paramount 180, L.P., its general partner
By: MRI-180 GP, LLC, its managing
general partner
By: ____________________________
Name:
Title:
-3-
<PAGE>
EXHIBIT A
SELLER POOL COMPANIES
1. Boston Old Colony Insurance Company
2. The Buckeye Union Insurance Company
3. Commercial Insurance Company of Newark, N.J.
4. The Continental Insurance Company
5. The Continental Insurance Company of New Jersey
6. The Fidelity and Casualty Company of New York
7. Firemen's Insurance Company of Newark, New Jersey
8. The Glens Falls Insurance Company
9. Kansas City Fire and Marine Insurance Company
10. The Mayflower Insurance Company, Ltd.
11. National-Ben Franklin Insurance Company of Illinois
12. Niagara Fire Insurance Company
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.1
<SEQUENCE>3
<FILENAME>d25096_ex12-1.txt
<DESCRIPTION>COMPUTATION OF RATIOS
<TEXT>
EXHIBIT 12.1 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
<TABLE>
<CAPTION>
Years ended December 31, 2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(In millions, except ratios)
<S> <C> <C> <C> <C> <C>
Income (loss) before income tax, net of minority interest $ 1,782 $ (41) $ 329 $ 1,358 $ 1,345
Adjustments:
Interest expense 206 202 219 198 200
Interest element of operating lease rental 32 35 47 34 32
------- ------- ------- ------- -------
Earnings before fixed charges $ 2,020 $ 196 $ 595 $ 1,590 $ 1,577
======= ======= ======= ======= =======
Fixed charges:
Interest expense $ 206 $ 202 $ 219 $ 198 $ 200
Interest element of operating lease rental 32 35 47 34 32
------- ------- ------- ------- -------
Total fixed charges $ 238 $ 237 $ 266 $ 232 $ 232
======= ======= ======= ======= =======
Ratio of earnings to fixed charges (1) 8.5 0.8 2.2 6.8 6.8
======= ======= ======= ======= =======
</TABLE>
(1) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges of consolidated companies. Fixed charges
consist of interest and that portion of operating lease rental expense
which is deemed to be an interest factor for such rentals.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.1
<SEQUENCE>4
<FILENAME>d25096_ex13-1.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
CNA CHARTING THE COURSE
- --------------------------------------------------------------------------------
When CNA set out to turn the company's performance around two years ago, we
began evaluating each aspect of our business with a fresh perspective. We were
determined to target those areas where our expertise added the most value for
our clients and, ultimately, our shareholders.
This intensive look at our business is engaging literally thousands of
employees. As a result, we've changed a great deal at CNA during the past two
years - simplifying our business, clarifying our goals and applying renewed
discipline and accountability to our performance.
CNA is charting the course to a future of profitable growth by focusing on
what we do best, and it's a journey that will continue to drive the creation of
shareholder value. This Annual Report details our substantial progress to date
and the strategies that will take us where we want to go.
- --------------------------------------------------------------------------------
CNA - WHO WE ARE CNA Financial Corporation is a holding company for
property-casualty and life insurance companies and other related businesses. The
CNA insurance group of companies is one of the largest writers of commercial
property-casualty insurance in the United States - using underwriting to help
businesses manage their risks.
CNA is the country's second largest commercial insurance writer, the eighth
largest property-casualty company and the 36th largest life insurance company.
CNA's insurance products include standard commercial lines, specialty
lines, surety, reinsurance, marine and other property and casualty coverages;
life and accident insurance; group long term care, disability and life
insurance; and pension products and annuities. CNA services include risk
management, information services, underwriting, loss control and claims
administration. Its products and services are marketed through agents, brokers
and managing general agents.
"CNA" is a registered service mark, trade name and domain name of CNA
Financial Corporation authorized for use by its subsidiaries.
CNA's major subsidiaries include The Continental Insurance Company,
incorporated in 1853, Continental Casualty Company, incorporated in 1897, and
Continental Assurance Company, incorporated in 1911. The company operates in all
50 states, as well as major international markets around the world.
CNA's financial strength is reflected in revenues of $15.6 billion in 2000,
and at year-end 2000, assets of $62.1 billion and stockholders' equity of
$9.6 billion. CNA Financial Corporation stock is traded primarily on the New
York Stock Exchange, and is approximately 87 percent owned by Loews Corporation.
- --------------------------------------------------------------------------------
Table of Contents
2 Letter to Shareholders
6 Enhancing Underwriting Expertise
8 Continuing Our Commitment
to Life and Group
10 Improving Service and Efficiency
12 Maintaining a Disciplined
Financial Approach
14 Building Worldwide Capabilities
16 Developing People and Partners
18 Building a Strong Reputation
20 Financial Highlights (1991-2000)
21 Management's Discussion and Analysis
41 Consolidated Financial Statements
74 Directors and Officers
IBC Company Information
- --------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of and for the Years Ended December 31
(In millions, except per share data and ratios) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations
Revenues $ 15,614 $ 16,403 $ 17,162 $ 17,199 $ 16,988
- -----------------------------------------------------------------------------------------------------------------------------
Net operating income (loss) $ 354 $ (145) $ (152) $ 488 $ 578
Net realized investment gains 860 192 434 478 387
Cumulative effect of a change
in accounting principle, net of tax -- (177) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,214 $ (130) $ 282 $ 966 $ 965
=============================================================================================================================
Earnings per share
Net operating income (loss) $ 1.92 $ (0.85) $ (0.86) $ 2.59 $ 3.08
Net realized investment gains, net of tax
and minority interest 4.69 1.04 2.35 2.58 2.09
Cumulative effect of a change in accounting
principle, net of tax and minority interest -- (0.96) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6.61 $ (0.77) $ 1.49 $ 5.17 $ 5.17
=============================================================================================================================
Financial condition
Invested assets $ 35,122 $ 35,560 $ 37,177 $ 36,203 $ 35,412
Total assets 62,068 61,219 62,432 61,675 60,455
Reserves 39,054 39,271 40,509 39,829 39,981
Debt 2,729 2,881 3,160 2,897 2,765
Stockholders' equity 9,647 8,938 9,157 8,309 7,060
Book value per common share $ 52.64 $ 47.66 $ 47.89 $ 44.01 $ 37.27
Return on average stockholders' equity 13.1% -1.4% 3.2% 12.6% 14.0%
Statutory surplus
Property-casualty companies* $ 8,387 $ 8,679 $ 7,593 $ 7,123 $ 6,349
Life insurance companies 1,274 1,222 1,109 1,224 1,163
=============================================================================================================================
</TABLE>
* Surplus includes equity of property-casualty companies' ownership in life
insurance subsidiaries.
1
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Bernard L. Hengesbaugh Chairman and Chief Executive Officer
Dear Shareholder:
I am pleased to report continued progress during 2000 in our efforts to
improve CNA's operating performance and to enhance shareholder value.
As this year's results indicate, we have a lot of additional work to do
before we attain the full measure of shareholder value that is within our reach.
But we are on the right path. We are beginning to achieve operating improvements
through simplification, focus and improved discipline.
Simplifying and clarifying our business today is also helping us chart a
course for a profitable and productive future for CNA. That course is being
developed around strategies focused on what we do best for our customers.
2
<PAGE>
CONTINUED IMPROVEMENT
During the past two years, CNA exited non-core businesses, sharpened our focus
on the risks of business customers and strengthened the fundamentals of our
operations. We are beginning to see the results of these efforts with the
continued improvement in our earnings.
Our net income for 2000 was $1.2 billion, an increase of $1.3 billion over
the net loss of $130 million in 1999. While this significant increase in net
income is attributable largely to realized gains on our superb Global Crossing
and Canary Wharf investments, operating performance also improved.
Net operating income of $354 million in 2000, improved $500 million over
1999's loss of $145 million. This came on operating revenues of $14.3 billion in
2000, compared with operating revenues of $16.1 billion in 1999. This is an
indicator of improved margins in our business.
Our performance during 2000 increased CNA's book value per share to $52.64
at the end of the year, a 10 percent increase compared with $47.66 at year-end
1999.
TWO KEY ELEMENTS
The two priorities that have driven the CNA turnaround since inception -
underwriting discipline and cost-effective operations - continued in 2000.
First, our underwriting actions were favorably influenced by three factors:
1. An underwriting, pricing, loss control and claims team more attuned to
underwriting excellence than even one year ago.
2. Continued strong partnerships with agents and brokers who are willing to work
with us to solve problems.
3. A generally supportive marketplace. (Reinsurance was a notable exception to
this through most of the year.)
As happened in 1999, the re-underwriting and pricing actions resulted in
renewal retention rates lower than historical levels with only modest new
business writings, and consequent reductions in premium volume. On the business
renewed, we achieved increases in the 14 to 20 percent range, thereby improving
future profit potential both from the rate increases and the improved quality of
the business retained.
Second, we are maintaining our commitment to drive unnecessary costs out of
the business. In spite of our decreased premium volume, our expense reduction
efforts are starting to show in the expense ratio and in real dollars of
underwriting and acquisition expenses.
Having said that, this management team is not satisfied with these results.
We have more to do to complete this fundamental improvement process. But we are
establishing the momentum for profitable growth and increased shareholder value
over the long term.
MILESTONES
During 2000, we reached some significant milestones on our path to improved
operating performance.
o Six of our seven business segments reported improved net operating results for
2000.
o We launched our eBusiness initiative, supported by a long term commitment to
invest more than $150 million over the next several years in support of this
strategy.
3
<PAGE>
o We began to see improved service levels through our new, centralized
processing facility in Maitland, Florida.
o We sold our life reinsurance business to MARC, the U.S. life subsidiary of
Munich Re. This allowed us to focus better on our core strategies.
o We affirmed our ongoing commitment to our Individual Life, Long Term Care and
Retirement Services businesses after a comprehensive analysis.
CHARTING THE COURSE
Looking forward, the people of CNA have responded enthusiastically to solving
the challenges we face - not just within our own company, but also new and
emerging challenges that face our industry and our clients in this new century.
During 2000, I was privileged to meet with more than 15,000 of our
employees to discuss our direction. I am more convinced than ever that our
success is assured by our talented people who work on the front lines with our
customers every day.
As you will see from our Statement of Direction on the facing page, our
commitment is simple and straightforward. Our future is centered on providing
significant value to our customers through great underwriting. This commitment
will be the core of our strategies and everything we do.
To sharpen and simplify our focus, we're creating three new organizations
as announced on January 29, 2001: Worldwide Field Operations, unifying CNA's
domestic and international branches, led by Gary Owcar; Global Specialty
Underwriting and Claims, extending our underwriting expertise worldwide, headed
by Peter Wilson; and Technology Solutions, combining eBusiness Operations,
information technology and business processing systems for the property-casualty
organization, led by Robert James. In addition, we have combined CNA Life and
Group Operations under the leadership of Robert Patin, who joined us earlier
this year as chief executive officer of this unit, having served eight years as
chairman and CEO of Washington National Corporation.
Through these changes, we are improving our ability to communicate and
collaborate within our organization on behalf of our clients, and we are
removing the "internal walls" so that we have the opportunity to provide
solutions to our clients' needs.
Three of these four new organizations draw very capable people promoted
from within CNA - a very healthy sign. But we have also continued our success in
attracting talented and experienced insurance and technology people from outside
CNA. These people recognize the opportunity that now exists to be part of the
re-emergence of CNA as a winner in coming years.
IN THE FUTURE
When you combine the momentum of our financial improvement and our newly focused
direction, I believe you can see why we are optimistic about the future of CNA.
We have outstanding franchise value, including a broad base of thousands of
customers . . . we have excellent partnerships with outstanding agents and
brokers . . . we maintain a strong balance sheet . . . and we have the resources
to make targeted investments that will enhance our ability to serve our
customers.
4
<PAGE>
CNA STATEMENT OF DIRECTION
- --------------------------------------------------------------------------------
Businesses face changing risks worldwide that demand great underwriting. The
people of CNA are dedicated to being the experts in understanding these risks
and in building well-reasoned products and services that serve the best interest
of our customers. By doing so, CNA will be very profitable.
Great underwriting requires expertiese across many disciplines and about many
different businesses. The people of CNA are committed to investing continuously
in research about the businesses wer serve, training to advance our skills, and
the technology to get the job done well.
Only the highest caliber of people can deliver great underwriting. The people of
CNA are dedicated to building a disciplined and diverse organization that
expects and regards superior results deivered with integrity and mutual respect.
We have made the tough decisions to improve our performance, we are
demonstrating the strength of our business model and we are providing a solid
platform for profitable growth and enhanced shareholder value.
BOARD CHANGES
Finally, I want to salute two directors who will be retiring from our board in
May: Robert Gwinn and Walter Mondale. Bob Gwinn, former Chairman and CEO of
Encyclopaedia Brittanica, served for over 40 years on our board with great
dedication and distinction. Walter Mondale, who served on our board for 12
years, has been a steady source of insight and sound advice. We will miss them
both.
Early this year, we announced that Walter Harris, president and CEO of
Tanenbaum-Harber Company, had become the newest member of our Board of
Directors. He brings more than two decades of insurance industry leadership, and
we are pleased to have Walter's experience and perspective on our Board.
In summary, it has been a year of significant effort and progress in
improving the fundamentals at CNA. We clearly have more work to do. But we are a
stronger organization today than even a year ago, and we are more confident of
delivering enhanced value for you in the years ahead.
Thank you for your continued support.
Sincerely,
Bernard L. Hengesbaugh
Chairman and Chief Executive Officer
CNA insurance companies
March 10, 2001
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
INTRODUCTION
The following discussion highlights significant factors influencing the
consolidated results of operations and financial condition of CNA Financial
Corporation (CNAF) and its subsidiaries (collectively CNA or the Company). Loews
Corporation (Loews) owns approximately 87% of the outstanding common stock of
CNAF. This discussion should be read in conjunction with the Consolidated
Financial Statements and the related Notes, appearing on pages 41 through 72,
and the five-year summary of selected financial highlights appearing on page 1.
The discussion also includes an overview of each of the Company's seven
operating segments, the products offered, the customers served, the distribution
channels used and an analysis of operating results. The provisions for
restructuring and other related charges, recorded in prior years, are discussed
on a consolidated basis on page 32. Because distinct investment portfolios are
not maintained for each insurance segment, the discussion of investment results,
including investment income and realized investment gains, is also on a
consolidated basis and begins on page 32.
CONSOLIDATED OPERATIONS
Business Overview
CNA is one of the largest insurance organizations in the United States. Based on
1999 net written premiums, CNA is the eighth largest property-casualty company
and the 36th largest life insurance company.
CNA conducts its operations through the seven operating segments listed
below. In addition to the seven operating segments, certain other activities are
reported in a Corporate and Other segment.
Agency Market Operations
Specialty Operations
CNA Re
Global Operations
Risk Management
Group Operations
Life Operations
These operating segments reflect the way in which CNA distributes its
products to the marketplace and the way in which it manages operations and makes
business decisions. A more detailed description of each segment is included
later in this discussion.
Operating Results
The following chart summarizes the consolidated results of operations for each
of the last three years.
Consolidated Operations
<TABLE>
<CAPTION>
Years ended December 31
(In millions, except per share data) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net earned premiums $ 11,474 $ 13,282 $ 13,536
Net investment income 2,080 2,101 2,146
Other revenues 739 705 799
- --------------------------------------------------------------------------------
Total revenues 14,293 16,088 16,481
Claims, benefits and expenses 13,804 16,331 16,567
Restructuring and other
related charges -- 83 246
- --------------------------------------------------------------------------------
Operating income (loss) before
income tax and minority interest 489 (326) (332)
Income tax (expense) benefit (107) 211 200
Minority interest (28) (30) (20)
- --------------------------------------------------------------------------------
Net operating income (loss) 354 (145) (152)
Net realized investment gains,
net of tax and minority interest 860 192 434
Cumulative effect of a change in
accounting principle, net of tax
and minority interest -- (177) --
- --------------------------------------------------------------------------------
Net income (loss) $ 1,214 $ (130) $ 282
================================================================================
Basic and diluted earnings (loss) per share:
Net operating income (loss) $ 1.92 $ (0.85) $ (0.86)
Net realized investment gains,
net of tax and minority interest 4.69 1.04 2.35
Cumulative effect of a change
in accounting principle, net
of tax and minority interest -- (0.96) --
- --------------------------------------------------------------------------------
Basic and diluted earnings (loss)
per share available to
common stockholders $ 6.61 $ (0.77) $ 1.49
================================================================================
Weighted average outstanding
common stock and common
stock equivalents 183.6 184.2 184.9
================================================================================
</TABLE>
21
<PAGE>
The following table summarizes net income excluding after-tax realized
investment gains/losses (net operating income) by segment.
Net Operating Income by Segment
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Agency Market Operations $ 110 $(201) $ (54)
Specialty Operations 131 49 58
CNA Re 57 (13) 68
Global Operations 42 64 18
Risk Management 29 19 (88)
Group Operations 36 (6) (48)
Life Operations 169 145 105
Corporate and Other (220) (202) (211)
- --------------------------------------------------------------------------------
Net operating income (loss) $ 354 $(145) $(152)
================================================================================
</TABLE>
2000 Compared with 1999
Net earned premiums decreased $1,808 million, or 14%, to $11,474 million in 2000
as compared with 1999. This decline was attributable to $1,354 million related
to the CNA Personal Insurance business (Personal Insurance) transaction (see
Note O to the Consolidated Financial Statements for discussion of the Personal
Insurance transaction), as well as continued efforts to re-underwrite business
and obtain adequate rates for exposure underwritten.
Net operating income was $354 million, or $1.92 per share, in 2000 as
compared with a net operating loss of $145 million, or $0.85 per share, in 1999.
Net operating income increased $499 million in 2000, primarily as a result of
the improvement of $451 million for the property-casualty segments, $42 million
for Group Operations and $24 million for Life Operations, partially offset by a
decline for Corporate and Other of $18 million. The improvement in the
property-casualty net operating income was principally attributable to improved
underwriting results of $554 million, partially offset by decreased investment
income and increased expenses, including increased interest expense related to
the cost of reinsurance. The improvement in 2000 results was primarily due to
significant rate increases across the entire book of business, favorable
catastrophe experience, reduced prior year reserve strengthening and the
non-recurrence of $54 million in restructuring and related charges incurred in
1999. After-tax catastrophe losses for 2000 improved by $189 million, including
$62 million related to Personal Insurance. See Note O to the Consolidated
Financial Statements for a discussion of the Personal Insurance transaction. In
addition, net operating income in both 2000 and 1999 benefited from a change in
estimate for certain insurance-related assessments resulting from regulatory
changes in the basis on which certain of these assessments are calculated. The
after-tax impact of these releases was $60 million in 2000 and $51 million in
1999.
Net income for 2000 was $1,214 million, or $6.61 per share, as compared
with a net loss for 1999 of $130 million, or $0.77 per share. Net realized gains
increased $668 million in 2000 primarily attributable to sales of equity
securities. Included in the net loss for 1999 was a charge of $177 million, net
of tax, or $0.96 per share, for the cumulative effect of a change in accounting
principle for insurance-related assessments.
1999 Compared with 1998
The Company had a net operating loss for 1999 of $145 million, or $0.85 per
share, compared with a net operating loss of $152 million, or $0.86 per share,
for 1998. The net operating loss for 1999 includes $363 million in loss and
allocated loss adjustment expense reserve strengthening for prior periods.
After-tax catastrophe losses were approximately $35 million higher in 1999 as
compared with 1998. The 1999 net operating loss also included $54 million in
after-tax restructuring and other related charges, as compared with $160 million
in after-tax restructuring and other related charges in 1998. The 1999 net
operating loss also reflects an after-tax benefit of $51 million resulting from
regulatory changes in the basis on which certain insurance-related assessments
are calculated.
Discussions of the results of operations from the Company's segments
follow.
AGENCY MARKET OPERATIONS
Business Overview
Agency Market Operations builds on the Company's long and successful
relationship with the independent agency distribution system to market a broad
range of property-casualty insurance products and services to small and middle
market businesses. Business products include workers' compensation, commercial
packages, general liability, umbrella and commercial auto, as well as a variety
of creative risk management services. In addition, Agency Market Operations
includes a professional employer organization, CNA UniSource, which provides
various employer-related services. Personal Insurance included personal auto and
homeowners coverage and also offered personal umbrella, separate scheduled
property, boat-owners and other recreational vehicle insurance. These operations
were transferred to The Allstate Corporation (Allstate) effective
October 1, 1999. See Note O to the Consolidated Financial Statements for
discussion of the Personal Insurance transaction.
Agency Market Operations is comprised of the following four groups:
Commercial Insurance, CNA E&S, CNA UniSource and Personal Insurance.
22
<PAGE>
Commercial Insurance (CI) provides standard property-casualty insurance products
such as workers' compensation, general and product liability, property,
commercial auto and umbrella coverage to a wide range of businesses. The
majority of CI customers are small and middle-market businesses, with less than
$1 million in annual insurance premiums. Most insurance programs are provided on
a guaranteed cost basis, although customized loss sensitive programs are also
available for larger middle-market customers. CI is a market leader in applying
industry segmentation techniques to design products and services tailored to the
needs of its targeted customer groups.
CI's operating model focuses on underwriting performance, exposure based
pricing, relationships with selective distribution sources and aligning
resources closer to CI's customers. The model includes more than 35 branches
that provide underwriting, loss and sales for all of CI's lines of business. In
addition, these branches provide claim services for the workers' compensation
business. Also, there are eight claim service centers which provide customers
and claimants, for all non-workers' compensation lines of business, with
efficient and quality service and focus on the total claims outcome through
specialized claim handling and timely claims reporting. The branches and service
centers are all located in the United States. Further, a centralized processing
center in Maitland, Florida, handles all policy processing and accounting, and
also acts as a call center for all branches to optimize customer service.
CNA E&S (E&S) provides specialized insurance and other financial products for
selected commercial risks on both an individual customer or program basis. Risks
insured by E&S are generally viewed as higher risk and less predictable in
exposure than those covered by standard insurance markets. By combining superior
insurance and financial expertise with an in-depth understanding of each
customer's unique and changing risks, E&S develops innovative business solutions
that are valued by the customer and producer. E&S's products are distributed
throughout the United States through specialist producers, program agents, and
CI's agents and brokers. E&S has specialized underwriting and claims resources
in Chicago, New York City, Denver and Columbus.
CNA UniSource is a business solutions provider offering outsourcing services
and products that relieve businesses of many administrative tasks, allowing them
more time to focus on their core business. CNA UniSource provides human
resources (HR) information technology, payroll processing and professional
employer organization services. CNA UniSource is also engaged in delivering
Internet-based HR and payroll administrative services and implementing HR
information outsourcing for large-scale businesses. CNA UniSource's results are
included in other revenues and expenses in the segment results.
Personal Insurance: On October 1, 1999, certain CNA subsidiaries completed a
transaction with Allstate to transfer substantially all of CNA's personal lines
insurance business. See Note O to the Consolidated Financial Statements for
discussion of the Personal Insurance transaction.
Operating Results
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 3,230 $ 3,667 $ 5,496
================================================================================
Net earned premiums $ 3,331 $ 4,799 $ 5,247
Claims, benefits and expenses 3,772 5,791 6,050
Restructuring and other
related charges -- 60 96
- --------------------------------------------------------------------------------
Underwriting loss (441) (1,052) (899)
Net investment income 604 686 744
Other revenues 151 80 48
Other expenses 185 77 52
- --------------------------------------------------------------------------------
Pre-tax operating income (loss) 129 (363) (159)
Income tax (expense) benefit (19) 162 105
- --------------------------------------------------------------------------------
Net operating income (loss) $ 110 $ (201) $ (54)
================================================================================
Ratios
Loss and loss adjustment expense 80.9% 90.4% 83.1%
Expense 29.8 31.0 32.6
Dividend 2.5 0.5 1.4
- --------------------------------------------------------------------------------
Combined 113.2% 121.9% 117.1%
================================================================================
</TABLE>
2000 Compared with 1999
Agency Market Operations' net written and earned premiums were impacted by the
transfer of Personal Insurance to Allstate. The 1999 net written premiums
through October 1, 1999 (the transfer date) were largely offset by the impact of
the ceded unearned premium relating to Personal Insurance. As a result, 1999 net
written and earned premiums included $379 million and $1,354 million related to
Personal Insurance.
Excluding the impact of Personal Insurance, Agency Market Operations' net
written premiums decreased $58 million, or 2%, to $3,230 million in 2000 as
compared with 1999. Net earned premiums for Agency Market Operations, excluding
Personal Insurance, decreased $114 million, or 3%, to $3,331 million in 2000 as
compared with 1999. These declines were due to the continued effort to
re-underwrite business and obtain adequate rates for exposure underwritten,
partially offset by a change in the structure of reinsurance which reduced ceded
premiums.
The combined ratio improved 8.7 points to 113.2% for 2000 as compared with
1999 and underwriting results improved $611 million. The loss ratio improvement
of 9.5 points is comprised of underwriting actions including the increased use
of reinsurance, the continued efforts to achieve adequate rates for exposure
underwritten, the
23
<PAGE>
non-renewal of unprofitable business and lower catastrophe losses than in 1999.
Also, the 1999 loss ratio included adverse loss development related to
automobile, workers' compensation and packaged general liability exposures. The
expense ratio improved 1.2 points principally as a result of decreased
underwriting expenses and the absence of restructuring-related charges,
partially offset by a decrease in ceding commissions received relating to a
change in the structure of reinsurance. The dividend ratio increase of
2.0 points is attributable to favorable development in dividend reserves in 1999
not present in 2000.
Net operating income increased $311 million based on improved underwriting
results, partially offset by lower investment income and an increase in interest
expense related to the cost of reinsurance. Net operating income in both 2000
and 1999 benefited from a change in estimate for certain insurance-related
assessments due to changes in the basis on which certain of these assessments
are calculated. The after-tax impact of this change was $30 million in 2000 and
$25 million in 1999.
CI achieved an average rate increase of approximately 15% in 2000. The
improvement in the reported loss ratio for the 2000 accident year is the first
for CI since 1993 and this improvement is expected to accelerate as the benefits
of rate increases and underwriting actions are fully realized. CI's effective
retention rate is in the low 70 percent range.
1999 Compared with 1998
Agency Market Operations' net written and net earned premiums were impacted by
the transfer of Personal Insurance to Allstate. Net written and earned premiums
from Personal Insurance decreased by $1,310 million and $268 million in 1999.
Excluding the impact of Personal Insurance, Agency Market Operations' net
written and earned premiums decreased $519 million and $180 million in 1999 as
compared with 1998. These decreases reflect the impact of the increased use of
reinsurance and efforts to achieve adequate pricing and the shedding of
unprofitable business.
The combined ratio for 1999 increased 4.8 points due to an increase in the
loss ratio of 7.3 points, partially offset by decreases in the expense and
dividend ratios of 1.6 points and 0.9 points. The increase in the loss ratio is
due principally to increased adverse loss reserve development in 1999, partially
offset by the beneficial effects of reinsurance agreements executed in 1999. The
1999 adverse loss reserve development included development related to
automobile, workers' compensation and packaged general liability exposures. The
decrease in the expense ratio is attributable to lower restructuring and other
related charges in 1999 as compared with 1998. Additionally, Agency Market
Operations' 1999 expense ratio benefited 0.9 points from regulatory changes in
the basis on which certain insurance-related assessments are calculated.
Underwriting losses for 1999 were $1,052 million as compared with $899 million
in 1998 due to deterioration in the combined ratio partially offset by
reductions in volume. Agency Market Operations had a net operating loss of
$201 million for 1999 as compared with a $54 million loss in 1998. The larger
loss was due primarily to the deterioration in underwriting results as described
above.
SPECIALTY OPERATIONS
Business Overview
Specialty Operations provides a broad array of professional, financial and
specialty property-casualty products and services through a network of brokers,
managing general agencies and independent agencies. Specialty Operations
provides creative solutions for managing the risks of its clients, including
architects, engineers, lawyers, healthcare professionals, financial
intermediaries and corporate directors and officers.
Specialty Operations is composed of three principal groups: CNA Pro, CNA
HealthPro and CNA Guaranty and Credit.
CNA Pro is one of the largest providers of non-medical professional liability
insurance and risk management services in the United States. CNA Pro's products
include errors and omissions, directors and officers, employment practices
liability coverages and a broad range of fidelity products. Products are
distributed on a national basis through a variety of channels including brokers,
agents and managing general underwriters. CNA Pro's customers include architects
and engineers, lawyers, accountants and real estate agents and brokers, along
with a broad range of large and small corporate clients and not-for-profit
organizations.
CNA HealthPro offers a comprehensive set of specialized insurance products and
clinical risk management consulting services designed to assist healthcare
providers in managing the quality-of-care risks associated with the delivery of
healthcare. Key customer segments include individual, small group and large
corporate purchasers of malpractice insurance. Caronia Corporation, an operating
company of CNA HealthPro, provides third-party claims administration for medical
professional liability insureds.
CNA Guaranty and Credit provides credit insurance on short-term trade
receivables for domestic and international clients, reinsurance to insurers who
provide financial guarantees to issuers of asset-backed securities, money market
funds and investment grade corporate debt securities and credit enhancement
products that focus on asset backed transactions. These products are distributed
through brokers, captive agents, financial institutions and directly to
customers. In addition, CNA Guaranty and Credit includes R.V.I. Guaranty Co.
Ltd. (RVI), a 50% owned, but not controlled, affiliate. RVI is the largest
monoline residual value insurer in the world, offering coverages to protect the
insured against a decrease in the market value of a properly maintained asset at
the termination of a lease.
24
<PAGE>
Other Operations consist principally of Hedge Financial Products (Hedge), which
focused on securitization of insurance risk and the embedding of financial
protections within traditional insurance programs, and agricultural and
entertainment insurance businesses. During 1999 and 1998, the Company decided to
exit Hedge and the agriculture and entertainment insurance businesses.
Operating Results
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 805 $ 948 $ 1,023
================================================================================
Net earned premiums $ 799 $ 1,001 $ 1,092
Claims, benefits and expenses 819 1,166 1,251
Restructuring and other
related charges -- -- 5
- --------------------------------------------------------------------------------
Underwriting loss (20) (165) (164)
Net investment income 216 235 245
Other revenues 26 19 27
Other expenses 35 30 44
- --------------------------------------------------------------------------------
Pre-tax operating income 187 59 64
Income tax expense (56) (10) (6)
- --------------------------------------------------------------------------------
Net operating income $ 131 $ 49 $ 58
================================================================================
Ratios
Loss and loss adjustment expense 75.4% 90.6% 87.0%
Expense 27.0 25.9 28.1
- --------------------------------------------------------------------------------
Combined 102.4% 116.5% 115.1%
================================================================================
</TABLE>
2000 Compared with 1999
Net written premiums for Specialty Operations for 2000 declined $143 million, or
15%, to $805 million as compared with 1999. Net earned premiums declined
$202 million, or 20%, to $799 million as compared with 1999. These premium
declines relate principally to 1) active decisions to renew only those accounts
which meet current underwriting guidelines supporting the ongoing commitment to
underwriting discipline, 2) a $46 million decline related to Hedge and the
agriculture and entertainment lines of business, 3) an increase in the
retrospective return premium relating to favorable loss experience in the
retrospectively rated architects' and engineers' business and 4) a $30 million
decline due to the increased use of reinsurance for the medical professional
liability lines of CNA HealthPro.
The combined ratio improved 14.1 points to 102.4% for 2000 as compared with
1999 and underwriting results improved $145 million. These improvements are the
result of the ongoing commitment to underwriting discipline reflected by a
15.2 point decline in the loss ratio, partially offset by a 1.1 point increase
in the expense ratio. The 2000 loss ratio was impacted by favorable loss
experience in the retrospectively rated architects' and engineers' business and
the increased use of reinsurance for the medical professional liability lines,
partially offset by large loss experience in the guaranty and credit business.
The 1999 loss ratio was unfavorably impacted by adverse loss experience mainly
in the medical malpractice lines of business. Acquisition and underwriting
expenses have decreased year-over-year, but the expense ratio has increased due
to the reduced net earned premium base. Net operating income has increased $82
million in 2000 as compared with 1999, principally from the improvement in the
underwriting results, partially offset by lower net investment income.
Specialty Operations achieved on average, premium-weighted retention levels
in the high 70 percent range across its entire book of business in 2000. CNA
HealthPro achieved an average rate increase of 18% in 2000, including an average
rate increase of 17% in the institutions and physicians products. For CNA Pro,
rate increases and other underwriting actions have been initiated for the
directors' and officers' product in late 2000.
1999 Compared with 1998
Net written premiums for Specialty Operations for 1999 declined $75 million, or
7%, to $948 million as compared with 1998. Net earned premiums for 1999 declined
$91 million, or 8%, to $1,001 million as compared with 1998, due primarily to
declines in CNA HealthPro and businesses exited. Net earned premiums for CNA
HealthPro declined $40 million, due mainly to new ceded reinsurance agreements
covering 1999 risks and the efforts to achieve adequate price increases and
eliminate unprofitable business. Hedge, agriculture and entertainment net earned
premiums decreased a combined $46 million from 1998 due to the exit from these
lines of business.
The combined ratio for 1999 increased 1.4 points due principally to a
3.6 point increase in the loss ratio as a result of adverse claim experience in
the medical malpractice and non-medical professional liability lines of
business. The impact of adverse claim experience in these lines of business was
to increase the 1999 loss ratio for Specialty Operations by 6.6 points over its
1998 level. The 1999 loss ratio was favorably impacted by 4.1 points due to the
exit from the agricultural insurance line of business. The expense ratio
declined 2.2 points in 1999 due principally to businesses exited. The
underwriting loss for 1999 was $165 million, essentially unchanged from 1998,
due to the offsetting impacts of a higher loss ratio and a lower expense ratio.
Net operating income for 1999 declined principally because of lower net
investment income.
CNA RE
Business Overview
CNA Re operates globally as a reinsurer in the broker market, offering both
treaty and facultative products. CNA Re's operations include the business of CNA
Reinsurance Company Limited (CNA Re U.K.), a United Kingdom reinsurance company,
and United States operations based in Chicago. While CNA Re's primary product is
traditional treaty reinsurance, it also offers facultative and financial
reinsurance. CNA Re also participates in Lloyd's of London through CNA Corporate
Capital Ltd., which provides capital to Lloyd's Syndicate 1229.
25
<PAGE>
CNA Re U.K. writes in both the London market and other European markets
through its headquarters in London and offices in Amsterdam, Milan, Singapore
and Zurich. As one of the largest reinsurers in this market, CNA Re U.K. has
ratings of A (Strong) from Standard & Poor's (S&P), A (Excellent) from A.M. Best
and A3 (Good) from Moody's. CNA Re U.K. writes United States and international
treaty and professional liability business, including medical malpractice,
errors and omissions and directors' and officers' coverages.
The United States operations of CNA Re provide products to the North
American markets. Treaty products include working layer property, working layer
casualty, property catastrophe, workers' compensation, products liability,
general liability, professional liability, specialty and excess and surplus
lines. In addition, financial reinsurance products are offered as well as
property and casualty facultative reinsurance.
In 2000, CNA Re instituted a new global operating structure by creating six
specialized underwriting centers of excellence and three centers of functional
excellence that span geographic boundaries. This structure allows the
organization to better utilize the specialized expertise of its people worldwide
and take advantage of market opportunities.
Operating Results
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 951 $ 1,275 $ 908
================================================================================
Net earned premiums $ 1,089 $ 1,176 $ 944
Claims, benefits and expenses 1,186 1,369 1,005
Restructuring and other
related charges -- -- 1
- --------------------------------------------------------------------------------
Underwriting loss (97) (193) (62)
Net investment income 195 161 163
Other revenues 5 (1) 5
Other expenses 14 (5) 11
- --------------------------------------------------------------------------------
Pre-tax operating income (loss) 89 (28) 95
Income tax (expense) benefit (32) 15 (27)
- --------------------------------------------------------------------------------
Net operating income (loss) $ 57 $ (13) $ 68
================================================================================
Ratios
Loss and loss adjustment expense 81.6% 84.9% 74.9%
Expense 27.3 31.5 31.7
- --------------------------------------------------------------------------------
Combined 108.9% 116.4% 106.6%
================================================================================
</TABLE>
2000 Compared with 1999
Net written premiums for CNA Re for 2000 decreased $324 million, or 25%, to
$951 million as compared with 1999. Net earned premiums decreased $87 million,
or 7%, to $1,089 million as compared with 1999. These declines reflect decisions
not to renew contracts that management believed did not meet its underwriting
profitability targets, partially offset by modest rate increases.
The combined ratio improved 7.5 points to 108.9% in 2000 as compared with
1999 and underwriting results improved $96 million. The improvement in the
underwriting results is attributable to improvements in both the loss and
expense ratios. The loss ratio improvement is attributable mainly to favorable
2000 catastrophe experience as compared with 1999 catastrophe results that were
negatively impacted by a series of European windstorms, Hurricane Floyd and
other international catastrophes. The improvement in the expense ratio was
related to decreased contingent commissions in 2000. Net operating income
increased $70 million in 2000 as compared with 1999 due to the improvement in
the underwriting results and an increase in investment income.
A significant portion of CNA Re's treaty business renewals are effective on
January 1. Reinsurance renewals for the January 1, 2001 cycle were the latest
experienced in the past several years. The delay was driven by a significant
difference between the improvement in the terms, conditions and rates required
by reinsurers and what clients considered acceptable. The retrocessional and
catastrophe markets exhibited the greatest amount of tightening. Casualty lines,
however, continued to be a challenge. CNA Re has been able to achieve targeted
rate increases but at a lower retention level than expected.
1999 Compared with 1998
Net written premiums for CNA Re increased $367 million, or 40%, to
$1,275 million as compared with 1998. Net earned premiums increased
$232 million, or 25%, to $1,176 million as compared with 1998. This growth
occurred in both foreign and domestic markets in the professional and standard
lines of business. Growth was experienced via expansion of treaty relationships
with existing clients, the continued development of new product lines and growth
in global facultative operations.
CNA Re's 1999 combined ratio increased by 9.8 points as compared with 1998,
primarily as a result of a 10.0 point increase in the loss ratio. The
underwriting results for 1999 were dramatically impacted by the series of
European windstorms, Hurricane Floyd and other international catastrophes, which
contributed to an aggregate 9.4 point increase in the 1999 loss ratio relative
to 1998. Net operating income in 1999 was adversely affected by $122 million in
after-tax catastrophe losses, compared with $50 million in after-tax catastrophe
losses in 1998.
GLOBAL OPERATIONS
Business Overview
Global Operations provides products and services to United States-based
customers expanding overseas and foreign customers. The major product lines
include marine, commercial and contract surety, warranty and specialty products,
as well as commercial property and casualty coverages.
Global Operations is composed of five principal groups: Marine, Surety,
Warranty, CNA Global and First Insurance Company of Hawaii (FICOH).
Marine completed the acquisition of Maritime Insurance Co., Ltd. (Maritime
Ltd.), based in the United Kingdom, and its Canadian subsidiary, Eastern Marine
Underwriters (EMU) on July 1, 1998,
26
<PAGE>
strengthening CNA's position as a global marine insurer. In 1999, CNA launched
the marketing brand, CNA Maritime, which unites three industry leaders, MOAC,
Maritime Ltd. and EMU, to serve global ocean marine needs. MOAC, a leading
provider of ocean marine insurance in the United States, offers hull, cargo,
primary and excess marine liability, marine claims and recovery products and
services. Business is sold through national brokers, regional marine specialty
brokers and independent agencies, which work closely with MOAC's nine branch
offices located throughout the United States. Maritime Ltd. is a leading marine
cargo and related marine insurance specialist with markets extending across
Europe and throughout the world. As foreign subsidiaries, Maritime Ltd. and EMU
are included in the results of, and are managed by, CNA Global. Growth is
expected to result from leveraging the relationships with CNA's domestic
producers, implementing e-commerce and providing customers with services and
products throughout the world.
On September 22, 2000, CNA Maritime launched the first phase of OMMnism
(Ocean Marine Manager network interface), an automated cargo insurance system
accessible over the Internet. This first phase of OMMnism allows potential
customers to receive real-time quotes, issue certificates, pay by credit card,
and access an array of other convenient policy services, such as on-line reports
and first notice of loss services. The core of CNA Maritime's global cargo
strategy will occur through interactive products such as OMMnism.
Surety consists primarily of CNA Surety Corporation (CNA Surety), which is
traded on the New York Stock Exchange (SUR) and is the largest publicly traded
provider of surety bonds, with approximately 8% of that market. Among its United
States competitors, CNA Surety has one of the most extensive distribution
systems and one of the most diverse surety product lines, offering 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 approximately
37,000 independent agencies. Growth is expected to come from CNA Surety's broad
product and distribution resources and international expansion. CNA owns
approximately 64% of CNA Surety.
Warranty is one of the largest warranty underwriters in the United States,
providing extended service contracts, warranties and related insurance products
that protect the consumer or business from the financial burden associated with
the breakdown, under-performance or maintenance of a product. Warranty's key
market segments consist of vehicle, retail, home, commercial and original
equipment manufacturers. Each market segment distributes its product via a sales
force employed or contracted through a program administrator.
CNA National Warranty Corporation (CNA Warranty) sells vehicle warranty
services in the United States and Canada. In July 1998, Warranty expanded into
the home warranty segment with the acquisition of a 90% interest in Home
Security of America, Inc., one of the largest home warranty administrators in
the United States. Also, in January 1998, the Company acquired a joint venture
interest in Specialty Underwriters, a provider of innovative equipment
maintenance management services to companies worldwide. These entities are
service administrators whose products are backed by insurance coverages provided
by CNA's insurance affiliates.
CNA Global is responsible for coordinating and managing the direct business of
the foreign property-casualty operations of CNA. This business identifies and
capitalizes on strategic indigenous opportunities outside the United States by
continuing to build its own capabilities and by initiating acquisitions,
strategic alliances and start-up operations that allow for expansion into
targeted markets. In addition, CNA Global provides United States-based customers
expanding their operations overseas with a single source for their commercial
insurance needs. To this end, CNA Global has placed underwriters within
commercial insurance branches.
CNA Global currently oversees operations in Europe, Latin America, Canada
and Asia. CNA Insurance Company (Europe) Limited (CIE) is based in London, with
offices in France, Germany, the Netherlands and Denmark. In Europe, CNA Global's
operations include the results of U.K.-based Maritime Ltd. and CIE. On
July 1, 2001, a planned merger of CIE into Maritime Ltd. is expected to be
completed. Through its network of offices, CNA Global built on the successes of
several CNA specialty products (including travel and accident, warranty and
financial lines insurance) and introduced those products across Europe in 2000.
During 2000, the Company had a majority and controlling interest in Omega A.R.T.
(Omega), a workers' compensation company domiciled in Argentina. Omega ranks as
the fifth largest workers' compensation company in Argentina based on premium
volume.
The short- to mid-term growth opportunities for CNA Global are in the more
mature foreign insurance markets, such as Europe and Canada, and in specialty
insurance products. In the longer term, emphasis will be on the emerging
insurance markets in Latin America and Asia.
First Insurance Company of Hawaii is the oldest and largest domestic
property-casualty insurer in Hawaii and offers commercial and personal lines
solely in that state. Distributed through 30 independent agencies, the business
mix has historically been approximately 70% commercial and 30% personal lines.
On November 1, 1999, Tokio Marine & Fire Insurance Co. Ltd. (Tokio) and CNA
executed an agreement to increase Tokio's ownership share from 40% to 50%,
resulting in equal ownership by CNA and Tokio. Concurrently, Tokio merged their
Hawaii-based operations into FICOH. As CNA retains control over FICOH, its
operations are consolidated with CNA's operations. CNA viewed this transaction
as a positive step in the ongoing strategic relationship between CNA and Tokio.
CNA's partnership with Tokio is expected to generate growth opportunities
and facilitate international expansion. Additionally, CNA foresees growth
opportunities through collaborative partnerships between FICOH and other CNA
businesses.
27
<PAGE>
Operating Results
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 1,160 $ 1,080 $ 985
================================================================================
Net earned premiums $ 1,089 $ 1,010 $ 941
Claims, benefits and expenses 1,128 1,037 991
Restructuring and other
related charges -- -- 1
- --------------------------------------------------------------------------------
Underwriting loss (39) (27) (51)
Net investment income 136 132 110
Other revenues 116 120 82
Other expenses 123 100 80
- --------------------------------------------------------------------------------
Pre-tax operating income 90 125 61
Minority interest (24) (28) (25)
Income tax expense (24) (33) (18)
- --------------------------------------------------------------------------------
Net operating income $ 42 $ 64 $ 18
================================================================================
Ratios
Loss and loss adjustment expense 60.3% 56.9% 62.2%
Expense 43.1 45.5 42.8
Dividend 0.1 0.3 0.4
- --------------------------------------------------------------------------------
Combined 103.5% 102.7% 105.4%
================================================================================
</TABLE>
2000 Compared with 1999
Net written premiums for Global Operations in 2000 increased $80 million, or 7%,
to $1,160 million as compared with 1999. Net earned premiums increased
$79 million, or 8%, to $1,089 million as compared with 1999. These increases
were driven by growth in the commercial casualty and property lines in the
European operations, as well as growth in the commercial warranty and surety
lines.
The combined ratio increased 0.8 points to 103.5% in 2000 as compared with
1999 and underwriting results declined $12 million. The decline in underwriting
results is mainly attributable to adverse current and prior year loss experience
in the vehicle warranty insurance line of business. Net operating income
decreased $22 million in 2000 as compared with 1999 due to the decline in
underwriting results and an increase in other expenses related to the
non-insurance operations in the warranty business.
Global operations achieved pricing increases in 2000 that averaged
approximately 3% across the businesses in this segment. Retention rates were in
the mid 70 percent range. Retention rates do not apply to the Surety and
Warranty businesses.
1999 Compared with 1998
Net written premiums in 1999 increased $95 million, or 10%, as compared with
1998. Net earned premiums increased $69 million, or 7%, to $1,010 million as
compared with 1998. CNA Global contributed $56 million of the increase, the
majority of which was attributable to a full year's premiums from Maritime Ltd.
Surety contributed increased net earned premium of $29 million, due to generally
favorable domestic economic conditions for public construction and expansion
internationally. Warranty net earned premiums increased $24 million over 1998,
due mainly to increased sales of new automobile warranties. Partially offsetting
this growth was a decrease in net earned premiums in MOAC of $49 million due to
competitive marine market conditions.
Underwriting results improved $24 million from 1998 due to a decrease in
the combined ratio of 2.7 points. This was due primarily to improved loss ratios
in MOAC, Surety and CNA Global partially offset by an increase in the loss ratio
in Warranty. The improvement in the MOAC and CNA Global loss ratios was due to a
change in the mix of business that reduced exposure to catastrophes and large
property losses. The decrease in Surety's loss ratio was due to favorable loss
experience in 1999 compared with 1998. The increase in the loss ratio in
Warranty was due to unfavorable loss experience in its automotive business. Net
operating income for 1999 increased $46 million as compared with 1998 primarily
from the improved underwriting results and increased investment income.
RISK MANAGEMENT
Business Overview
Risk Management serves the property-casualty needs of large domestic commercial
businesses, offering customized strategies to address the management of business
risks. Also, Risk Management, primarily through RSKCoSM, provides total risk
management services relating to claims, loss control, cost management and
information services to the commercial insurance marketplace.
Risk Management includes two groups: Risk Transfer and RSKCoSM.
Risk Transfer writes casualty and property lines of insurance. The casualty
business focuses on workers' compensation, commercial auto liability and general
liability through traditional and innovative advanced financial risk products.
Excess products provide umbrella, excess workers' compensation and high excess
coverages. Casualty offerings target Fortune 1000 businesses.
Over the last three years, domestic and global property insurance
capabilities have been increased, providing primary, quota share and excess of
loss property facilities. Capabilities include providing property, inland
marine, global and boiler and machinery coverages to large accounts and Fortune
100 businesses.
RSKCoSM was formed in 1998 and provides total risk management services
(integrated and single component) related to claims, loss control, cost
management and information services to the commercial insurance marketplace.
RSKCo'sSM capabilities include:
Claim Services provides services that allow customers to select from a
single source the desired level of service ranging from an integrated claims
package to any component service.
Loss Control provides pre-loss prevention services that include industrial
hygiene, laboratory, ergonomics, field consulting and training, property,
environmental and transportation loss control. Driver training is provided
through Smith System Driver Improvement Institute, Inc., a wholly owned
subsidiary.
28
<PAGE>
Cost Management provides post-loss cost control services through case
management, medical bill review, preferred provider organizations and other
unique partnerships to reduce lost work days through rapid response, quality
care and effective coordination.
Information Services provides services including data access, reporting
tools, information and benchmarking analysis, consulting and custom reporting
services.
Operating Results
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net written premiums $ 633 $ 839 $ 889
================================================================================
Net earned premiums $ 637 $ 801 $ 823
Claims, benefits and expenses 760 936 1,018
- --------------------------------------------------------------------------------
Underwriting loss (123) (135) (195)
Net investment income 163 154 144
Other revenues 318 316 230
Other expenses 324 307 227
Non-insurance restructuring and
other related charges -- 10 88
- --------------------------------------------------------------------------------
Pre-tax operating income (loss) 34 18 (136)
Income tax (expense) benefit (5) 1 48
- --------------------------------------------------------------------------------
Net operating income (loss) $ 29 $ 19 $ (88)
================================================================================
Ratios
Loss and loss adjustment expense 95.8% 94.3% 89.1%
Expense 23.5 22.6 30.7
Dividend -- -- 3.9
- --------------------------------------------------------------------------------
Combined 119.3% 116.9% 123.7%
================================================================================
</TABLE>
2000 Compared with 1999
Net written premiums for Risk Management in 2000 decreased $206 million, or 25%,
to $633 million as compared with 1999. Net earned premiums decreased
$164 million, or 20%, to $637 million as compared with 1999. These declines
resulted from a continued focus on re-underwriting the book of business, as well
as the increased utilization of reinsurance.
Despite the combined ratio increase of 2.4 points to 119.3% in 2000 as
compared with 1999, underwriting results improved by $12 million. Increases in
both the loss and expense ratios led to the unfavorable change in the combined
ratio. The loss ratio increase of 1.5 points is principally the result of
adverse property and casualty experience for both the current and prior accident
years. Acquisition and underwriting expenses have decreased year-over-year, but
the expense ratio has increased due to a reduced net earned premiums base in the
current year. Net operating income improved $10 million primarily as a result of
improved underwriting results, improved net operating income for RSKCoSM,
increased investment income and restructuring-related charges incurred in 1999
that did not recur in 2000. These improvements were partially offset by an
increase in interest expense related to the cost of reinsurance. Net operating
income in both 2000 and 1999 benefited from a change in estimate for certain
insurance-related assessments due to regulatory changes in the basis on which
certain of these assessments are calculated. The after-tax impact of this change
was $30 million in 2000 and $26 million in 1999.
Risk Management has been involved in numerous underwriting initiatives to
improve results. Risk Management achieved double-digit price increases in 2000
on average across its book of business while maintaining premium-weighted
retention in the low 80 percent range. Risk Management's underwriting
initiatives continue to focus on risk selection, increased attachment points and
strengthened underwriting terms and conditions through increasing deductibles
and limiting the scope of coverages. Risk Management has also launched a quality
initiative designed to increase net operating income through the review and
improvement of all activities that create, market and support products and
services.
1999 Compared with 1998
Net written premiums for 1999 declined $50 million, or 6%, to $839 million as
compared with 1998. Net earned premiums for 1999 declined $22 million, or 3%, to
$801 million as compared with 1998. This decrease resulted from Risk
Management's decision to take advantage of a favorable reinsurance market and
cede a larger portion of its direct premiums, the redesign of existing risk
management programs and decreased business as a result of pricing actions taken
in a difficult market.
Risk Management's underwriting loss decreased $60 million in 1999 as the
combined ratio for 1999 decreased 6.8 points due to decreases in the expense and
dividend ratios of 8.1 points and 3.9 points, partially offset by an increase in
the loss ratio of 5.2 points. The increase in the loss ratio was principally the
result of adverse loss development related primarily to asbestos exposures,
offset in part by the beneficial effects of reinsurance agreements executed in
1999. Risk Management's expense ratio benefited 4.9 points from regulatory
changes in the basis on which certain insurance-related assessments are
calculated and a decrease in restructuring-related charges of $78 million. The
decrease in the dividend ratio is due to favorable development in dividend
reserves. Despite reserve strengthening, overall results increased to a net
operating income of $19 million from a net operating loss of $88 million in
1998. Positively influencing results were underwriting expense savings,
reinsurance programs, the impact of favorable regulatory changes in the basis on
which certain insurance-related assessments are calculated and reduced
restructuring-related charges compared with those recorded in 1998.
29
<PAGE>
GROUP OPERATIONS
Business Overview
Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. Group Operations also provides health insurance
to federal employees, retirees and their families (Federal Markets); managed
care and self-funded medical excess insurance; medical provider network
management and administration services; and reinsurance for life and health
insurers.
Group Operations includes four principal groups: Group Benefits (formerly
Special Benefits), Provider Markets, Life Reinsurance and Federal Markets.
Group Benefits provides group term life insurance, short- and long-term
disability, statutory disability, long term care and accident products. Products
are marketed through a nationwide operation of 31 sales offices, third party
administrators, managing general agents and insurance consultants.
Provider Markets is composed of two major businesses. CNA Health Partners
provides comprehensive managed care services to employers offering self-funded
medical plans. Services offered include network development and management,
medical management, medical claims administration, consulting services and
management services. Group reinsurance assumes reinsurance on health, life and
other related products written on a group basis, as well as excess risk
coverages related to healthcare.
Life Reinsurance reinsures individual life and health products marketed by
unaffiliated life insurance companies throughout North America. Sales are
generated through an internal sales force. On December 31, 2000, CNA sold its
Life Reinsurance business. See Note O to the Consolidated Financial Statements
for discussion of the Life Reinsurance transaction.
Federal Markets is the second largest provider of health insurance benefits to
federal employees, insuring approximately one million members under the Mail
Handlers Benefit Plan (MHBP) offered through the Federal Employees Health
Benefit Plan (FEHBP), and also underwrites conversion policies and supplemental
coverages for members. Federal Markets is responsible for all claim management
activities under the plan, such as large case management, hospital and provider
bill negotiations, fraud detection activities and vendor contracts.
Operating Results
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earned premiums $ 3,675 $ 3,571 $ 3,733
Net investment income 142 130 133
Other revenues 49 40 24
- --------------------------------------------------------------------------------
Total operating revenues 3,866 3,741 3,890
Benefits 3,068 3,053 3,171
Expenses 748 699 763
Restructuring and other
related charges -- 5 39
- --------------------------------------------------------------------------------
Pre-tax operating income (loss) 50 (16) (83)
Income tax (expense) benefit (14) 10 35
- --------------------------------------------------------------------------------
Net operating income (loss) $ 36 $ (6) $ (48)
================================================================================
</TABLE>
2000 Compared with 1999
Net earned premiums for Group Operations in 2000 increased $104 million, or 3%,
to $3,675 million as compared with 1999. This increase was principally a result
of a $41 million increase in Group Benefits, primarily related to the group life
line of business; a $35 million increase in Life Reinsurance; an $18 million
increase in Provider Markets, primarily related to the group reinsurance line of
business and a $10 million increase in Federal Markets. The increases in Group
Benefits and Life Reinsurance relate to new business production.
Net operating income increased $42 million in 2000 as compared with 1999.
This increase relates to a $24 million improvement in Federal Markets due to the
1999 exit of unprofitable medical lines, a $34 million improvement in Provider
Markets and a $4 million improvement in Life Reinsurance. These improvements
were partially offset by an $18 million decline in Group Benefits due to
favorable 1999 loss experience in the group life line of business. The
improvement associated with Provider Markets relates to adverse experience and
loss development for the personal accident business recorded in 1999, which
exceeded $7 million of exit costs incurred from the Management Services
Organization (MSO) business and $13 million of adverse development on the
medical stop loss business in 2000. The decision to shut down the MSO business
was based on lack of demand as providers are backing away from risk contracting.
The strategy to focus on Group Benefits, Federal Markets and the group
reinsurance lines of business positions Group Operations for the expectation of
modest improvement in net operating income in 2001.
1999 Compared with 1998
Net earned premiums declined in 1999 by $162 million, or 4%, to $3,571 million
as compared with 1998. Federal Markets' net earned premiums declined
$274 million, almost entirely due to the exit of selected medical markets in
late 1998. This decline was partially offset by growth in Life Reinsurance and
Group Benefits of $60 million and $53 million.
30
<PAGE>
Net operating results in 1999 improved by $42 million as compared with
1998. Key components of the improvement include better underwriting results in
Group Benefits' life and disability product lines, the exit of the employer
health and affinity lines of business and lower restructuring and other related
charges, partially offset by adverse losses and reserve development in the
personal accident business.
LIFE OPERATIONS
Business Overview
Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers and various other independent insurance consultants.
Life Operations is composed of four principal groups: Individual Life,
Retirement Services, Long Term Care and Other Operations.
Individual Life primarily offers level premium term life insurance, universal
life insurance and related products. New sales of term life have consistently
placed CNA among the top five producers in the market in each of the past three
years.
Retirement Services markets annuities and investment products and services to
both retail and institutional customers. In the institutional market, CNA has
benefited from strong sales and earnings of its Index 500 product, which is a
guaranteed investment contract that is indexed to the performance of the
Standard and Poor's 500(R) (S&P 500(R)) Index.
Long Term Care products provide reimbursement for covered nursing home and home
health care expenses incurred due to physical or mental disability. New sales of
Long Term Care have placed CNA among the top producers in the individual
marketplace in each of the past three years.
Other Operations businesses include developing operations in certain
international markets and life settlements.
Operating Results
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales volume*:
Individual life $ 929 $ 873 $ 761
Retirement services 1,723 2,270 1,553
Long term care 398 343 299
Other operations 141 183 141
- --------------------------------------------------------------------------------
Total $ 3,191 $ 3,669 $ 2,754
================================================================================
Net earned premiums $ 876 $ 936 $ 823
Net investment income 601 556 525
Other revenues 192 123 115
- --------------------------------------------------------------------------------
Total operating revenues 1,669 1,615 1,463
Benefits 1,104 1,122 998
Expenses 311 277 295
Restructuring and other
related charges -- -- 7
- --------------------------------------------------------------------------------
Pre-tax operating income 254 216 163
Income tax expense (85) (71) (58)
- --------------------------------------------------------------------------------
Net operating income $ 169 $ 145 $ 105
================================================================================
</TABLE>
* Sales volume is a cash-based measure that includes premium and annuity
considerations, investment deposits and other sales activities that are not
reported as premiums under accounting principles generally accepted in the
United States of America (GAAP).
2000 Compared with 1999
Sales volume for Life Operations declined $478 million, or 13%, to
$3,191 million in 2000 as compared with 1999. Sales volume decreased because of
a reduction in Retirement Services' products sold to institutions. These
products tend to be "large case" institutional markets' sales, which can be
sporadic, opportunistic and sensitive to independent agency ratings. Despite the
overall decline, Life Operations' competitively priced product portfolio enabled
most of its businesses to experience growth in 2000. Individual Life and Long
Term Care products had an increasing base of direct premiums, and variable
investment contracts experienced growth of $270 million to reach an annual sales
level of $380 million in 2000. Net earned premiums declined $60 million, or 6%,
to $876 million in 2000 as compared with 1999. This decline was mainly
attributable to sales declines in structured settlements and single premium
group annuities due to a competitive pricing environment. These declines were
partially offset by a growing in-force block of Long Term Care and annuity
products.
Net operating income increased $24 million in 2000 as compared with 1999.
The increase was principally attributable to increased earnings in the Index 500
product, the continued growth of Individual Life insurance in-force and
favorable investment results in Individual Life and the Retirement Services
businesses.
Life Operations expects that its continued product innovation and strong
commitment to growth will generate increased sales, particularly of variable
products and Long Term Care business.
1999 Compared with 1998
Sales volume increased $915 million, or 33%, to $3,669 million in 1999 as
compared with 1998. The 1999 increase represents increased sales of $717 million
in Retirement Services and a
31
<PAGE>
growing base of premiums for Individual Life and Long Term Care. The significant
growth in Retirement Services was largely attributable to strong sales in
institutional investment products and variable annuities. Net earned premiums
increased $113 million, or 14%, to $936 million in 1999 as compared with 1998.
This increase was attributable mainly to increases in Long Term Care of $61
million and Retirement Services of $39 million.
Net operating income increased to $145 million in 1999 as compared with
$105 million in 1998. The 1999 improvement in net operating income was due
primarily to favorable investment performance in the portfolio supporting
Retirement Services' Index 500 product, improved mortality experience in the
individual life market and expense reductions across virtually all of the other
principal groups.
CORPORATE AND OTHER
The Corporate and Other segment results consist of interest expense on corporate
borrowings, certain run-off insurance operations, asbestos claims related to
Fibreboard Corporation (Fibreboard), financial guarantee insurance contracts and
certain non-insurance operations, including eBusiness initiatives.
Net operating loss increased to $220 million for 2000 as compared with 1999
primarily as a result of expenses in 2000 for CNA's eBusiness initiatives.
The net operating loss for 1999 was $202 million, or $9 million less than
1998. The improvement was primarily attributable to decreased interest expense
and decreased losses of $20 million from AMS Services, Inc. (AMS), an
information technology and agency software development subsidiary which was sold
in the fourth quarter of 1999, partially offset by increased losses from run-off
insurance operations. See Note O to the Consolidated Financial Statements for
discussion of the AMS transaction.
RESTRUCTURING AND OTHER RELATED CHARGES
On August 5, 1998, CNA announced estimates of the financial implications of its
initiatives to achieve world-class performance. "World-class performance," as
defined by the Company, refers to the Company's intention to position each of
its strategic business units (SBU) as a market leader by sharpening its focus on
customers and employing new technology to work smarter and faster. In the third
quarter of 1998, the Company finalized and approved a plan to restructure its
operations. The restructuring plan focused on a gross workforce reduction of
approximately 4,500 employees resulting in a net reduction of approximately
2,400 employees, the consolidation of certain processing centers, the closing of
various facilities and the exiting of certain businesses. The details of the
restructuring and other related charges recognized in 1998 and 1999 are
discussed in Note N to the Consolidated Financial Statements.
As of December 31, 2000, the remaining accrued restructuring and other
related charges consist of $7 million of lease termination costs, all of which
are expected to be paid during 2001.
INVESTMENTS
The components of net investment income for the years ended December 31, 2000,
1999 and 1998 are presented in the following table.
Net Investment Income
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities:
Bonds:
Taxable $ 1,549 $ 1,509 $ 1,490
Tax-exempt 216 267 340
Redeemable preferred stocks 1 -- 2
Equity securities 52 36 33
Mortgage loans and real estate 4 4 5
Policy loans 12 11 11
Short-term investments 201 188 241
Securities lending transactions, net 22 26 10
Other invested assets 71 101 67
- --------------------------------------------------------------------------------
Gross investment income 2,128 2,142 2,199
Investment expenses (48) (41) (53)
- --------------------------------------------------------------------------------
Net investment income $ 2,080 $ 2,101 $ 2,146
================================================================================
</TABLE>
Lower net investment income results for 2000 as compared with 1999 was due
to lower levels of invested assets caused by asset transfers in the fourth
quarter of 1999 in connection with the Personal Insurance transaction with
Allstate and the $1.1 billion payment from escrow to Fibreboard to settle
certain asbestos-related claims. The impact of a lower invested asset base on
net investment income was partially offset by the increase in yield on the bond
portfolio. Lower net investment income in 1999 compared with 1998 was due to the
lower invested asset base, as discussed above, and due to a decline in yield on
the bond portfolio. The bond segment of the investment portfolio yielded 6.7% in
2000, 6.1% in 1999 and 6.4% in 1998.
The components of net realized investment gains for the years ended
December 31, 2000, 1999 and 1998 are presented in the following table.
Net Realized Investment Gains
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds $ 96 $ (177) $ 265
Corporate and other
taxable securities (171) (78) 67
Tax-exempt bonds 13 (44) 90
Asset-backed bonds (65) (13) 39
Other (3) 1 6
- --------------------------------------------------------------------------------
Total fixed maturity securities (130) (311) 467
Equity securities 1,116 366 38
Other invested assets 339 253 190
- --------------------------------------------------------------------------------
Total realized investment gains 1,325 308 695
Allocated to participating
policyholders (4) 7 (14)
Income tax expense (461) (123) (247)
- --------------------------------------------------------------------------------
Net realized investment gains $ 860 $ 192 $ 434
================================================================================
</TABLE>
32
<PAGE>
Net realized investment gains increased $668 million in 2000 as compared
with 1999. This increase is principally related to realized gains from the sale
of Global Crossing Ltd. (Global Crossing) common stock and Canary Wharf Group
plc (Canary Wharf) common stock. The increase in net realized gains for 2000 as
compared with 1999 was $171 million for Global Crossing and $209 million for
Canary Wharf. Additionally, a favorable change in market conditions contributed
to the results for the bond sector.
Net realized investment gains decreased $242 million in 1999 as compared
with 1998. This decrease was principally related to interest rates and other
market conditions impacting the results from bond sales. This decrease was
partially offset by increased net realized gains for the sale of Global Crossing
and Canary Wharf. The increase in net realized gains for 1999 as compared with
1998 was $103 million for Global Crossing and $79 million for Canary Wharf.
A primary objective in the management of the fixed maturity portfolio is to
maximize total return relative to underlying liabilities and respective
liquidity needs. In achieving this goal, assets may be sold to take advantage of
market conditions or other investment opportunities or credit and tax
considerations. This activity will produce realized gains and losses depending
on market conditions including interest rates.
Substantially all invested assets are publicly traded securities classified
as available-for-sale in the accompanying Consolidated Financial Statements.
Accordingly, changes in fair value for these securities are reported in other
comprehensive income.
The following table details the carrying value of CNA's general and
separate account investment portfolios as of the end of each of the last two
years.
General and Separate Account Investments
<TABLE>
<CAPTION>
December 31
(In millions) 2000 % 1999 %
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Account Investments
Fixed maturity securities:
Bonds:
Taxable $23,249 66% $22,722 64%
Tax-exempt 3,349 10 4,396 12
Redeemable preferred stocks 54 -- 130 --
Equity securities:
Common stocks 2,216 6 3,344 9
Non-redeemable preferred stocks 196 1 266 1
Mortgage loans and real estate 26 -- 47 --
Policy loans 193 1 192 1
Other invested assets 1,116 3 1,108 3
Short-term investments 4,723 13 3,355 10
- --------------------------------------------------------------------------------
Total general account investments $35,122 100% $35,560 100%
================================================================================
Separate Account Investments
Fixed maturity securities:
Taxable bonds $ 2,703 65% $ 3,260 72%
Equity securities:
Common stocks 212 5 240 5
Non-redeemable preferred stocks 3 -- 21 1
Other invested assets 849 21 493 11
Short-term investments 380 9 489 11
- --------------------------------------------------------------------------------
Total separate account investments $ 4,147 100% $ 4,503 100%
================================================================================
</TABLE>
The Company's general and separate account investment portfolios consist
primarily of publicly traded government bonds, asset-backed securities,
mortgage-backed securities, municipal bonds and corporate bonds.
Approximately 57% and 63% of separate account investments at
December 31, 2000 and 1999, are used to fund guaranteed investment contracts for
which Continental Assurance Company (CAC) and Valley Forge Life Insurance
Company (VFL) guarantee principal and a specified return to the contract holders
(guaranteed investment contracts). The duration of fixed maturity securities
included in the guaranteed investment contract portfolio is matched
approximately with the corresponding payout pattern of the liabilities of the
guaranteed investment contracts.
The Company's investment policies for both the general and separate account
portfolios emphasize high credit quality and diversification by industry, issuer
and issue. Assets supporting interest rate sensitive liabilities are segmented
within the general account to facilitate asset/liability duration management.
The general account portfolio consists primarily of high-quality (rated BBB
or higher) bonds, 93% and 94% of which were rated as investment-grade at
December 31, 2000 and 1999. The following table summarizes the ratings of CNA's
general account bond portfolio at carrying value.
General Account Bond Ratings
<TABLE>
<CAPTION>
December 31
(In millions) 2000 % 1999 %
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
affiliated agency securities $ 8,689 32% $ 8,781 32%
Other AAA rated 7,120 27 9,692 36
AA and A rated 5,954 22 4,465 16
BBB rated 3,066 12 2,598 10
Below investment-grade 1,769 7 1,582 6
- --------------------------------------------------------------------------------
Total $26,598 100% $27,118 100%
================================================================================
</TABLE>
The following table summarizes the bond ratings of the investments
supporting those separate account products, which guarantee principal and a
specified rate of interest.
Guaranteed Separate Account Bond Ratings
<TABLE>
<CAPTION>
December 31
(In millions) 2000 % 1999 %
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
affiliated agency securities $ 224 10% $ 59 2%
Other AAA rated 1,248 55 1,795 62
AA and A rated 374 16 548 19
BBB rated 397 17 375 13
Below investment-grade 49 2 107 4
- --------------------------------------------------------------------------------
Total $2,292 100% $2,884 100%
================================================================================
</TABLE>
33
<PAGE>
At December 31, 2000 and 1999, approximately 98% and 95% of the general
account portfolio and 99% and 97% of the guaranteed investment contract
portfolio bonds are United States Government Agency securities or were rated by
S&P's or Moody's Investors Service. The remaining bonds are rated by other
rating agencies, outside brokers or Company management.
Below investment-grade bonds, as presented in the tables above, are
high-yield securities rated below BBB by bond rating agencies as well as other
unrated securities that, in the opinion of management, are below
investment-grade. High-yield securities generally involve a greater degree of
risk than investment-grade securities. However, expected returns should
compensate for the added risk. This risk is also considered in the interest rate
assumptions for the underlying insurance products. CNA's concentration in
high-yield bonds was approximately 7% and 6% of the general account portfolio
and 2% and 4% of the guaranteed investment contract portion of CNA's separate
account bond portfolio as of December 31, 2000 and 1999.
Included in CNA's general account fixed maturity securities at
December 31, 2000 are $7,623 million of asset-backed securities, at fair value,
consisting of approximately 46% in United States government agency issued
pass-through certificates, 34% in collateralized mortgage obligations (CMOs),
16% in corporate asset-backed obligations and 4% in corporate mortgage-backed
pass-through certificates. The majority of CMOs held are actively traded in
liquid markets and are priced by broker-dealers.
Short-term investments at December 31, 2000 and 1999 consisted primarily of
commercial paper and money market funds. The components of the general account
short-term investments portfolio are presented in the following table.
Short-term Investments
<TABLE>
<CAPTION>
December 31
(In millions) 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $3,291 $1,988
U.S. Treasury securities 383 41
Money market funds 620 904
Other 429 422
- --------------------------------------------------------------------------------
Total short-term investments $4,723 $3,355
================================================================================
</TABLE>
CNA invests in certain derivative financial instruments primarily to reduce
its exposure to market risk (principally interest rate, equity price and foreign
currency risk). CNA considers the derivatives in its general account to be held
for purposes other than trading. Derivative securities are recorded at fair
value at the reporting date.
Certain derivatives in separate accounts are held for trading purposes. The
Company uses derivatives to mitigate market risk by purchasing S&P 500(R) index
futures contracts in a notional amount equal to the contract liability relating
to Life Operations' Index 500 guaranteed investment contract product.
The Company's largest equity holding in a single issuer is Global Crossing
common stock. See Note B to the Consolidated Financial Statements for a
discussion of the Company's ownership in Global Crossing.
The Company's second largest equity holding is Canary Wharf. During 2000,
the Company experienced a net decrease in unrealized gains of $334 million on
its position in Canary Wharf, which was valued at $291 million on
December 31, 2000. The majority of this decline was due to the sale of
60.1 million shares, resulting in a pretax realized gain of $444 million.
MARKET RISK
Market risk is a broad term related to changes in the fair value of a financial
instrument. Discussions herein regarding market risk focus on only one element
of market risk - 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. The Company's primary market risk exposures
are due to changes in interest rates, although the Company has certain exposures
to changes in equity prices and foreign currency exchange rates. The fair value
of the financial instruments are adversely affected when interest rates rise,
equity markets decline and the dollar strengthens against foreign currency.
Active management of market risk is integral to the Company's operations.
The Company may use the following tools to manage its 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 its existing asset and liability portfolios.
For purposes of this disclosure, market risk sensitive instruments are
divided into two categories: 1) instruments entered into for trading purposes
and 2) instruments entered into for purposes other than trading. The Company's
general account market risk sensitive instruments presented are classified as
held for purposes other than trading.
Sensitivity Analysis
CNA monitors its sensitivity to interest rate risk by evaluating the change in
the value of financial assets and liabilities due to fluctuations in interest
rates. The evaluation is performed by applying an instantaneous change in
interest rates of varying magnitudes on a static balance sheet to determine the
effect such a change in rates would have on the Company's market value at risk
and the resulting effect on stockholders' equity. The analysis presents the
sensitivity of the market value of the Company's financial instruments to
selected changes in market rates and prices. The range of change chosen reflects
the Company's view of changes which 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 the Company's prediction of future
market events, but rather an illustration of the impact of such events.
The sensitivity analysis estimates the decline in the market value of the
Company's interest sensitive assets and liabilities that were held on
December 31, 2000 and December 31, 1999 due to instantaneous parallel increases
in the period end yield curve of 100 and 150 basis points.
34
<PAGE>
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, 2000 and December 31, 1999, with all other
variables held constant.
Equity price risk was measured assuming an instantaneous 10% and 25%
decline in the S&P 500(R) Index (Index) from its level at December 31, 2000 and
December 31, 1999, with all other variables held constant. The Company's equity
holdings were assumed to be highly and positively correlated with the Index. At
December 31, 2000, a 10% and 25% decrease in the Index would result in a
$457 million and $1,042 million decrease compared to $564 million and
$1,420 million decrease at December 31, 1999, in the market value of the
Company's equity investments. Of these amounts, under the 10% and 25% scenarios,
$167 million and $418 million at December 31, 2000 and $148 million and
$381 million at December 31, 1999 pertained to decreases in the market value of
the separate account investments. These decreases would substantially be offset
by decreases in related separate account liabilities to customers. Similarly,
increases in the market value of the separate account equity 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 market value of
the Company's financial instruments at December 31, 2000 and 1999, due to an
increase in interest rates of 100 basis points, a decline of 10% in foreign
currency exchange rates and a 10% decline in the Index.
<TABLE>
<CAPTION>
Market Risk Scenario 1 Increase (Decrease)
December 31, 2000 Market Interest Currency Equity
(In millions) Value Rate Risk Risk Risk
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held for Other Than Trading Purposes
General account:
Fixed maturity securities $26,652 $(1,428) $ (213) $ (22)
Equity securities 2,412 -- (44) (223)
Short-term investments 4,723 (4) (18) --
Other invested assets 1,333 43 -- (45)
Interest rate caps 1 1 -- --
Interest rate swaps -- -- -- --
Equity indexed futures -- -- -- --
Other derivative securities 1 1 (4) --
Total general account 35,122 (1,387) (279) (290)
- --------------------------------------------------------------------------------------------------------------------
Separate accounts:
Fixed maturity securities 2,293 (118) (7) --
Equity securities 212 -- (1) (21)
Short-term investments 150 -- -- --
Other invested assets 444 -- -- (44)
Other derivative securities -- -- -- --
Total separate accounts 3,099 (118) (8) (65)
Total all securities held for other than trading purposes 38,221 (1,505) (287) (355)
- --------------------------------------------------------------------------------------------------------------------
Held for Trading Purposes
Separate accounts:
Fixed maturity securities 410 (19) (4) (1)
Equity securities 3 -- -- --
Short-term investments 230 -- -- --
Other invested assets 404 -- -- (3)
Equity indexed futures -- 2 -- (98)
Other derivative securities 1 (6) -- --
Total all securities held for trading purposes 1,048 (23) (4) (102)
- --------------------------------------------------------------------------------------------------------------------
Total all securities $39,269 $(1,528) $ (291) $ (457)
====================================================================================================================
Debt (carrying value) $ 2,729 $ (114) $ -- $ --
====================================================================================================================
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
MarketRisk Scenario 1 Increase (Decrease)
-------------------
December 31, 1999 Market Interest Currency Equity
(In millions) Value Rate Risk Risk Risk
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held for Other Than Trading Purposes
General account:
Fixed maturity securities $ 27,248 $ (1,268) $ (149) $ (14)
Equity securities 3,610 -- (84) (361)
Short-term investments 3,355 (2) (26) --
Other invested assets 1,331 42 -- (44)
Interest rate caps 4 5 -- --
Interest rate swaps -- -- -- --
Equity indexed futures -- 19 -- --
Other derivative securities 12 (8) 59 3
Total general account 35,560 (1,212) (200) (416)
- -----------------------------------------------------------------------------------------------------------------------
Separate accounts:
Fixed maturity securities 2,927 (115) (16) (2)
Equity securities 242 -- -- (24)
Short-term investments 59 -- -- --
Other invested assets 175 -- -- (17)
Other derivative securities (1) (7) -- --
Total separate accounts 3,402 (122) (16) (43)
Total all securities held for other than trading purposes 38,962 (1,334) (216) (459)
- -----------------------------------------------------------------------------------------------------------------------
Held for Trading Purposes
Separate accounts:
Fixed maturity securities 333 (12) (1) --
Equity securities 19 -- -- (2)
Short-term investments 430 -- (2) --
Other invested assets 319 -- -- 2
Equity indexed futures -- 2 -- (105)
Other derivative securities -- (1) -- --
Total all securities held for trading purposes 1,101 (11) (3) (105)
- -----------------------------------------------------------------------------------------------------------------------
Total all securities $ 40,063 $ (1,345) $ (219) $ (564)
=======================================================================================================================
Debt (carrying value) $ 2,881 $ (132) $ -- $ --
=======================================================================================================================
</TABLE>
36
<PAGE>
The following tables present the estimated effects on the market value of
the Company's financial instruments at December 31, 2000 and 1999, due to an
increase in interest rates of 150 basis points, a 20% decline in foreign
currency exchange rates and a 25% decline in the S&P 500(R).
<TABLE>
<CAPTION>
MarketRisk Scenario 2 Increase (Decrease)
-------------------
December 31, 2000 Market Interest Currency Equity
(In millions) Value Rate Risk Risk Risk
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held for Other Than Trading Purposes
General account:
Fixed maturity securities $26,652 $(2,180) $ (427) $ (56)
Equity securities 2,412 -- (88) (456)
Short-term investments 4,723 (6) (36) --
Other invested assets 1,333 65 -- (112)
Interest rate caps 1 2 -- --
Interest rate swaps -- (1) -- --
Equity indexed futures -- -- -- --
Other derivative securities 1 1 (7) --
Total general account 35,122 (2,119) (558) (624)
- ----------------------------------------------------------------------------------------------------------------
Separate accounts:
Fixed maturity securities 2,293 (171) (15) --
Equity securities 212 -- (1) (53)
Short-term investments 150 -- -- --
Other invested assets 444 -- -- (111)
Other derivative securities -- -- -- --
Total separate accounts 3,099 (171) (16) (164)
Total all securities held for other than trading purposes 38,221 (2,290) (574) (788)
- ----------------------------------------------------------------------------------------------------------------
Held for Trading Purposes
Separate accounts:
Fixed maturity securities 410 (28) (7) (1)
Equity securities 3 -- -- (1)
Short-term investments 230 -- -- --
Other invested assets 404 -- -- (7)
Equity indexed futures -- 3 -- (245)
Other derivative securities 1 (9) -- --
Total all securities held for trading purposes 1,048 (34) (7) (254)
- ----------------------------------------------------------------------------------------------------------------
Total all securities $39,269 $(2,324) $ (581) $(1,042)
=================================================================================================================
Debt (carrying value) $ 2,729 $ (166) $ -- $ --
=================================================================================================================
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
MarketRisk Scenario 2 Increase (Decrease)
-------------------
December 31, 1999 Market Interest Currency Equity
(In millions) Value Rate Risk Risk Risk
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held for Other Than Trading Purposes
General account:
Fixed maturity securities $ 27,248 $ (1,878) $ (298) $ (35)
Equity securities 3,610 -- (168) (902)
Short-term investments 3,355 (3) (51) --
Other invested assets 1,331 63 -- (111)
Interest rate caps 4 11 -- --
Interest rate swaps -- -- -- --
Equity indexed futures -- 29 -- --
Other derivative securities 12 (13) 118 9
Total general account 35,560 (1,791) (399) (1,039)
- -----------------------------------------------------------------------------------------------------------------------
Separate accounts:
Fixed maturity securities 2,927 (170) (32) (4)
Equity securities 242 -- -- (60)
Short-term investments 59 -- (1) --
Other invested assets 175 -- -- (44)
Other derivative securities (1) (11) -- _
Total separate accounts 3,402 (181) (33) (108)
- -----------------------------------------------------------------------------------------------------------------------
Total all securities held for other than trading purposes 38,962 (1,972) (432) (1,147)
Held for TradingPurposes
Separate accounts:
Fixed maturity securities 333 (18) (1) (1)
Equity securities 19 -- -- (5)
Short-term investments 430 -- (4) --
Other invested assets 319 -- -- (6)
Equity indexed futures -- 3 -- (261)
Other derivative securities -- (2) -- --
Total all securities held for trading purposes 1,101 (17) (5) (273)
- -----------------------------------------------------------------------------------------------------------------------
Total all securities $ 40,063 $ (1,989) $ (437) $ (1,420)
=======================================================================================================================
Debt (carrying value) $ 2,881 $ (193) $ -- $ --
=======================================================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The principal operating cash flow sources of CNA's property-casualty and life
insurance subsidiaries are premiums and investment income. The primary operating
cash flow uses are payments for claims, policy benefits and operating expenses.
For the year ended December 31, 2000, net cash used for operating
activities was $1,373 million as compared with net cash used of $2,934 million
and $806 million in 1999 and 1998. The improvement in 2000 relates primarily to
significant outflows in 1999 of 1) $1.1 billion in cash to Allstate in
connection with the transaction involving the Company's Personal Insurance
business and 2) $1.1 billion of claim payments from escrow pursuant to the
Fibreboard settlement. See Note O to the Consolidated Financial Statements for
discussion of the Personal Insurance transaction. Excluding these significant,
non-recurring transactions from 1999, the Company's 2000 cash outflow from
operations declined by approximately $600 million to an outflow of approximately
$1.4 billion. The operating cash flows forgone in 2000 due to the transfer of
Personal Insurance in 1999 was approximately $250 million. The remainder of the
decline related primarily to increased payments of claims and decreased receipts
of premiums.
For the year ended December 31, 1999, net cash used for operating
activities increased significantly, due to the non-recurring transactions
described above. Excluding these transactions, cash from operations improved in
1999 over 1998, primarily due to lower levels of paid operating expenses.
For the year ended December 31, 2000, net cash inflows from investment
activities were $1,870 million as compared with $3,428 million and $300 million
for the same period in 1999 and 1998. Cash flows from investing activities were
particularly high in 1999 due to sales of investments to fund the outflows
related to the Personal Insurance transaction and Fibreboard claim payments.
For the year ended December 31, 2000, net cash used for financing
activities was $487 million as compared with $558 million in 1999. In 1998, cash
provided by financing activities amounted to $340 million. During 2000 and 1999,
cash flows for financing activities included the repurchase of preferred and
common equity instruments, the retirement or repurchase of senior debt
securities and mortgages, the repayment of bank loans and the payment of
dividends. During 1998, cash provided by financing activities included issuance
of preferred stock and increased cash flows from borrowings.
38
<PAGE>
On February 15, 2000, S&P lowered the Company's senior debt rating from A-
to BBB and lowered the Company's preferred stock rating from BBB to BB+. As a
result of these actions, the facility fee payable on the aggregate amount of
CNA's $795 million revolving credit facility (Facility) was increased to 12.5
basis points per annum from 9.0 basis points per annum and the interest rate was
increased to London Interbank Offered Rate (LIBOR) plus 27.5 basis points from
LIBOR plus 16.0 basis points. Subsequently, the Company repurchased and retired
all of its outstanding balance in its $150 million of money market preferred
stock in the first four months of 2000.
The Company has selected a financial institution to lead the syndication
process for the new CNAF credit facility to replace the current CNAF revolving
credit facility that terminates in May 2001.
During 2000, CNA purchased a portion of its debt notes when opportunities
arose. CNA may purchase additional securities in the future. These repurchases
included approximately $24 million of The Continental Corporation (Continental)
senior notes and approximately $14 million of CNAF senior notes. On
August 2, 1999, the Company repaid its $157 million, 11% Secured Mortgage Notes,
due June 30, 2013.
On April 19, 1999, CNA filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission (SEC), which became effective, relating to
$600 million in senior and subordinated debt, junior debt, common stock,
preferred stock and warrants. No securities have been issued under this
registration.
On April 15, 1999, the Company retired $100 million of Continental's 8.25%
senior notes.
On December 23, 1998, CNA sold $200 million of preferred stock to Loews. On
June 30, 1999, CNA redeemed this preferred stock at par plus accrued dividends.
In 1998, CNA issued $1 billion of senior notes under a $1 billion
Registration Statement on Form S-3 filed with the SEC on August 18, 1997. This
shelf registration incorporated $250 million of securities remaining available
for issuance from a prior shelf registration. Since filing this shelf
registration, CNA has issued in four separate offerings senior notes with an
aggregate principal amount of $1 billion. Proceeds from these debt issues were
used to repay or refinance existing debt, provide funds for acquisitions, and
increase the capital of CCC.
The Company is separated into three intercompany reinsurance pools: the
Continental Casualty Company Pool (CCC Pool), The Continental Insurance Company
Pool (CIC Pool) and the Continental Assurance Company Pool (CAC Pool). The CCC
Pool, CIC Pool and CAC Pool are composed of nine, fifteen and two legal
insurance entities, respectively, domiciled in a total of 13 states and doing
business in 50 states and Canada (the Pool Companies). To the extent a Pool
Company's currently due claim liabilities may exceed its readily available
liquid assets, the Company may be called upon to contribute capital to that
company. Furthermore, such capital would likely be obtained in the form of a
dividend from another Pool Company, possibly in a different pool, which may or
may not require the approval of insurance regulators in the jurisdiction of the
dividend-paying company. In addition, by agreement with the New Hampshire
Insurance Department as well as certain other state insurance departments,
dividend paying capacity for the CIC Pool is restricted to internal and external
debt service requirements through September 2003 up to a maximum of $85 million
annually, without the prior approval of the New Hampshire Insurance Department.
As of December 31, 2000, approximately $881 million of dividend payments would
not be subject to insurance department pre-approval. Accordingly, management
must continuously monitor the capital allocation among the pools and the
liquidity and capital resources of the individual Pool Companies. See Note K to
the Consolidated Financial Statements for discussion of statutory accounting
practices.
In March of 1998, the National Association of Insurance Commissioners
(NAIC) adopted the Codification of Statutory Accounting Principles
(Codification). Codification, which is intended to standardize regulatory
accounting and reporting to state insurance departments, is effective
January 1, 2001. However, statutory accounting principles will continue to be
established by individual state laws and permitted practices. The states in
which CNAF's insurance subsidiaries conduct business will require adoption of
Codification (with certain modifications) for the preparation of statutory
financial statements effective January 1, 2001. The Company estimates that the
adoption of Codification, as modified, will increase statutory capital and
surplus as of January 1, 2001 by approximately $77 million, which primarily
relates to deferred tax assets, partially offset by insurance related
assessments and pension liabilities.
The table below presents ratings issued by A.M. Best, Fitch, Moody's and
S&P for the CCC Pool, the CIC Pool and the CAC Pool. Also rated were CNAF's
senior debt, commercial paper and Continental senior debt.
<TABLE>
<CAPTION>
Insurance Ratings Debt Ratings
--------------------------------- ----------------
CCC Pool CAC Pool CIC Pool CNAF Continental
Financial Commercial Senior
Strength Senior Debt Paper
- -------------------------------------------------------------------------------------
Debt
<S> <C> <C> <C> <C> <C> <C>
A.M. Best A A A- -- -- --
Fitch AA- AA -- A- -- --
Moody's A2 A2* A3 Baa1 P2 Baa2
S&P A AA- A- BBB A2 BBB-
</TABLE>
* CAC and VFL are rated separately by Moody's and both have an A2 rating.
39
<PAGE>
ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2000, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position No. 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk (SOP 98-7). Adoption of SOP 98-7 did not have a
significant impact on the results of operations or the equity of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101). SAB 101 summarizes the SEC
Staff's view in applying GAAP to revenue recognition in financial statements.
This bulletin, through its subsequent revised releases SAB No. 101A and No.
101B, is effective for registrants no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. Adoption of this bulletin, which
occurred on October 1, 2000, did not have a significant impact on the results of
operations or the equity of the Company.
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). SFAS 133 was subsequently amended by
Statement of Financial Accounting Standard No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133, which delayed the effective date of SFAS 133 by one year, and
Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities (SFAS 138). SFAS 138
addresses a limited number of issues causing implementation difficulties for
entities applying SFAS 133. SFAS 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 133 requires that an entity recognize all derivative instruments as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge of the exposures to changes in the fair value, cash flows
or foreign currencies. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation.
The Company is required to adopt SFAS 133 effective January 1, 2001. The
transition adjustments resulting from adoption must be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change
in accounting principle. The Company estimates that the initial adoption of SFAS
133 will not have a significant impact on the equity of the Company; however,
adoption will result in an estimated after-tax decrease to 2001 earnings of
$62 million. Of this estimated transition amount, approximately $58 million
relates to investments and investment related derivatives (primarily related to
the Company's hedged position in Global Crossing common stock, see Note C to the
Consolidated Financial Statements). Because the Company already carries its
investment related derivatives at fair value through other comprehensive income,
there is an equal and offsetting favorable adjustment of $58 million to
stockholders' equity (accumulated other comprehensive income). The remainder of
the estimated transition adjustment is attributable to collateralized debt
obligation products that are derivatives under SFAS 133.
These estimates are based on the Company's interpretation of SFAS 133 and
related implementation guidance. Changes in implementation guidance or the
interpretation thereof could result in changes in the transition adjustment
estimate.
FORWARD-LOOKING STATEMENTS
The statements contained in this management discussion and analysis that are not
historical facts are forward-looking statements. When included in the
management's discussion and analysis, the words "believes," "expects,"
"intends," "anticipates," "estimates" and analogous expressions are intended to
identify forward-looking statements. Such statements inherently are subject to a
variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among
others, the impact of competitive products, policies and pricing; product and
policy demand and market responses; development of claims and claim trends and
the effect on loss reserves; the performance of reinsurance companies under
reinsurance contracts with the Company; general economic and business
conditions; changes in financial markets (interest rate, credit, currency,
commodities and stocks); changes in foreign, political, social and economic
conditions; regulatory initiatives and compliance with governmental regulations;
judicial decisions and rulings; the effect on the Company of changes in rating
agency policies and practices; the results of financing efforts; changes in the
Company's composition of operating segments; the actual closing of contemplated
transactions; and agreements and various other matters and risks (many of which
are beyond the Company's control) detailed in the Company's SEC filings. These
forward-looking statements speak only as of the filing date of this document.
The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.
40
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
(In millions, except per share data) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net earned premiums $ 11,474 $ 13,282 $ 13,536
Net investment income 2,080 2,101 2,146
Realized investment gains, net of participating
policyholders' and minority interests 1,321 315 681
Other revenues 739 705 799
Total revenues 15,614 16,403 17,162
- ---------------------------------------------------------------------------------------------------------------------------
Claims, Benefits and Expenses
Insurance claims and policyholders' benefits 9,831 11,890 11,701
Amortization of deferred acquisition costs 1,880 2,143 2,180
Other operating expenses 1,887 2,096 2,467
Restructuring and other related charges -- 83 246
Interest 206 202 219
Total claims, benefits and expenses 13,804 16,414 16,813
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax and cumulative effect
of a change in accounting principle 1,810 (11) 349
Income tax (expense) benefit (568) 88 (47)
Minority interest (28) (30) (20)
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 1,214 47 282
Cumulative effect of a change in accounting principle, net of tax of $95 -- (177) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,214 $ (130) $ 282
===========================================================================================================================
Basic and Diluted Earnings (Loss) per Share
Income before cumulative effect of a change in accounting principle $ 6.61 $ 0.19 $ 1.49
Cumulative effect of a change in accounting principle, net of tax -- (0.96) --
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per share available to common stockholders $ 6.61 $ (0.77) $ 1.49
===========================================================================================================================
Weighted average outstanding common stock and common stock equivalents 183.6 184.2 184.9
===========================================================================================================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
41
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
(In millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturity securities available-for-sale (amortized cost of $26,579 and $27,948) $ 26,652 $ 27,248
Equity securities available-for-sale (cost of $1,175 and $1,150) 2,412 3,610
Mortgage loans and real estate (less accumulated depreciation of $1 and $1) 26 47
Policy loans 193 192
Other invested assets 1,116 1,108
Short-term investments 4,723 3,355
- ------------------------------------------------------------------------------------------------------------------------
Total investments 35,122 35,560
Cash and cash equivalents 163 153
Receivables:
Reinsurance 9,397 7,403
Insurance 5,026 5,115
Less allowance for doubtful accounts (321) (310)
Accrued investment income 404 387
Receivables for securities sold 424 284
Deferred acquisition costs 2,418 2,436
Prepaid reinsurance premiums 1,445 1,456
Federal income taxes recoverable (includes $25 and $241 due from Loews) 15 269
Deferred income taxes 503 852
Property and equipment at cost (less accumulated depreciation of $802 and $701) 716 746
Intangibles 317 328
Other assets 2,152 1,937
Separate account business 4,287 4,603
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 62,068 $ 61,219
========================================================================================================================
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities:
Insurance reserves:
Claim and claim adjustment expense $ 26,962 $ 27,356
Unearned premiums 4,821 5,103
Future policy benefits 6,669 6,102
Policyholders' funds 602 710
Collateral on loaned securities and derivatives 1,308 1,300
Payables for securities purchased 593 135
Participating policyholders' equity 131 121
Debt 2,729 2,881
Other liabilities 4,102 3,775
Separate account business 4,287 4,603
Total liabilities 52,204 52,086
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes A, E and F)
Minority interest 217 195
Stockholders' equity:
Common stock 464 464
Preferred stock -- 150
Additional paid-in capital 126 126
Retained earnings 8,327 7,114
Accumulated other comprehensive income 873 1,188
Treasury stock, at cost (71) (41)
- ----------------------------------------------------------------------------------------------------------
9,719 9,001
Notes receivable for the issuance of common stock (Note I) (72) (63)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,647 8,938
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 62,068 $ 61,219
==========================================================================================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
43
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 1,214 $ (130) $ 282
Adjustments to reconcile net income (loss)
to net cash flows used by operating activities:
Cumulative effect of change in accounting principle, net of tax -- 177 --
Minority interest 28 30 20
Deferred income tax provision 493 138 47
Realized investment gains (1,321) (315) (681)
Amortization of intangibles 21 23 93
Amortization of bond discount (309) (243) (208)
Depreciation 155 185 166
Changes in:
Receivables, net (1,664) (9) (404)
Deferred acquisition costs (132) (221) (280)
Accrued investment income (17) 6 (3)
Federal income taxes recoverable 254 (17) (233)
Prepaid reinsurance premiums 11 (152) (435)
Insurance reserves (128) (1,193) 586
Transfer of business via reinsurance (41) (1,149) --
Other 63 (64) 244
- -----------------------------------------------------------------------------------------------------------------
Total adjustments (2,587) (2,804) (1,088)
- ----------------------------------------------------------------------------------------------------------------
Net cash flows used by operating activities (1,373) (2,934) (806)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of fixed maturity securities (40,975) (45,515) (39,039)
Proceeds from fixed maturity securities:
Sales 38,502 43,587 35,480
Maturities, calls and redemptions 4,222 2,996 3,564
Purchases of equity securities (1,858) (1,575) (1,071)
Proceeds from sales of equity securities 2,935 1,803 848
Change in short-term investments (1,124) 907 823
Change in collateral on loaned securities and derivatives 9 1,170 (23)
Change in other investments 313 238 (81)
Purchases of property and equipment, net (152) (250) (261)
Acquisitions, net of cash acquired (2) (19) (120)
Other, net -- 86 180
- -----------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities $ 1,870 $ 3,428 $ 300
==================================================================================================================
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Dividends paid to preferred stockholders $ (1) $ (13) $ (7)
Purchase of treasury stock (35) -- (102)
Receipts from investment contracts credited to
policyholder account balances 5 7 6
Return of policyholder account balances on investment contracts (138) (78) (20)
Principal payments on debt (164) (450) (730)
Proceeds from issuance of debt -- 177 993
(Redemption) issuance of preferred stock (150) (200) 200
Other, net (4) (1) --
- -----------------------------------------------------------------------------------------------------------
Net cash flows (used by) from financing activities (487) (558) 340
- -----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 10 (64) (166)
Cash and cash equivalents, beginning of year 153 217 383
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 163 $ 153 $ 217
===========================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid (received):
Interest expense $ 205 $ 201 $ 210
Federal income taxes (154) (279) 143
Non-cash transactions:
Notes receivable for the issuance of stock 4 19 44
Exchange of Canary Wharf Limited Partnership interest into common stock -- 539 --
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
45
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Notes
Other Receivable
Comprehen- for the Total
Additional sive Issuance Stock-
Common Preferred Paid-in Retained Income Treasury of Common holders'
Stock Stock Capital Earnings (Loss) Stock Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 464 $ 150 $ 126 $ 6,983 $ 589 $ (3) $ -- $ 8,309
Comprehensive income:
Net income -- -- -- 282 -- -- -- 282
Other comprehensive income -- -- -- -- 475 -- -- 475
-----
Total comprehensive income 757
Issuance of preferred stock -- 200 -- -- -- -- -- 200
Purchase of treasury stock -- -- -- -- -- (102) -- (102)
Increase in notes from issuance
of common stock -- -- -- -- -- 44 (44) --
Preferred dividends -- -- -- (7) -- -- -- (7)
Balance, December 31, 1998 464 350 126 7,258 1,064 (61) (44) 9,157
Comprehensive loss:
Net loss -- -- -- (130) -- -- -- (130)
Other comprehensive income -- -- -- -- 124 -- -- 124
-----
Total comprehensive loss (6)
Redemption of preferred stock -- (200) -- -- -- -- -- (200)
Increase in notes from issuance
of common stock -- -- -- (1) -- 20 (19) --
Preferred dividends -- -- -- (13) -- -- -- (13)
Balance, December 31, 1999 464 150 126 7,114 1,188 (41) (63) 8,938
Comprehensive income:
Net income -- -- -- 1,214 -- -- -- 1,214
Other comprehensive loss -- -- -- -- (315) -- -- (315)
-----
Total comprehensive income 899
Redemption of preferred stock -- (150) -- -- -- -- -- (150)
Purchase of treasury stock -- -- -- -- -- (35) -- (35)
Increase in notes from issuance
of common stock -- -- -- -- -- 5 (9) (4)
Preferred dividends -- -- -- (1) -- -- -- (1)
Balance, December 31, 2000 $ 464 $ -- $ 126 $ 8,327 $ 873 $ (71) $ (72) $ 9,647
====================================================================================================================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include CNA Financial Corporation (CNAF)
and its controlled subsidiaries, which include property-casualty insurance
companies (principally Continental Casualty Company (CCC) and The Continental
Insurance Company (CIC)) and life insurance companies (principally Continental
Assurance Company (CAC) and Valley Forge Life Insurance Company (VFL)),
collectively CNA or the Company. Loews Corporation (Loews) owns approximately
87% of the outstanding common stock of the Company.
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.
Certain amounts applicable to prior years have been reclassified to conform to
the current year presentation.
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 could differ from those estimates.
Business
CNA 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.
Insurance products include property and casualty coverages; life, accident
and health insurance; and retirement products and annuities. CNA services
include risk management, information services, healthcare management, claims
administration and employee leasing/payroll processing. CNA's products and
services are marketed through agents, brokers, managing general agents and
direct sales.
Insurance
Earned premiums: Insurance premiums on property-casualty and accident and health
insurance contracts are earned ratably over the duration of the policies after
provision for estimated adjustments on retrospectively rated policies and
deductions for ceded insurance. The reserve for unearned premiums on these
contracts represents the portion of premiums written relating to the unexpired
terms of coverage. Revenues on interest sensitive contracts are comprised of
contract charges and fees, which are recognized over the coverage period.
Premiums for other life insurance products and annuities are recognized as
revenue when due, after deductions for ceded insurance premiums.
Claim and claim adjustment expense reserves: Claim and claim adjustment expense
reserves, except reserves for structured settlements, workers' compensation
lifetime claims and accident and health disability claims, 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
unreported losses, 3) estimates of losses on assumed reinsurance, 4) estimates
of future expenses to be incurred in settlement of claims and 5) estimates of
claim recoveries, exclusive of reinsurance recoveries, which are reported as an
asset. 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.
Claim and claim adjustment expense reserves represent management's
estimates of ultimate liabilities based on currently available facts and case
law. The ultimate liability may vary significantly from such estimates. CNA
regularly reviews its reserves, and any adjustments to the previously
established reserves are recognized in operating income in the period that the
need for such adjustments becomes apparent.
Structured settlements have been negotiated for certain property-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 6.0% to 7.5%. At December 31, 2000 and 1999, the discounted
reserves for unfunded structured settlements were $884 million and $883 million,
net of discount of $1,473 million and $1,483 million.
Workers' compensation lifetime claim reserves and accident and health
disability claim reserves are calculated using mortality and morbidity
assumptions based on Company and industry experience, and are discounted at
interest rates allowed by insurance regulators that range from 3.5% to 6.5%. At
December 31, 2000 and 1999, such discounted reserves totaled $2,205 million and
$2,174 million, net of discount of $940 million and $893 million.
47
<PAGE>
Future policy benefits reserves: Reserves for traditional life insurance
products (whole and term life products) and long-term care products are computed
using the net level premium method, which incorporates actuarial assumptions as
to interest rates, mortality, morbidity, 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 3% to 9%, 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. Reserves for interest sensitive contracts are equal to
the account balances that accrue to the benefit of the policyholders. Interest
crediting rates ranged from 4.30% to 6.85% for the three years ended
December 31, 2000.
Insurance-related assessments: CNA's participation in involuntary risk pools is
mandatory and is generally a function of its proportionate share of the
voluntary market, by line of insurance, in each state in which it does business.
In the first quarter of 1999, CNA adopted Statement of Position No. 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
(SOP 97-3). SOP 97-3 requires that insurance companies recognize liabilities for
insurance-related assessments 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 on or before the date of the financial
statements. Adoption of SOP 97-3 resulted in an after-tax charge of $177 million
as a cumulative effect of a change in accounting principle in 1999. The pro
forma effect of adoption on reported results for prior periods was not
significant. Insurance-related assessment liabilities are not discounted or
recorded net of premium taxes. These liabilities are included as part of other
liabilities in the consolidated balance sheets.
Reinsurance: Amounts recoverable from reinsurers are estimated in a manner
consistent with claim and claim adjustment expense reserves or future policy
benefits reserves and reported as a recoverable in the consolidated balance
sheets. Reinsurance contracts that do not meet the criteria for risk transfer
are recorded in accordance with Statement of Position No. 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk. The related deposit assets are recorded as reinsurance
receivables in the consolidated balance sheets.
Deferred acquisition costs: Costs that vary with and are related primarily to
the acquisition of property-casualty insurance business are deferred and
amortized ratably over the period the related premiums are earned. Such costs
include commissions, premium taxes and certain underwriting and policy issuance
costs. Anticipated investment income is considered in the determination of the
recoverability of deferred acquisition costs.
Life insurance business acquisition costs are deferred and amortized based
on assumptions consistent with those used for computing future policy benefits
reserves. Deferred acquisition costs on traditional life business are amortized
over the assumed premium paying periods. The amortization of deferred
acquisition costs for universal life and annuity contracts are matched to the
recognition of gross profits on these contracts. To the extent that unrealized
gains or losses on available-for-sale securities would result in an adjustment
of deferred policy acquisition costs had they actually been realized, an
adjustment is recorded to deferred acquisition costs and to unrealized
investment gains or losses.
Investments
Valuation of investments: CNA classifies its fixed maturity securities (bonds
and redeemable preferred stocks) and its equity securities as
available-for-sale, and as such, they are carried at fair value. The amortized
cost of fixed maturity securities is adjusted for amortization of premiums and
accretion of discounts to maturity, and amortization and accretion are included
in investment income. Changes in fair value are reported as a component of other
comprehensive income. Investments are written down to estimated fair values and
losses are recognized in income when a decline in value is determined to be
other than temporary.
Mortgage loans are carried at unpaid principal balances, including
unamortized premium or discount. Real estate is carried at depreciated cost.
Policy loans are carried at unpaid balances. Short-term investments are carried
at amortized cost, which approximates fair value.
Other invested assets include investments in joint ventures, limited
partnerships and certain derivative securities. Investments in joint ventures
and limited partnerships are carried at CNA's equity in the investees' net
assets.
Investments in derivative securities are carried at fair value at the
reporting date, and changes in fair value are recognized in realized investment
gains and losses. Derivatives used to hedge the fair value of assets or
liabilities are classified with the related hedged item in the consolidated
balance sheets. For interest rate swaps associated with certain corporate
borrowings, amounts due or payable under these swaps are recorded as an
adjustment to interest expense and changes in the fair value of the swaps are
not recognized in the Company's consolidated financial statements.
Investment gains and losses: All securities transactions are recorded on the
trade date. Realized investment gains and losses are determined on the basis of
the cost or amortized cost of the specific securities sold.
Equity in affiliates: CNA uses the equity method of accounting for investments
in companies in which its ownership interest of the voting shares of an investee
company enables CNA to influence the operating or financial decisions of the
investee company but without a controlling financial interest. Equity in net
income of these affiliates is reported in other revenues.
48
<PAGE>
Securities lending activities: CNA lends securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must deposit
collateral with CNA equal to 100% of the fair value of the securities if the
collateral is cash or 102% of the fair value of the securities if the collateral
is securities. Cash deposits from these transactions are invested in short-term
investments, primarily commercial paper, and a liability is recognized for the
obligation to return the collateral. The fair value of collateral held and
included in short-term investments was $885 million and $1,300 million at
December 31, 2000 and 1999. CNA continues to receive the interest on loaned debt
securities as beneficial owner and, accordingly, loaned debt securities are
included in fixed maturity securities.
Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are both readily
convertible into known amounts of cash and so near to maturity that they present
insignificant risk of changes in value due to changing interest rates.
Separate Account Business
CAC and VFL write investment and annuity contracts. The supporting assets and
liabilities of certain of these contracts are legally segregated and reported as
assets and liabilities of separate account business. CAC and VFL guarantee
principal and a specified return to the contractholders on approximately 57% and
63% of the separate account business at December 31, 2000 and 1999.
Substantially all assets of the separate account business are carried at fair
value. Separate account liabilities are carried at contract values.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
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.
Intangibles
Intangibles include goodwill, representing the excess of purchase price over
fair value of the net assets of acquired entities, and other intangible assets.
Goodwill is generally amortized on a straight-line basis over the period of
expected benefit, generally ranging from 15 to 30 years. Other intangible assets
are amortized on a straight-line basis over their estimated economic lives.
Amortization expense on goodwill and other intangibles amounted to $21 million,
$23 million and $32 million for the years ended December 31, 2000, 1999 and
1998. Intangible assets are periodically reviewed to determine whether
impairment in value has occurred.
Earnings Per Share
Earnings per share applicable to common stock are based on weighted average
outstanding shares, retroactively adjusted for all stock splits. The computation
of earnings per share was as follows.
Earnings Per Share
<TABLE>
<CAPTION>
Years ended December 31
(In millions, except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 1,214 $ (130) $ 282
Less preferred dividends (1) (13) (7)
- --------------------------------------------------------------------------------
Net income (loss) applicable to
common stock $ 1,213 $ (143) $ 275
================================================================================
Weighted average outstanding
common stock and common
stock equivalents 183.6 184.2 184.9
Basic and diluted earnings (loss)
per share available to common
stockholders $ 6.61 $ (0.77) $ 1.49
================================================================================
</TABLE>
Accounting Pronouncements
In the first quarter of 2000, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position No. 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk (SOP 98-7). Adoption of SOP 98-7 did not have a
significant impact on the results of operations or the equity of the Company.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes the SEC Staff's view in applying GAAP to revenue
recognition in financial statements. This bulletin, through its subsequent
revised releases SAB No. 101A and No. 101B, was effective for registrants no
later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. Adoption of this bulletin, which occurred on October 1, 2000,
did not have a significant impact on the results of operations or the equity of
the Company.
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). SFAS 133 was subsequently amended by
Statement of Financial Accounting Standard No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which delayed the effective date of SFAS 133 by one year,
and Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging
49
<PAGE>
Activities (SFAS 138). SFAS 138 addresses a limited number of issues causing
implementation difficulties for entities applying SFAS 133. SFAS 133, as amended
and interpreted, establishes accounting and reportings standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 requires that an entity
recognize all derivative instruments as either assets or liabilities in the
balance sheet and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge of the exposures
to changes in the fair value, cash flows or foreign currencies. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation.
The Company is required to adopt SFAS 133 effective January 1, 2001. The
transition adjustments resulting from adoption must be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a
change in accounting principle. The Company estimates that the initial adoption
of SFAS 133 will not have a significant impact on the equity of the Company;
however, adoption will result in an estimated after-tax decrease to 2001
earnings of $62 million. Of this estimated transition amount, approximately
$58 million relates to investments and investment-related derivatives (related
primarily to the Company's hedged position in GlobalCrossing Ltd. (Global
Crossing) common stock, see Note C). Because the Company already carries its
investment-related derivatives at fair value through other comprehensive income,
there is an equal and offsetting favorable adjustment of $58 million to
stockholders' equity (accumulated other comprehensive income). The remainder of
the estimated transition adjustment is attributable to collateralized debt
obligation products that are derivatives under SFAS 133.
These estimates are based on the Company's interpretation of SFAS 133 and
related implementation guidance. Changes in implementation guidance or the
interpretation thereof could result in changes in the transition adjustment
estimate.
NOTE B. INVESTMENTS
The significant components of net investment income are presented in the
following table.
Net Investment Income
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities $ 1,766 $ 1,776 $ 1,832
Short-term investments 201 188 241
Other 161 178 126
- --------------------------------------------------------------------------------
Gross investment income 2,128 2,142 2,199
Investment expenses (48) (41) (53)
- --------------------------------------------------------------------------------
Net investment income $ 2,080 $ 2,101 $ 2,146
================================================================================
</TABLE>
Net realized investment gains (losses) and net change in unrealized
appreciation (depreciation) in investments were as follows.
Net Investment Appreciation
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net realized investment gains (losses):
Fixed maturity securities:
Gross realized gains $ 434 $ 269 $ 621
Gross realized losses (564) (580) (154)
Net realized (losses) gains
on fixed maturity securities (130) (311) 467
- --------------------------------------------------------------------------------
Equity securities:
Gross realized gains 1,337 481 119
Gross realized losses (221) (115) (81)
Net realized gains
on equity securities 1,116 366 38
- --------------------------------------------------------------------------------
Other realized investment gains 339 253 190
- --------------------------------------------------------------------------------
Net realized investment gains
before allocation to participating
policyholders and minority interest 1,325 308 695
Allocation to participating
policyholders and minority interest (4) 7 (14)
Income tax expense (461) (123) (247)
Net realized investment gains 860 192 434
- --------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
in investments:
Fixed maturity securities 773 (1,262) 34
Equity securities (1,223) 1,545 796
Other (52) 18 (112)
- --------------------------------------------------------------------------------
Total net change in unrealized
(depreciation) appreciation
in general account investments (502) 301 718
Net change in unrealized
appreciation (depreciation) on
separate accounts and other 66 (59) 5
Allocation to participating
policyholders and minority interest (12) 24 (6)
Deferred income tax
benefit (expense) 161 (100) (249)
Net change in unrealized
(depreciation) appreciation
in investments (287) 166 468
- --------------------------------------------------------------------------------
Net realized gains and change
in unrealized appreciation
in investments $ 573 $ 358 $ 902
================================================================================
</TABLE>
50
<PAGE>
Other realized investment gains for the years ended December 31, 2000, 1999
and 1998 include gains and losses related to the sale of certain operations or
affiliates. See Note O.
The unrealized gain on the Company's position in Global Crossing common
stock, including the fair market value of the related hedge discussed in Note C,
was $902 million and $1,764 million as of December 31, 2000 and 1999. Changes in
the Company's investment in Global Crossing, on a pre-tax basis, were as
follows.
<PAGE>
Change in Net Realized Gains and Unrealized Appreciation (Depreciation) for
Global Crossing
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Decrease) increase in unrealized gain on common stock $(1,525) $ 924 $ 828
Increase in unrealized gain on options collar 663 -- --
=============================================================================================================================
Net (decrease) increase in unrealized gain on position in Global Crossing common stock $ (862) $ 924 $ 828
Realized gains on sales of Global Crossing common stock $ 485 $ 222 $ 63
=============================================================================================================================
</TABLE>
The following tables provide a summary of investments in fixed maturity
securities and equity securities available-for-sale.
Summary of Fixed Maturity and Equity Securities
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 2000
U.S. Treasury securities and obligations of government agencies $ 5,103 $ 198 $ 3 $ 5,298
Asset-backed securities 7,549 100 26 7,623
States, municipalities and political subdivisions - tax-exempt 3,279 79 9 3,349
Corporate securities 7,237 149 342 7,044
Other debt securities 3,357 63 136 3,284
Redeemable preferred stocks 54 -- -- 54
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 26,579 589 516 26,652
Equity securities 1,175 1,400 163 2,412
====================================================================================================================================
Total $27,754 $ 1,989 $ 679 $29,064
====================================================================================================================================
December 31, 1999
U.S. Treasury securities and obligations of government agencies $ 8,431 $ 14 $ 127 $ 8,318
Asset-backed securities 7,253 14 228 7,039
States, municipalities and political subdivisions - tax-exempt 4,514 16 134 4,396
Corporate securities 5,502 34 303 5,233
Other debt securities 2,185 36 89 2,132
Redeemable preferred stocks 63 72 5 130
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 27,948 186 886 27,248
Equity securities 1,150 2,635 175 3,610
- ------------------------------------------------------------------------------------------------------------------------------------
Total $29,098 $ 2,821 $ 1,061 $30,858
====================================================================================================================================
</TABLE>
51
<PAGE>
The following table summarizes fixed maturity securities by contractual
maturity at December 31, 2000.
Contractual Maturity
<TABLE>
<CAPTION>
Amortized Fair
(In millions) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,217 $ 1,210
Due after one year through five years 5,047 5,014
Due after five years through ten years 6,965 6,861
Due after ten years 5,801 5,944
Asset-backed securities 7,549 7,623
- --------------------------------------------------------------------------------
Total $26,579 $26,652
================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because some
securities may be called or prepaid with or without call or prepayment
penalties.
The carrying value of investments (other than equity securities) that did
not produce income during 2000 was $35 million. At December 31, 2000, no
investments, other than investments in U.S. government agency securities,
exceeded 10% of stockholders' equity.
Restricted Investments
The Company may from time to time invest in securities that have a limited
market or the sale of which may be restricted in whole or in part. As of
December 31, 2000, the Company owned 19.3 million shares of Global Crossing
common stock valued at $277 million, representing approximately 2.2% of Global
Crossing's outstanding common stock. Because the Company's holdings of Global
Crossing were not acquired in a public offering, the shares may not be sold to
the public unless the sale is registered or exempt from the registration
requirements of the Securities Act of 1933 (the Act) including sales pursuant to
Rule 144. The Company has the right to require Global Crossing to register,
under the Act, all of the Company's current holdings. See Note C for discussion
of the Company's hedge of this investment.
Cash and securities with carrying values of $1.9 billion and $1.8 billion
were deposited by the Company's insurance subsidiaries under requirements of
regulatory authorities as of December 31, 2000 and 1999.
Note C. FINANCIAL INSTRUMENTS
In the normal course of business, CNA invests in various financial assets,
incurs various financial liabilities and enters into agreements involving
derivative securities, including off-balance sheet financial instruments.
Fair values are disclosed for all financial instruments, for which it is
practicable to estimate fair value, whether or not such values are recognized in
the consolidated balance sheets. Management attempts to obtain quoted market
prices for the purposes of these disclosures. Where quoted market prices are not
available, fair values are estimated using present value or other valuation
techniques. These techniques are significantly affected by management's
assumptions, including discount rates and estimates of future cash flows.
Potential taxes and other transaction costs have not been considered in
estimating fair values. The estimates presented herein are not necessarily
indicative of the amounts that CNA would realize in a current market exchange.
Non-financial instruments such as real estate, deferred acquisition costs,
property and equipment, deferred income taxes and intangibles and certain
financial instruments such as insurance reserves and leases are excluded from
the fair value disclosures. Therefore, the fair value amounts cannot be
aggregated to determine the underlying economic value of the Company.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, short-term investments, accrued investment income,
receivables for securities sold, federal income taxes recoverable, collateral on
loaned securities and derivatives, payables for securities purchased and certain
other assets and other liabilities approximate fair value because of the
short-term nature of these items. These assets and liabilities are not listed in
the following tables.
The following methods and assumptions were used by CNA in estimating the
fair value for financial assets and liabilities.
The fair values of fixed maturity and equity securities were based on
quoted market prices, where available. For securities not actively traded, fair
values were estimated using values obtained from independent pricing services or
quoted market prices of comparable instruments.
The fair values for mortgage loans and policy loans were estimated using
discounted cash flows utilizing interest rates currently offered for similar
loans to borrowers of comparable credit quality. Loans with similar
characteristics were aggregated for purposes of these calculations.
Premium deposits and annuity contracts were valued based on cash surrender
values and the outstanding fund balances.
Valuation techniques to determine fair value of other invested assets and
other separate account business assets consisted of discounting cash flows,
obtaining quoted market prices of the investments and comparing the investments
to similar instruments or to the underlying assets of the investments.
CNA'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 fair values of financial guarantee contracts were estimated using
discounted cash flows utilizing interest rates currently offered for similar
contracts.
The fair values of guaranteed investment contracts and deferred annuities
of the separate account business were estimated using discounted cash flow
calculations based on interest rates currently offered for similar contracts
with similar maturities. The fair values of the liabilities for variable
separate account business were based on the quoted market values of the
underlying assets of each variable separate account. The fair values of other
separate account liabilities approximate their carrying value because of their
short-term nature.
52
<PAGE>
The carrying amount and estimated fair value of CNA's financial instrument
assets and liabilities are listed in the following table. Derivative financial
instruments are shown in a separate table.
Financial Assets and Liabilities
<TABLE>
<CAPTION>
2000 1999
------------------------ ------------------------
December 31 Carrying Estimated Carrying Estimated
(In millions) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Investments:
Fixed maturity securities $26,652 $26,652 $27,248 $27,248
Equity securities 2,412 2,412 3,610 3,610
Mortgage loans 22 23 44 42
Policy loans 193 180 192 179
Other invested assets 1,116 1,116 1,108 1,108
Separate account business:
Fixed maturity securities 2,703 2,703 3,260 3,260
Equity securities 215 215 261 261
Other 849 849 493 493
Notes receivable for the issuance of common stock 72 58 63 56
Financial liabilities
Premium deposits and annuity contracts $ 1,486 $ 1,419 $ 1,293 $ 1,240
Debt 2,729 2,595 2,881 2,775
Financial guarantee contracts 150 128 124 112
Separate account business:
Guaranteed investment contracts 882 880 1,516 1,518
Variable separate accounts 1,387 1,387 1,505 1,505
Deferred annuities 114 115 117 125
Other 623 623 571 571
</TABLE>
Derivative Financial Instruments
CNA invests in derivative financial instruments in the normal course of business
primarily to reduce its exposure to market risk (principally interest rate risk,
equity stock price risk and foreign currency risk). Financial instruments used
for such purposes include interest rate swaps, interest rate caps, put and call
options, commitments to purchase securities, futures and forwards. Other than
derivatives held in certain separate accounts, the Company generally does not
hold or issue these instruments for trading purposes. CNA also uses derivatives
to mitigate the risk associated with its indexed group annuity contracts (a
separate account product) by purchasing Standard & Poor's 500(R) (S&P 500(R))
index futures contracts in a notional amount equal to the contract holder
liability, which is calculated using the S&P 500(R) rate of return.
Futures are contracts to buy or sell a standard quantity and quality of a
commodity, financial instrument or index at a specified future date and price.
Forwards are contracts between two parties to purchase and sell a specific
quantity of a commodity, government security, foreign currency or other
financial instrument at a price specified at contract inception, with delivery
and settlement at a specified future date.
Commitments to purchase government and municipal securities are agreements
to purchase securities in the future at a predetermined price.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time. The option purchaser
pays a premium to the option seller (writer) for the right to exercise the
option. The option seller is obligated to buy (put) or sell (call) the item
underlying the contract at a set price, if the option purchaser chooses to
exercise.
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount.
The gross notional principal or contractual amounts of derivative financial
instruments in the general account at December 31, 2000 and 1999 were
$2,872 million and $2,062 million. The gross notional principal or contractual
amounts of derivative financial instruments in the separate accounts were
$1,411 million and $1,627 million at December 31, 2000 and 1999. The contractual
or notional amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these instruments.
53
<PAGE>
Interest rates, equity prices and foreign currency exchange rates generally
affect the fair values associated with derivative financial instruments. The
credit exposure associated with non-performance by the counterparties to these
instruments is generally limited to the gross fair value of the asset related to
the instruments recognized in the consolidated balance sheets. The Company
continuously monitors the creditworthiness of its counterparties. The Company
generally does not require collateral from its derivative investment
counterparties.
The fair values of derivatives generally represent the estimated amounts
that CNA would expect to receive or pay upon termination of the contracts at the
reporting date. Dealer quotes are available for substantially all of CNA's
derivatives. For derivative instruments not actively traded, fair values are
estimated using values obtained from independent pricing services, costs to
settle or quoted market prices of comparable instruments.
A summary of the aggregate contractual or notional amounts, estimated fair
values and gains (losses) related to derivative financial instruments is as
follows.
Derivative Financial Instruments
<TABLE>
<CAPTION>
Fair Value
Contractual ------------------------------------
Notional Recognized
(In millions) Amount Asset (Liability) Gains (Losses)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of and for the year ended December 31, 2000
General account
Total return swaps $ 5 $ -- $ -- $ 12
Interest rate caps 500 1 -- (3)
Commitments to purchase government and municipal securities -- -- -- 5
Futures sold, not yet purchased 80 -- -- (7)
Forwards 13 -- -- 54
Options purchased 18 1 -- (9)
Options written -- -- -- 8
Options purchased - GlobalCrossing 1,000 664 -- --
Options written - GlobalCrossing 1,256 -- 1 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $2,872 $ 666 $ 1 $ 60
===================================================================================================================================
Separate accounts
Futures purchased $ 996 $ -- $ (13) $ (172)
Futures sold, not yet purchased 76 -- -- (4)
Commitments to purchase government and municipal securities 111 1 -- 4
Options purchased 110 -- -- (2)
Options written 118 -- (1) 4
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,411 $ 1 $ (14) $ (170)
- -----------------------------------------------------------------------------------------------------------------------------------
As of and for the year ended December 31, 1999
General account
Interest rate swaps on corporate borrowings $ 650 $ -- $ -- $ --
Total return swaps 7 -- -- 11
Interest rate caps 500 4 -- 4
Commitments to purchase government and municipal securities 127 -- (1) (1)
Futures sold, not yet purchased 153 -- -- 9
Forwards 591 9 -- 21
Options purchased 25 4 -- (5)
Options written 9 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $2,062 $ 17 $ (1) $ 39
===================================================================================================================================
Separate accounts
Futures purchased $1,113 $ -- $ -- $ 131
Futures sold, not yet purchased 79 -- -- 2
Commitments to purchase government and municipal securities 228 -- (2) (4)
Options purchased 108 1 -- (1)
Options written 99 -- -- 4
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,627 $ 1 $ (2) $ 132
===================================================================================================================================
</TABLE>
54
<PAGE>
During the first quarter of 2000, at which time the Company owned
36.1 million shares of Global Crossing common stock, the Company entered into
option agreements intended to hedge the market risk associated with
approximately 19.3 million shares of Global Crossing common stock. These option
agreements were structured as a collar in which the Company purchased put
options and sold call options on Global Crossing common stock. As of
December 31, 2000, the average exercise prices were $51.70 and $64.93 on the put
and call options, subject to adjustments on the call options under certain
limited circumstances. The options expire in the first half of 2002 and are only
exercisable on their expiration dates. The Company has designated the collar as
a hedge of its investment in Global Crossing common stock. Accordingly, the fair
value of the collar is presented in equity securities available-for-sale in the
accompanying consolidated balance sheets, consistent with the hedged item.
Additionally, at December 31, 2000, CNA holds collateral, included in short-term
investments, with a fair value of $462 million. See Note B for discussion of
changes in the fair value of the collar.
The Company had entered into interest rate swap agreements to convert the
variable rate of its borrowings under a revolving credit facility and its
commercial paper program to a fixed rate. The Company was party to interest rate
swap agreements with several banks with an aggregate notional principal amount
of $650 million at December 31, 1999. Those agreements, which terminated
December 14, 2000, effectively fixed the Company's interest cost on $650 million
of variable rate debt for 1998, 1999 and most of 2000. See Note H for discussion
of these agreements.
NOTE D. INCOME TAXES
CNA and its eligible subsidiaries (CNA Tax Group) are included in the
consolidated federal income tax return of Loews and its eligible subsidiaries.
Loews and CNA have agreed that for each taxable year, CNA 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, CNA may be required
to repay tax recoveries previously received from Loews. Either party may cancel
this agreement upon 30 days' written notice.
For 2000, the inclusion of the CNA Tax Group in the consolidated federal
income tax return of Loews increased the Loews federal income tax liability.
Accordingly, CNA has paid or will pay Loews approximately $64 million for 2000.
In 1999 and 1998, the inclusion of the CNA Tax Group in the consolidated federal
income tax return of Loews resulted in a decreased federal income tax liability
for Loews. Accordingly, Loews has paid CNA approximately $288 million for 1999
and $83 million for 1998.
A reconciliation between CNA's federal income tax expense (benefit) at
statutory rates and the recorded income tax expense (benefit), after giving
effect to minority interest, but before giving effect to the cumulative effect
of a 1999 change in accounting principle for SOP 97-3, is as follows.
Tax Rate Reconciliation
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at
statutory rates $ 624 $ (14) $ 115
Tax benefit from tax exempt income (71) (84) (103)
Other expense, including state
income taxes 15 10 35
- --------------------------------------------------------------------------------
Effective income tax expense
(benefit) $ 568 $ (88) $ 47
================================================================================
</TABLE>
The composition of CNA's total income tax expense (benefit) allocated
between operating income and realized investment gains and losses, excluding the
cumulative effect of the 1999 change in accounting principle, is as follows.
Components of Tax Provision
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) on
operating income $ 107 $(211) $(200)
Income tax expense on realized
investment gains 461 123 247
- --------------------------------------------------------------------------------
Total income tax expense (benefit) $ 568 $ (88) $ 47
================================================================================
</TABLE>
The current and deferred components of CNA's income tax expense (benefit),
excluding taxes on the cumulative effect of the 1999 change in accounting
principle, are as follows.
Current and Deferred Taxes
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense (benefit) $ 75 $(226) $ --
Deferred tax expense 493 138 47
- --------------------------------------------------------------------------------
Total income tax expense (benefit) $ 568 $ (88) $ 47
================================================================================
</TABLE>
55
<PAGE>
The deferred tax effects of the significant components of CNA's deferred
tax assets and liabilities are set forth in the table below.
Components of Net Deferred Tax Assets
<TABLE>
<CAPTION>
December 31
(In millions) 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities)
Insurance reserves:
Property-casualty claim reserves $ 864 $ 1,081
Unearned premium reserves 294 335
Life reserves 187 213
Other insurance reserves 21 26
Deferred acquisition costs (763) (778)
Net unrealized gains (470) (627)
Postretirement benefits other than pensions 134 149
Net operating losses -- 137
Foreign affiliate(s) related 110 44
Receivables 82 80
Accrued assessments and guarantees 43 72
Investment valuation differences 10 65
Other, net (9) 55
- --------------------------------------------------------------------------------
Net deferred tax asset $ 503 $ 852
================================================================================
</TABLE>
At December 31, 2000, gross deferred tax assets and liabilities amounted to
approximately $1.9 billion and $1.4 billion. In comparison, gross deferred tax
assets and liabilities amounted to approximately $2.4 billion and $1.5 billion
at December 31, 1999. CNA's management believes it is more likely than not that
the deferred tax assets will be realized through future earnings and available
tax planning strategies.
NOTE E. CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES
CNA's property-casualty insurance claim and claim adjustment expense reserves
represent the estimated amounts necessary to settle all outstanding claims,
including claims that are incurred but not reported, as of the reporting date.
The Company's reserve projections are based primarily on detailed analysis of
the facts in each case, CNA's experience with similar cases and various
historical development patterns. Consideration is given to such historical
patterns as field reserving trends, 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 reserves.
Establishing loss reserves is an estimation process. Many factors can
ultimately affect the final settlement of a claim and, therefore, the reserve
that is needed. 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.
The table below provides a reconciliation between beginning and ending
claim and claim adjustment expense reserves.
Reconciliation of Claim and Claim Adjustment Expense Reserves
<TABLE>
<CAPTION>
As of and for the years
ended December 31
(In millions) 2000 1999 1998
<S> <C> <C> <C>
Reserves, beginning of year:
Gross $ 26,631 $ 28,317 $ 28,533
Ceded 6,273 5,424 5,326
Net reserves, beginning of year 20,358 22,893 23,207
- --------------------------------------------------------------------------------
Net reserves transferred
under retroactive reinsurance
agreements -- (1,024) --
Net reserves of acquired insurance
companies at date of acquisition -- -- 122
Total net adjustments -- (1,024) 122
- --------------------------------------------------------------------------------
Net incurred claim and claim adjustment expenses:
Provision for insured events
of current year 6,331 7,287 7,903
Increase in provision for
insured events of prior years 427 1,027 263
Amortization of discount 158 139 143
Total net incurred 6,916 8,453 8,309
- --------------------------------------------------------------------------------
Net payments attributable to:
Current year events 1,888 2,744 2,791
Prior year events 6,916 7,460 5,954
Reinsurance recoverable
against net reserves transferred
under retroactive reinsurance
agreements (See Note O) (370) (240) --
- --------------------------------------------------------------------------------
Total net payments 8,434 9,964 8,745
- --------------------------------------------------------------------------------
Net reserves, end of year 18,840 20,358 22,893
Ceded reserves, end of year 7,568 6,273 5,424
- --------------------------------------------------------------------------------
Gross reserves, end of year* $ 26,408 $ 26,631 $ 28,317
================================================================================
</TABLE>
* Excludes life claim and claim adjustment expense reserves of $554 million and
$725 million at December 31, 2000 and 1999, included in the consolidated balance
sheets.
The increase (decrease) in provision for insured events of prior years
(reserve development) is composed of the following components.
Reserve Development
<TABLE>
<CAPTION>
Years ended December 31
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Environmental pollution and
other mass tort $ 17 $ (84) $ 227
Asbestos 65 560 243
Other 345 551 (207)
- --------------------------------------------------------------------------------
Total $ 427 $ 1,027 $ 263
- -===============================================================================
</TABLE>
56
<PAGE>
Environmental Pollution and Other
Mass Tort and Asbestos Reserves
CNA's property-casualty insurance companies have potential exposures related to
environmental pollution and other mass tort and asbestos claims.
Environmental pollution cleanup is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to cleanup. The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial interpretations in many cases have expanded
the scope of coverage and liability beyond the original intent of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of
1980 (Superfund) and comparable state statutes (mini-Superfunds) govern the
cleanup and restoration of toxic waste sites and formalize the concept of legal
liability for cleanup and restoration by "Potentially Responsible Parties"
(PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for
cleanup
<PAGE>
of waste sites if PRPs fail to do so, and to assign liability to PRPs. The
extent of liability to be allocated to a PRP is dependent on 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) on its National Priorities List (NPL). The
addition of new cleanup sites to the NPL has slowed in recent years. State
authorities have designated many cleanup sites as well.
Many policyholders have made claims against various CNA insurance
subsidiaries for defense costs and indemnification in connection with
environmental pollution matters. These claims relate to accident years 1989 and
prior, which coincides with CNA's adoption of the Simplified Commercial General
Liability coverage form, which includes an absolute pollution exclusion. CNA and
the insurance industry are disputing coverage for many such claims. Key coverage
issues include whether cleanup costs are considered damages under the policies,
trigger of coverage, allocation of liability among triggered policies,
applicability of pollution exclusions and owned property exclusions, the
potential for joint and several liability and the definition of an occurrence.
To date, courts have been inconsistent in their rulings on these issues.
A number of proposals to reform Superfund have been made by various
parties. However, no reforms were enacted by Congress during 2000, and it is
unclear what positions the Congress or the administration will take and what
legislation, if any, will result in the future. If there is legislation, and in
some circumstances even if there is no legislation, the federal role in
environmental cleanup may be significantly reduced in favor of state action.
Substantial changes in the federal statute or the activity of the EPA may cause
states to reconsider their environmental cleanup statutes and regulations. There
can be no meaningful prediction of the pattern of regulation that would result.
Due to the inherent uncertainties described above, including the
inconsistency of court decisions, the number of waste sites subject to cleanup,
and the standards for cleanup and liability, the ultimate liability of CNA for
environmental pollution claims may vary substantially from the amount currently
recorded.
The following table provides data related to CNA's environmental pollution
and other mass tort and asbestos claim and claim adjustment expense reserves.
Environmental Pollution and Other Mass Tort and Asbestos Reserves
<TABLE>
<CAPTION>
2000 1999
- --------------------------------------------------------------------------------
Environmental Environmental
December 31 Pollution and Pollution and
(In millions) Other Mass Tort Asbestos Other Mass Tort Asbestos
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross reserves $ 493 $ 848 $ 618 $ 946
Ceded reserves (146) (245) (155) (262)
- --------------------------------------------------------------------------------
Net reserves $ 347 $ 603 $ 463 $ 684
================================================================================
</TABLE>
As of December 31, 2000, 1999 and 1998 CNA carried $347 million,
$463 million and $787 million of claim and claim expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims. In 2000, CNA recorded $17 million of adverse
development compared with $84 million of favorable development in 1999 and
$227 million of adverse development in 1998. These changes were based upon the
Company's continuous review of these types of exposures, as well as its internal
studies and annual analysis of environmental pollution and other mass tort
claims. The analysis of activity in calendar year 2000 indicated a slight
deterioration in pollution claims. The analysis completed in 1999 indicated
favorable results in the number of new claims being reported in the other mass
tort area. The 1998 analysis indicated deterioration in claim experience related
mainly to pollution claims.
CNA's property-casualty insurance subsidiaries also have exposure to
asbestos claims. Estimation of asbestos claim and claim adjustment expense
reserves involves many of the same limitations discussed above for environmental
pollution claims, such as inconsistency of court decisions, specific policy
provisions, allocation of liability among insurers, missing policies and proof
of coverage. As of December 31, 2000, 1999 and 1998, CNA carried approximately
$603 million, $684 million and $1,456 million of claim and claim adjustment
expense reserves, net of reinsurance recoverables, for reported
57
<PAGE>
and unreported asbestos-related claims. In 2000, CNA recorded $65 million of
adverse development compared with $560 million of adverse development in 1999
and $243 million of adverse development in 1998. The reserve strengthening in
2000 for asbestos-related claims was a result of management's continuous review
of development with respect to these exposures, as well as a review of the
results of the Company's annual analysis of these claims, which was completed in
conjunction with the study of environmental pollution and other mass tort
claims. This analysis indicated continued deterioration in claim counts and
asbestos-related claims similar to the results noted in both 1999 and 1998. The
factors that have led to the deterioration in claim counts include intensive
advertising campaigns by lawyers for asbestos claimants and the addition of new
defendants, such as distributors of asbestos-containing products.
The results of operations in future years may continue to be adversely
affected by environmental pollution and other mass tort and asbestos claim and
claim adjustment expenses. Management will continue to monitor these liabilities
and make further adjustments as warranted.
Other Reserves
Unfavorable claim and claim adjustment expense reserve development for other
lines in 2000 was due to unfavorable loss experience in standard commercial
lines, assumed reinsurance and accident and health lines. These unfavorable
changes were partially offset by favorable development in non-medical
professional liability and other casualty lines. The unfavorable development in
standard commercial lines can be attributed to adverse claim experience for
recent accident years in the commercial auto liability, commercial multi-peril
and workers' compensation lines of business. The unfavorable development in the
assumed reinsurance and accident and health lines also resulted from adverse
claims experience.
Unfavorable claim and claim adjustment expense reserve development for
other lines in 1999 of $551 million was due to unfavorable loss development of
approximately $540 million for standard commercial lines, approximately
$60 million for medical malpractice and approximately $70 million for accident
and health. These unfavorable changes were partially offset by favorable
development of approximately $120 million in non-medical professional liability
and assumed reinsurance on older accident years. The unfavorable development in
standard commercial lines was due to commercial automobile liability and
workers' compensation losses being higher than expected in recent accident
years. In addition, the number of claims reported for commercial multiple-peril
liability claims from older accident years did not decrease as much as expected.
The unfavorable development for medical malpractice was also due to losses being
higher than expected for recent accident years. The accident and health
unfavorable development was due to higher than expected claim reporting on
assumed personal accident coverage in recent accident years.
Other lines' favorable claim and claim adjustment expense reserve
development for 1998 of $207 million was due to favorable loss development of
approximately $100 million in the commercial lines business and approximately
$105 million of favorable loss development in the personal lines business. The
favorable development in the commercial lines of business was primarily
attributable to improved frequency and severity in the commercial auto lines for
older accident years, as well as some continued improvement in workers'
compensation for older years. The favorable development in the personal auto
lines of business was attributable to improved trends, particularly in personal
auto liability.
CNA's insurance subsidiaries also have exposure to construction defect
losses, principally in its general liability and commercial multiple-peril
lines. This exposure relates to claims involving property damage alleging loss
of use, damage, destruction or deterioration of land, buildings and other
structures involving new construction or major rehabilitation of real property.
Many of these claims involve multiple defects and multiple defendants. The
majority of losses have been concentrated in a limited number of states,
including California. The Company has taken several underwriting actions to
mitigate this exposure in the future. Estimation of construction defect losses
is subject to a high level of uncertainty due to the long period of time between
the accident date and the reporting of the claim, emerging case law, changing
regulatory rules and the allocation of damages to the multiple defendants. Due
to the inherent uncertainties noted above, the ultimate liability for
construction defect claims may vary substantially from the amount currently
recorded.
Financial Guarantee Reserves
CNA's property-casualty operations write financial guarantee insurance
contracts, which guarantee corporate credit and asset-backed securities.
Premiums are received throughout the exposure period and are recognized as
revenue in proportion to the underlying risk insured. In addition, through
August 1, 1989, CNA's property-casualty operations wrote financial guarantee
insurance in the form of surety bonds and also insured equity policies. These
bonds represented primarily industrial development bond guarantees and, in the
case of insured equity policies, typically extended in initial terms from 10 to
13 years. For these guarantees and policies CNA received an advance premium,
which is recognized over the exposure period and in proportion to the underlying
risk insured.
At December 31, 2000 and 1999, gross exposure on financial guarantee surety
bonds and insured equity policies was $249 million and $352 million. The degree
of risk to CNA related to this exposure is substantially reduced through
reinsurance, diversification of exposures and collateral requirements. In
addition, security interests in improved real estate are also commonly obtained
on financial guarantee risks. Approximately 39% and 37% of the risks were ceded
to reinsurers at December 31, 2000 and 1999. Total exposure, net of reinsurance,
amounted to $151 million and $222 million at December 31, 2000 and 1999. At
December 31, 2000 and 1999, collateral consisting of letters of credit, cash
reserves and debt service reserves amounted to $7 million and $43 million.
Gross unearned premium reserves for financial guarantee contracts were
$23 million and $11 million at December 31, 2000 and 1999. Gross claim and claim
adjustment expense reserves totaled $127 million and $113 million at
December 31, 2000 and 1999.
58
<PAGE>
NOTE F. LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES
Tobacco Litigation
Four insurance subsidiaries of CNAF are defendants in a lawsuit arising out of
policies allegedly issued to Liggett Group, Inc. (Liggett). The lawsuit was
filed by Liggett and its current parent, Brooke Group Holding Inc., in the
Delaware Superior Court, New Castle County, on January 26, 2000. The lawsuit,
which involves numerous insurers, concerns coverage issues relating to a number
of tobacco-related claims (currently over 1,100 pending) asserted against
Liggett over the past 20 years. However, Liggett only began submitting claims
for coverage under the policies in January 2000. CNA believes its coverage
defenses are strong. Based on facts and circumstances currently known,
management believes that the ultimate outcome of the pending litigation should
not materially affect the financial condition or results of operations of CNA.
IGI Contingency
In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an
arrangement with IOA Global, Ltd. (IOA), an independent managing general agent
based in Philadelphia, Pennsylvania, to develop and manage a book of accident
and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies,
Ltd. (IGI), a personal accident reinsurance managing general underwriter, was
appointed to underwrite and market the book under the supervision of IOA.
Between April 1, 1997 and December 1, 1999, IGI underwrote a number of
reinsurance
<PAGE>
arrangements with respect to personal accident insurance worldwide (the IGI
Program). Under various arrangements, CNA Re Ltd. both assumed risks as a
reinsurer and also ceded a substantial portion of those risks to other
companies, including other CNA insurance subsidiaries and ultimately to a group
of reinsurers participating in a reinsurance pool known as the Associated
Accident and Health Reinsurance Underwriters (AAHRU) Facility. CNA's Group
Operations business unit participated as a pool member in the AAHRU Facility in
varying percentages between 1997 and 1999.
CNA has undertaken a review of the IGI Program and, among other things, has
determined that a small portion of the premiums assumed under the IGI Program
related to United States workers' compensation "carve-out" business. CNA is
aware that a number of reinsurers with workers' compensation carve-out insurance
exposure have disavowed their obligations under various legal theories. If one
or more such companies are successful in avoiding or reducing their liabilities,
then it is likely that CNA's liability will also be reduced. Moreover, based on
information known at this time, CNA reasonably believes it has strong grounds
for avoiding a substantial portion of its United States workers' compensation
carve-out exposure through legal action.
As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. CNA believes it has valid and enforceable
reinsurance contracts with the AAHRU Facility and other reinsurers with respect
to the IGI Program, including the United States workers' compensation carve-out
business. It is likely that certain reinsurers will dispute their liabilities to
CNA; however, the Company is unable to predict the extent of such potential
disputes at this time. Legal actions could result, and the resolution of any
such actions could take years.
Based on the Company's review of the entire IGI Program, CNA has
established reserves for its estimated exposure under the program and an
estimate for recoverables from retrocessionaires.
The Company is pursuing a number of loss mitigation strategies. Although
the results of these various actions to date support the recorded reserves, the
estimate of ultimate losses is subject to considerable uncertainty. As a result
of these uncertainties, the results of operations in future years may be
adversely affected by potentially significant reserve additions. Management does
not believe that any such future reserve additions will be material to the
equity of the Company.
Other Litigation
CNAF and its subsidiaries are also parties to other litigation arising in the
ordinary course of business. The outcome of such other litigation will not, in
the opinion of management, materially affect the financial position or results
of operations of CNA.
NOTE G. REINSURANCE
CNA assumes and cedes reinsurance with other insurers and reinsurers and members
of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk,
minimize exposures on larger risks and to exit certain lines of business.
Reinsurance coverages are tailored to the specific risk characteristics of each
product line and CNA's retained amount varies by type of coverage. Generally,
property risks are reinsured on an excess of loss, per risk basis. Liability
coverages are generally reinsured on a quota share basis in excess of CNA's
retained risk. CNA's life reinsurance includes coinsurance, yearly renewable
term and facultative programs.
The ceding of insurance does not discharge the primary liability of the
Company. Therefore, a credit exposure exists with respect to property, liability
and life reinsurance ceded to the extent that any reinsurer is unable to meet
the obligations assumed under reinsurance agreements. CNA holds substantial
collateral in the form of funds and bank letters of credit. Such collateral was
approximately $1,566 million and $1,306 million at December 31, 2000 and 1999.
CNA places reinsurance with carriers only after review of the nature of the
contract and a thorough assessment of the reinsurers' credit quality and claims
settlement practices.
CNA's largest recoverables from a single reinsurer, including prepaid
reinsurance premiums, were approximately $1,176 million, $776 million and
$402 million at December 31, 2000, from The Allstate Corporation (Allstate),
American Reinsurance Company and National Indemnity Insurance Company.
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $4,863 million, $3,224 million and $994 million for 2000, 1999 and
1998.
59
<PAGE>
Life premiums are primarily from long duration contracts and
property-casualty premiums and accident and health premiums are primarily from
short duration contracts.
The effects of reinsurance on earned premiums and written premiums for the
years ended December 31, 2000, 1999 and 1998 are shown in the following table.
Components of Earned Premiums
<TABLE>
<CAPTION>
(In millions) Direct Assumed Ceded Net Assumed/Net %
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 Earned Premiums
Property-casualty $ 8,389 $ 1,955 $ 3,421 $ 6,923 28.2%
Accident and health 3,644 484 487 3,641 13.3
Life 1,227 220 537 910 24.2
- ---------------------------------------------------------------------------------------------------------------
Total earned premiums $13,260 $ 2,659 $ 4,445 $11,474 23.2%
===============================================================================================================
1999 Earned Premiums
Property-casualty $ 9,158 $ 1,816 $ 2,199 $ 8,775 20.7%
Accident and health 3,730 198 397 3,531 5.6
Life 1,174 222 420 976 22.7
- ---------------------------------------------------------------------------------------------------------------
Total earned premiums $14,062 $ 2,236 $ 3,016 $13,282 16.8%
===============================================================================================================
1998 Earned Premiums
Property-casualty $ 8,327 $ 1,549 $ 897 $ 8,979 17.3%
Accident and health 3,745 176 256 3,665 4.8
Life 1,014 159 281 892 17.8
- ---------------------------------------------------------------------------------------------------------------
Total earned premiums $13,086 $ 1,884 $ 1,434 $13,536 13.9%
===============================================================================================================
</TABLE>
Components of Written Premiums
<TABLE>
<CAPTION>
(In millions) Direct Assumed Ceded Net Assumed/Net %
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 Written Premiums
Property-casualty $ 8,412 $ 1,787 $ 3,444 $ 6,755 26.5%
Accident and health 3,598 468 489 3,577 13.1
Life 1,229 220 537 912 24.1
- ---------------------------------------------------------------------------------------------------------------
Total written premiums $13,239 $ 2,475 $ 4,470 $11,244 22.0%
===============================================================================================================
1999 Written Premiums
Property-casualty $ 9,114 $ 1,948 $ 3,262 $ 7,800 25.0%
Accident and health 3,731 194 403 3,522 5.5
Life 1,158 196 461 893 21.9
- ---------------------------------------------------------------------------------------------------------------
Total written premiums $14,003 $ 2,338 $ 4,126 $12,215 19.1%
===============================================================================================