SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 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)
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 periods 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 1, 1997
- ------------------------------ -----------------------------
Common Stock, Par value $2.50 61,798,262
- --------------------------------------------------------------------------------
Page (1) of (27)
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 (Unaudited) and DECEMBER 31, 1996................... 3
STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996......... 4
STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996................... 5
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996................... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) JUNE 30, 1997.............................. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 24
SIGNATURES............................................................. 25
EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE................ 26
EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES.............................. 27
EXHIBIT 12.2 COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED,
TO FIXED CHARGES.............................. 27
EXHIBIT 27 FINANCIAL DATA SCHEDULE............................... 28
(2)
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
June 30 December 31
1997 1996
(In millions of dollars) (Unaudited)
- --------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities available for sale
(cost: $25,849 and $27,540).................... $ 25,940 $ 27,721
Equity securities available for sale
(cost: $541 and $702).......................... 657 859
Mortgage loans and real estate
(less accumulated depreciation: $4 and $4)...... 114 123
Policy loans................................... 179 174
Other invested assets.......................... 649 681
Short-term investments......................... 9,003 5,854
------------ -----------
Total investments......................... 36,542 35,412
Cash........................................... 402 257
Insurance receivables:
Reinsurance receivables..................... 6,599 6,965
Other insurance receivables................. 6,458 5,943
Less allowance for doubtful accounts........ (278) (277)
Deferred acquisition costs..................... 2,123 1,854
Accrued investment income...................... 427 508
Receivables for securities sold................ 517 264
Federal income taxes recoverable
(includes $22 and $151 due from Loews)......... 11 134
Deferred income taxes.......................... 1,263 1,347
Property and equipment at cost
(less accumulated depreciation:
$539 and $436)................................ 672 645
Prepaid reinsurance premiums................... 249 295
Intangibles.................................... 411 418
Other assets................................... 1,166 849
Separate Account business...................... 6,023 6,121
-----------------------------------------------------------------------------
Total assets $ 62,585 $ 60,735
=============================================================================
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET - CONTINUED
- --------------------------------------------------------------------------------
June 30 December 31
1997 1996
(In millions of dollars) (Unaudited)
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities:
Insurance reserves:
Claim and claim expense..................... $ 30,619 $ 30,830
Unearned premiums........................... 5,107 4,659
Future policy benefits...................... 4,526 4,181
Policyholders' funds........................ 720 746
Securities sold under repurchase agreements..... 1,618 100
Payables for securities purchased............... 1,042 405
Participating policyholders' equity............. 122 119
Long-term debt.................................. 2,763 2,765
Other liabilities............................... 2,705 3,749
Separate Account business....................... 6,023 6,121
---------- -----------
Total liabilities........................... 55,245 53,675
---------- -----------
Stockholders' equity:
Common stock ($2.50 par value;
Authorized - 200,000,000 shares;
Issued - 61,841,969 shares)..................... 155 155
Money market cumulative preferred stock......... 150 150
Additional paid-in capital...................... 435 435
Retained earnings............................... 6,433 6,024
Net unrealized investment gains(losses)......... 170 299
Treasury stock, at cost......................... (3) (3)
---------- -----------
Total stockholders' equity.................. 7,340 7,060
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity.. $ 62,585 $ 60,735
================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements.
(3)
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS
1997 1996 1997 1996
(In millions of dollars, except per share data)
- --------------------------------------------------------------------------------
Revenues:
Premiums.....................................$ 3,348 $ 3,321 $ 6,695 $ 6,614
Net investment income........................ 547 558 1,111 1,135
Realized investment gains.................... 172 73 238 378
Other........................................ 176 143 331 283
--------- ------- ------- ------
4,243 4,095 8,375 8,410
--------- ------- ------- ------
Benefits and expenses:
Insurance claims and policyholders' benefits.. 2,860 2,774 5,752 5,561
Amortization of deferred acquisition costs.... 596 484 1,116 1,057
Other operating expenses...................... 399 502 841 916
Interest expense.............................. 46 45 96 104
--------- -------- ------- ------
3,901 3,805 7,805 7,638
--------- -------- ------- ------
Income before income tax................... 342 290 570 772
Income tax expense............................ 107 88 158 241
--------- -------- ------- ------
Net Income $ 235 $ 202 $ 412 $ 531
================================================================================
EARNINGS PER SHARE
- ------------------
Net income.................................... $ 3.78 $ 3.25 $ 6.63 $ 8.55
====== ====== ====== ======
Weighted average outstanding shares of
common stock (in millions of shares).......... 61.8 61.8 61.8 61.8
================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements(Unaudited)
(4)
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Unaudited)
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1997 and 1996
Additional Net Unrealized Total
Capital Paid in Retained Investment Gains
Stock Capital Earnings (Losses)
(In millions of dollars)
- -------------------------------------------------------------------------------
Balance, December 31, 1995 $ 302 $ 435 $5,066 $ 933 $6,736
New Income - - 531 - 531
Unrealized investment - - - (888) (888)
Preferred dividends - - (3) - (3)
- -------------------------------------------------------------------------------
Balance, June 30, 1996 302 435 $5,594 $ 45 $6,376
===============================================================================
Balance, December 31, 1996 302 435 $6,024 $ 299 $7,060
Net income - - 412 - 412
Unrealized investment - - - (129) (129)
Preferred dividends - - (3) - (3)
- -------------------------------------------------------------------------------
Balance, June 30, 1997 $ 302 $ 435 $6,433 $ 170 $7,340
===============================================================================
See accompanying Notes to Condensed Consolidated Financial Statements.
(5)
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended June 30 1997 1996
(In millions of dollars)
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income....................................... $ 412 $ 531
-------- ----------
Adjustments to reconcile net income to net
cash flows from operating activities:
Net realized investment gains, pre-tax......... (238) (378)
Participating policyholders' interest.......... (1) 4
Amortization of intangibles.................... 13 11
Amortization of bond discount.................. (150) (85)
Depreciation................................... 93 79
Changes in:
Insurance receivables, net.................. (148) (302)
Deferred acquisition costs.................. (269) (205)
Accrued investment income................... 81 87
Federal income taxes........................ 123 99
Deferred income tax recoverable............. 115 28
Prepaid reinsurance premiums................ 46 (36)
Insurance reserves.......................... 564 312
Reinsurance payables........................ (17) 227
Other liabilities........................... (1,156) (98)
Other, net.................................. (138) (387)
------------ ---------
Total adjustments......................... (1,082) (644)
------------ ---------
Net cash flows from operating activities.. (670) (113)
------------ ---------
Cash flows from investing activities:
Purchases of fixed maturities.................... (17,652) (16,864)
Proceeds from fixed maturities:
Sales........................................... 18,656 17,128
Maturities, calls and redemptions............... 1,106 1,311
Purchases of equity securities.................. (564) (602)
Proceeds from sale of equity securities......... 781 779
Change in short-term investments................ (2,852) (1,600)
Purchases of property and equipment............. (130) (91)
Change in securities sold under
repurchase agreements........................... 1,518 135
Change in other investments..................... 26 278
Investment in affiliates........................ (65) --
Other, net...................................... 3 2
----------- ---------
Net cash flows from investing activities.. 827 476
----------- ---------
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS - CONTINUED
(Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended June 30 1997 1996
(In millions of dollars)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid to preferred shareholders.......... (3) (3)
Receipts from investment contracts credited to
policyholder account balances..................... 4 9
Return of policyholder account balances on
investment contracts.............................. (11) (18)
Change in short-term debt......................... -- (255)
Principal payments on long-term debt.............. (3) (1)
Proceeds from issuance of long-term debt.......... 1 9
----------- --------
Net cash flows from financing activities... (12) (259)
------------ --------
Net cash flows........................ 145 104
Cash at beginning of period........................ 257 222
- ------------------------------------------------------------------------------
Cash at end of period $ 402 $ 326
==============================================================================
Supplemental disclosures of cash flow information:
Cash (paid) received:
Interest expense................................ $ (106) $ (111)
Federal income taxes............................ 153 (92)
==============================================================================
See accompanying Notes to Condensed Consolidated Financial Statements.
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE A. Basis of Presentation:
The Condensed Consolidated Financial Statements (unaudited) include CNA
Financial Corporation (CNA or the Company) and its operating subsidiaries which
consist of property/casualty insurance companies (principally Continental
Casualty Company and The Continental Insurance Company) and life insurance
companies (principally Continental Assurance Company and Valley Forge Life
Insurance Company). Loews Corporation (Loews) owns approximately 84% of the
outstanding common stock of CNA.
CNA is a multiple-line insurer underwriting property and casualty
coverages; life, accident and health insurance; and pension and annuity
business. CNA serves a wide spectrum of insureds, including individuals; small,
medium and large businesses; associations; professionals and groups.
The operating results for the interim periods are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with the financial statements and notes thereto
included in CNA's Annual Report to Shareholders (incorporated by reference in
Form 10-K) for the year ended December 31, 1996, filed with the Commission on
March 31, 1997, and the information shown below.
The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. Certain
amounts applicable to prior years have been reclassified to conform to
classifications followed in 1997. All significant intercompany amounts have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of CNA's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying condensed consolidated financial statements.
NOTE B. Restricted Investments:
On December 30, 1993, CNA deposited $987 million in an escrow account,
pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note C
below. At June 30, 1997, the escrow account amounted to $1.09 billion. The funds
are included in short-term investments and are invested substantially in U. S.
Treasury securities. The escrow account is the prefunding mechanism to the trust
fund for future claimants.
NOTE C. Legal Proceedings and Contingent Liabilities:
The following information updates legal proceedings and contingent
liabilities reported in Note F of the Notes to the Consolidated Financial
Statements in the 1996 Annual Report to Shareholders.
(7)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
FIBREBOARD LITIGATION
CNA's primary property/casualty subsidiary, Continental Casualty
Company ("Casualty"), has been party to litigation with Fibreboard Corporation
("Fibreboard") involving coverage for certain asbestos-related claims and
defense costs (San Francisco Superior Court, Judicial Council Coordination
Proceeding 1072). As described below, Casualty, Fibreboard, another insurer
(Pacific Indemnity, a subsidiary of the Chubb Corporation), and a negotiating
committee of asbestos claimant attorneys (collectively referred to as Settling
Parties) have reached a Global Settlement (the "Global Settlement") to resolve
all future asbestos-related bodily injury claims involving Fibreboard, which is
subject to court approval.
Casualty, Fibreboard and Pacific Indemnity have also reached an
agreement (the "Trilateral Agreement"), on a settlement to resolve the coverage
litigation in the event the Global Settlement does not obtain final court
approval or is subsequently successfully attacked. The implementation of either
the Global Settlement or the Trilateral Agreement would have the effect of
settling Casualty's litigation with Fibreboard.
On July 27, 1995, the United States District Court for the Eastern
District of Texas entered judgment approving the Global Settlement Agreement and
the Trilateral Agreement. As expected, appeals were filed as respects both of
these decisions. On July 25, 1996, a panel of the United States Fifth Circuit
Court of Appeals in New Orleans affirmed the judgment approving the Global
Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the
Trilateral Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and
Suggestions for Rehearing by the entire Fifth Circuit Court of Appeals as
respects the decision on the Global Settlement Agreement were denied. Two
petitions for certiorari were filed in the Supreme Court as respects the Global
Settlement Agreement. On June 27, 1997, the Supreme Court granted these
petitions, vacated the Fifth Circuit's judgment as respects the Global
Settlement Agreement, and remanded to the Fifth Circuit for reconsideration in
light of the Supreme Court's decision in Amchem Products Co. v. Windsor. The
Fifth Circuit has not yet rendered a decision on this remand.
No further appeal was filed with respect to the Trilateral Agreement;
therefore, court approval of the Trilateral Agreement has become final.
Global Settlement Agreement
On April 9, 1993, Casualty and Fibreboard entered into an agreement
pursuant to which, among other things, the parties agreed to use their best
efforts to negotiate and finalize a global class action settlement with
asbestos-related bodily injury and death claimants.
On August 27, 1993, the Settling Parties reached an agreement in
principle for an omnibus settlement to resolve all future asbestos-related
bodily injury claims involving Fibreboard. The Global Settlement Agreement was
executed on December 23, 1993. The agreement calls for contribution by Casualty
and Pacific Indemnity of an aggregate of $1.53 billion to a trust fund for a
class of all future asbestos claimants, defined generally as those persons whose
claims against Fibreboard were neither filed nor settled before August 27, 1993.
An additional $10 million is to be contributed to the fund by Fibreboard. As
indicated above, the Global Settlement approval is presently before the Fifth
Circuit on remand by order of the Supreme Court vacating the Fifth Circuit's
previous decision approving the Global Settlement. There is limited precedent
for settlements which determine the rights of future claimants to seek relief.
(8)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
Through June 30, 1997, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 134,800 claims, for an
estimated settlement amount of approximately $1.62 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under these settlements. Approximately $1.53 billion was paid through June
30, 1997, including approximately $590 million paid in the fourth quarter of
1996 and the first quarter of 1997 as a result of the Trilateral Agreement
becoming final. As described above, such payments are partially recoverable from
Pacific Indemnity. Casualty may negotiate other agreements with various classes
of claimants including groups who may have previously reached agreement with
Fibreboard.
Final court approval of the Trilateral Agreement and its implementation
has eliminated any further material exposure with respect to the Fibreboard
matter, and subsequent reserve adjustments, if any, will not materially affect
the results of operations or equity of CNA.
OTHER LITIGATION
CNA and its subsidiaries are also parties to other litigation arising
in the ordinary course of business. The outcome of this other litigation will
not, in the opinion of management, materially affect the results of operations
or equity of CNA.
ENVIRONMENTAL POLLUTION AND ASBESTOS-RELATED CLAIMS
The CNA property/casualty insurance companies have potential exposures
related to environmental pollution and asbestos-related claims.
Environmental pollution clean-up is the subject of both federal and
state regulation. By some estimates, there are thousands of potential waste
sites subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. 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-Superfund") govern
the clean-up and restoration of abandoned toxic waste sites and formalize the
concept of legal liability for clean-up and restoration by "Potentially
Responsible Parties" ("PRP's"). Superfund and the mini-Superfunds (Environmental
Clean-up Laws or "ECLs") establish a mechanism to pay for clean-up of waste
sites if PRP's fail to do so, and to assign liability to PRP's. 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 clean-up is unknown. To date,
approximately 1,300 clean-up sites have been identified by the Environmental
Protection Agency on its National Priorities List. On the other hand, the
Congressional Budget Office is estimating that there will be 4,500 National
Priority List sites, and other estimates project as many as 30,000 sites that
will require clean-up under ECLs. Very few sites have been subject to clean-up
to date. The extent of clean-up necessary and the assignment of liability has
not been established.
CNA and the insurance industry are disputing coverage for many such
claims. Key coverage issues include whether Superfund response costs are
considered damages under the policies, trigger of coverage, applicability of
pollution exclusions, the potential for joint and several liability and
definition of an occurrence. Similar coverage issues exist for clean-up of waste
sites not covered under Superfund. To date, courts have been inconsistent in
their rulings on these issues.
(9)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
A number of proposals to reform Superfund have been made by various
parties. Despite Superfund taxing authority expiring at the end of 1995, no
reforms have yet been enacted by Congress. While the current Congress may
address this issue, no predictions can be made as to what legislation, if any,
will result. If there is legislation, and in some circumstances even if there is
no legislation, the federal role in environmental clean-up may be materially
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
clean-up 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 clean-up,
and the standards for clean-up and liability, the ultimate exposure to CNA for
environmental pollution claims cannot be meaningfully quantified.
Claim and claim expense reserves represent management's estimates of
ultimate liabilities based on currently available facts and case law. However,
in addition to the uncertainties previously discussed, additional issues related
to, among other things, specific policy provisions, multiple insurers and
allocation of liability among insurers, consequences of conduct by the insured,
missing policies and proof of coverage make quantification of liabilities
exceptionally difficult and subject to adjustment based on new data. As of June
30, 1997 and December 31, 1996, CNA carried approximately $882 million and $908
million, respectively, of claim and claim expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution claims. The
reserves relate to claims for accident years 1988 and prior, which coincides
with CNA's adoption of the Simplified Commercial General Liability coverage form
which included an absolute pollution exclusion. There was no unfavorable reserve
development for the six months ended June 30, 1997 and 1996.
CNA has exposure to asbestos-related claims, including those
attributable to the Fibreboard Claim. A detailed discussion of CNA's litigation
with Fibreboard Corporation regarding asbestos-related bodily injury claims is
discussed at the beginning of this note. Estimation of asbestos-related claim
reserves encounter many of the same limitations discussed above for
environmental pollution claims such as inconsistency of court decisions,
specific policy provisions, multiple insurers and allocation of liability among
insurers, missing policies and proof of coverage. As of June 30, 1997 and
December 31, 1996, CNA carried approximately $1,516 million and $1,506 million,
respectively, of claim and claim expense reserves, net of reinsurance
recoverable, for reported and unreported asbestos-related claims. Unfavorable
reserve development for the six months ended June 30, 1997 and 1996, totaled $25
million and $26 million, respectively.
<PAGE>
The following table provides additional data related to CNA's
environmental pollution and asbestos-related claims reserves.
|------------------------------------------------------------------------------|
| |
|RESERVE SUMMARY JUNE 30, 1997 DECEMBER 31, 1996 |
| ------------------------ ------------------------|
| ENVIRONMENTAL ASBESTOS ENVIRONMENTAL ASBESTOS|
| POLLUTION POLLUTION |
|------------------------------------------------------------------------------|
|(In millions of dollars) |
| |
|Gross reserves: |
| Reported claims $ 306 $ 1,517 $ 289 $ 1,551 |
| Unreported claims 659 105 714 94 |
| ---- ------ ---- ----- |
| 965 1,622 1,003 1,645 |
|Less reinsurance recoverable (83) (106) (95) (139)|
|------------------------------------------------------------------------------|
|NET RESERVES $ 882 $ 1,516 $ 908 $ 1,506 |
|==============================================================================|
(10)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
The results of operations in future years may continue to be adversely
affected by environmental pollution and asbestos claims and claim expenses.
Management will continue to monitor potential liabilities and make further
adjustments as warranted.
OTHER
Other reserve development for the six months ended June 30, 1997 and
1996 was favorable and aggregated to $116 million and $267 million,
respectively. Reserve development for the six months ended June 30, 1997
reflects continued favorable claim frequency (rate of claim occurrence) and
severity (average cost per claim) experience in the workers' compensation line
of business as well as favorable experience in the surety line of business.
Reserve development for the six months ended June 30, 1996 was principally due
to favorable experience in workers' compensation. These trends reflect the
positive effects of changes in workers' compensation laws, or moderate increases
in medical costs, and a generally strong economy in which individuals return to
the workplace more quickly.
CNA, consistent with sound reserving practices, regularly adjusts its
reserve estimates in subsequent reporting periods as new facts and circumstances
emerge that indicate the previous estimates need to be modified.
NOTE D. Reinsurance:
CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss to provide greater diversification of
risk and to minimize exposures on larger risks. The reinsurance coverages are
tailored to the specific risk characteristics of each product line with CNA's
retained amount varying by type of coverage. Generally, reinsurance coverage for
property risks is 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.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in its states of domicile, CNA
receives collateral, primarily in the form of bank letters of credit, securing a
large portion of the recoverables.
<PAGE>
|------------------------------------------------------------------------------|
|SIX MONTHS ENDED JUNE 30 EARNED PREMIUMS |
| ----------------------------------------- ASSUMED/ |
| NET |
|(In millions of dollars) DIRECT ASSUMED CEDED NET % |
|------------------------------------------------------------------------------|
| |
|1997 |
| Life $ 435 $ 61 $ 57 $ 439 13.8 %|
| Accident and health 1,859 57 65 1,851 3.1 |
| Property and casualty 4,304 560 459 4,405 12.7 |
|------------------------------------------------------------------------------|
| TOTAL PREMIUMS $6,598 $ 678 $ 581 $ 6,695 10.1 %|
|==============================================================================|
| |
|1996 |
| Life $ 354 $ 57 $ 15 $ 396 14.5 %|
| Accident and health 1,661 90 34 1,717 5.2 |
| Property and casualty 4,249 1,003 751 4,501 22.3 |
|------------------------------------------------------------------------------|
| TOTAL PREMIUMS $6,264 $1,150 $ 800 $ 6,614 17.4 %|
|==============================================================================|
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
In the table above, life premium revenue is from long duration
contracts, property/casualty earned premium is from short duration contracts,
and approximately three-quarters of accident and health earned premiums are from
short duration contracts.
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $394 and $604 million at June 30, 1997 and June 30, 1996,
respectively.
NOTE E. Debt:
Long-term borrowings consisted of the following:
|----------------------------------------------------------------------------|
|LONG-TERM DEBT JUNE 30 DECEMBER 31|
|(In millions of dollars) 1997 1996 |
|----------------------------------------------------------------------------|
| |
| Variable Rate Debt: |
| Credit Facility $ 400 $ 400 |
| Commercial Paper 675 675 |
| Senior Notes: |
| 8 7/8%, due March 1, 1998 150 150 |
| 8 1/4%, due April 15, 1999 102 102 |
| 7 1/4%, due March 1, 2003 146 146 |
| 6 1/4%, due November 15, 2003 249 248 |
| 6 3/4%, due November 15, 2006 248 248 |
| 8 3/8%, due August 15, 2012 98 98 |
| 7 1/4% Debenture, due November 15, 2023 247 247 |
| 11% Secured Mortgage Notes, due June 20, 2013 387 387 |
| 6.90% - 16.29% Secured Capital Leases, |
| due December 31, 2011 46 47 |
| Other 15 17 |
|----------------------------------------------------------------------------|
| TOTAL LONG-TERM DEBT $ 2,763 $ 2,765 |
|============================================================================|
To finance the acquisition of Continental (including the refinancing of
$205 million of Continental debt) CNA entered into a five-year $1.325 billion
revolving credit facility. In 1996, the company renegotiated the facility,
extending the maturity to May 2001. The interest rate for the facility is based
on the London Interbank Offered Rate (LIBOR), plus 16 basis points.
Additionally, there is a facility fee of 9 basis points annually. The average
interest rate on the borrowings under the revolver at June 30, 1997 was 5.83%.
Under the terms of the facility, CNA may prepay the debt without penalty.
On November 15, 1996, CNA issued $250 million of 6 3/4% senior notes,
due November 15, 2006. The net proceeds from this issuance of approximately $248
million were used to pay down a portion of the borrowings outstanding under the
revolving credit facility. As a result of this debt issuance, borrowing capacity
under the revolving credit facility was reduced by $250 million to $1.075
billion. Concurrent with the paydown of $250 million on the revolving credit
facility, CNA terminated interest rate swaps with a total notional amount of
$250 million.
An additional $250 million of securities remain available for issuance
under a shelf registration.
CNA maintains a Commercial Paper Program to take advantage of favorable
interest rate spreads. The commercial paper borrowings are classified as
long-term as $675 million of the committed bank facility will support the
commercial paper program. The weighted-average yield on commercial paper at June
30, 1997 was 5.92%.
<PAGE>
As of August 1, 1997, the outstanding loans under the revolving credit
facility were $400 million. There was no unused borrowing capacity under the
facility after the effects of the commercial paper program.
(12)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONCLUDED
To offset the variable rate characteristics of the facility, CNA
entered into interest rate swap agreements with several banks having a total
notional principal amount of $950 million. These agreements terminate from May
to December 2000. These agreements provide that CNA pay interest at a fixed
rate, averaging 6.20% at June 30, 1997, in exchange for the receipt of interest
at the three month LIBOR rate. The effect of these interest rate swaps was to
increase interest expense by $2.3 million for the six months ended June 30,
1997.
The weighted average interest rate (interest and facility fees) on the
variable rate acquisition debt, which includes the revolving credit facility and
commercial paper was 6.32% at June 30, 1997. This rate reflects the effect of
the interest rate swaps.
NOTE F. Pending Acquisition
In the fourth quarter of 1996, CNA entered into a merger agreement with
Capsure Holdings Corp. (Capsure) to form a new stock company, CNA Surety
Corporation. CNA will be the majority shareholder of the new company owning
approximately 62% of the shares. The remaining shares will be held by existing
Capsure shareholders and option holders. The transaction will be accounted for
as a purchase and is expected to close in the third quarter of 1997. The
transaction closing is subject to the approvals of the Capsure shareholders,
state insurance regulators, certain governmental authorities and the
satisfaction of certain other conditions. Until the required approvals are
received and the transaction is complete, the companies will continue to operate
independently.
Capsure provides surety and fidelity bonds nationwide through its
subsidiaries Western Surety Company and Universal Surety of America. Capsure's
revenues for the year ended December 31, 1996 were approximately $111 million.
Total assets were approximately $313 million at December 31, 1996.
(13)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto found on pages 3 to
13, which contain additional information helpful in evaluating operating results
and financial condition.
CNA is one of the largest commercial insurers in the United States, the
third largest property-casualty company and the twenty-second largest life
insurance company in the country, based on 1996 net written premium. Based on
market share, CNA ranks first among United States insurers in commercial
affiliation marketing, commercial multiple peril, personal packages, surety, and
ocean marine; second in commercial auto, general liability, medical malpractice,
federal employees health benefit plans, multiple peril crop, offshore energy,
accounts receivable credit; third in automobile warranty, directors & officers,
farmowners multiple peril, recreational watercraft and workers' compensation;
and sixth in reinsurance in the United States. In addition, CNA ranks first,
second or third for various errors & omissions coverages for architects and
engineers, accountants, lawyers and other professionals.
<PAGE>
RESULTS OF OPERATIONS:
The following chart summarizes key components of operating results for
the six months and quarter ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------------|
|PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS |
|(In millions of dollars) 1997 1996 1997 1996 |
|------------------------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED INVESTMENT |
| GAINS/LOSSES): |
|Revenues: |
| Premiums: |
<S> <C> <C> <C> <C>
| Property/Casualty $ 2,529 $ 2,479 $ 5,000 $ 4,987 |
| Life 819 842 1,695 1,627 |
| ------ ------ ------ ----- |
| 3,348 3,321 6,695 6,614 |
| Net investment income 547 558 1,111 1,135 |
| Other 176 143 331 283 |
| ------ ------ ------ ----- |
| 4,071 4,022 8,137 8,032 |
|Benefits and expenses 3,900 3,805 7,800 7,625 |
| ------ ------ ------ ----- |
| Operating income before income tax 171 217 337 407 |
| (45) (66) (75) (110) |
|Income tax expense ------ ------ ----- ----- |
| Net operating income $ 126 $ 151 $ 262 $ 297 |
| ------ ------ ----- ----- |
|SUPPLEMENTAL FINANCIAL DATA: |
|Net operating income (loss) by group: |
| Property/Casualty $ 125 $ 146 $ 264 $ 298 |
| Life 24 26 47 55 |
| Other, primarily interest expense (23) (21) (49) (56) |
| ----- ----- ----- ------ |
| 126 151 262 297 |
| ----- ---- ----- ------ |
|Net realized investment gains (losses) by group: |
| Property/Casualty 82 46 94 180 |
| Life 26 8 44 57 |
| Other 1 (4) 12 (3)|
| ------ ----- ----- ------ |
| 109 50 150 234 |
| ------ ----- ----- ------ |
|Net income (loss) by group: |
| Property/Casualty 207 192 358 478 |
| Life 50 34 90 111 |
| Other, primarily interest expense (22) (24) (36) (58)|
| ------ ----- ----- ------ |
| $ 235 $ 202 $ 412 $ 531 |
| |
|================================================================================================|
</TABLE>
(14)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Consolidated Results
Consolidated revenues for the first six months of both 1997 and 1996
were approximately $8.4 billion. Consolidated revenues excluding realized
investment gains, increased to $8.1 billion for the first half of 1997 as
compared to $8.0 billion for the first half of 1996. For the first six months,
revenues reflect an increase of $81 million (1.2%) in earned premiums, a
decrease of $25 million (2.2%) in investment income and an increase of $48
million (16.9%) in other income.
Net operating income, which excludes net realized investment gains, for
the first half of 1997 was $262 million, or $4.19 per share, compared to net
operating income of $297 million, or $4.76 per share, for the first six months
of 1996. Net operating income for the second quarter was $126 million, or $2.01
per share, compared with $152 million, or $2.44 per share, for the same quarter
in 1996. CNA's income in the first half of 1997 is net of pretax losses of $76
million related to catastrophe claims; pretax catastrophe losses in the first
half of 1996 were $208 million.
Realized investment gains, net of tax, for the first half of 1997 were
$150 million, or $2.44 per share, compared to net realized investment gains for
the first half of 1996 of $234 million, or $3.79 per share. The components of
the net realized investment gains (losses) are as follows:
|--------------------------------------------------------------------------|
|REALIZED INVESTMENT GAINS(LOSSES) |
|SIX MONTHS ENDED JUNE 30 1997 1996 |
|(In millions of dollars) |
|--------------------------------------------------------------------------|
|Bonds: |
| U.S. Government $ 49 $ 112 |
| Tax exempt 2 10 |
| Asset-backed 9 21 |
| Taxable 84 45 |
| ------ ----- |
| Total bonds 144 188 |
| |
|Stocks 39 129 |
|Derivative securities (1) 12 |
|Separate accounts and other 55 49 |
| ------ ----- |
| Realized investment gains reported in revenues 237 378 |
|Participating policyholders' interest (5) (13) |
|Income tax expense (82) (131) |
| ------ ----- |
| Net realized investment gains |
| $ 150 $ 234 |
|==========================================================================|
Net income was $412 million, or $6.63 per share, compared to $531
million, or $8.55 per share, for the first six months of 1996. Net income for
the second quarter was $235 million, or $3.78 per share, compared with a net
income of $202 million, or $3.25 per share, for the second quarter of 1996.
(15)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Property/Casualty Operations
|------------------------------------------------------------------------------|
|PROPERTY/CASUALTY GROUP SECOND QUARTER SIX MONTHS |
|PERIOD ENDED JUNE 30 1997 1996 1997 1996 |
|(In millions of dollars) |
|------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED |
|INVESTMENT GAINS/LOSSES): |
|Revenues: |
| Premiums $ 2,537 $ 2,479 $ 5,000 $ 4,986 |
| Net investment income 450 458 911 940 |
| Other 142 126 275 241 |
| ------ ------ ------ ------ |
| 3,129 3,063 6,186 6,167 |
|Benefits and expenses 2,956 2,848 5,845 5,761 |
| ----- ----- ------ ----- |
| Income before income tax 173 215 341 406 |
|Income tax expense (48) (69) (77) (108)|
| ------ ----- ------- ------|
| Net operating income (excluding realized |
| investment gains/losses) $ 125 $ 146 $ 264 $ 298 |
|==============================================================================|
Property/casualty revenues, excluding net realized investment
gains/losses, increased $19 million for the six months ended June 30, 1997 when
compared to the same period a year ago. Property/casualty earned premium
increased $14 million from the prior years comparable period. The increase in
earned premium is due primarily to an increase in commercial operations
particularly in professional and specialty, accident and health and reinsurance
business partially offset by a decrease in involuntary risk business.
Property/casualty pretax operating income before realized gains
reflects a decrease of $65 million for the first six months of 1997 compared to
the same period in 1996. The decrease in operating income stems from an increase
in underwriting losses as well as a decline in investment income. This decrease
was offset in part by lower operating expenses and favorable catastrophe loss
experience. Underwriting losses for the six and three months ended June 30,
1997, were $570 million and $277 million, compared to $534 million and $243
million for the same periods in 1996. The GAAP combined ratio for the six months
ending June 30, 1997 was 109.3% as compared to 108.6% for the comparable period
in 1996. GAAP expense ratios were 29.8% and 30.0% for the six month periods
ended June 30, 1997 and June 30, 1996, respectively. Deterioration in the loss
ratio reflects continued competitive pressures on virtually all segments of the
insurance market, particularly commercial insurance. CNA incurred pre-tax
catastrophe losses of approximately $76 million and $45 million for the six and
three months ended June 30, 1997 compared to $208 million and $115 million for
the respective periods in 1996.
Pretax operating income excluding net realized investment gains/losses,
for the property/casualty insurance subsidiaries was $341 million and $173
million for the six months and three months ended June 30, 1997, compared to
$406 million and $215 million for the same period a year ago. Investment income
decreased 3.1% and 1.7% for the six and three months ended June 30, 1997, to
$911 million and $450 million, respectively, when compared with the comparable
periods a year ago of $940 million and $458 million, respectively. The decrease
reflects reduced operating cash flow and a movement to shorter duration
investments. The fixed maturities segment of the investment portfolio yielded
6.4% in the first half of 1997 as compared to 6.9% for the first half of 1996.
(16)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The net income of CNA's property/casualty insurance subsidiaries,
excluding net realized investment gains/losses, was $264 and $125 million for
the six and three months ended June 30, 1997, compared to $298 million and $146
million for the same periods in 1996. Net realized investment gains for the six
and three months ended June 30, 1997 were $94 million and $82 million, compared
to $180 million and $46 million in the comparable periods of 1996.
Life Operations
|------------------------------------------------------------------------------|
|LIFE GROUP SECOND QUARTER SIX MONTHS |
| |
|PERIOD ENDED JUNE 30 1997 1996 1997 1996 |
|(In millions of dollars) |
|------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED |
| INVESTMENT GAINS/LOSSES): |
|Revenues: |
| Premiums $ 812 $ 847 $1,697 $ 1,640 |
| Net investment income 99 100 204 197 |
| Other 33 17 56 42 |
| ---- ---- ----- ------ |
| 944 964 1,957 1,879 |
|Benefits and expenses 909 924 1,884 1,793 |
| ---- ----- ----- ------ |
| Income before income tax 35 40 73 86 |
|Income tax expense (11) (14) (26) (31)|
| ---- ----- ----- ------ |
| Net operating income (excluding realized |
| investment gains/losses) $ 24 $ 26 $ 47 $ 55 |
|==============================================================================|
Life group revenues, excluding realized investment gains, were
approximately $2.0 billion, up 4.2% for the six months ended June 30, 1997
compared to the same period a year ago. Life premium revenues were $1.697
billion for the six months ended June 30, 1997 compared to $1.640 billion and
$847 million for the same period in 1996. The increase is due to the continued
growth in sales in the Viaterm life product, continued growth in Disability and
Accident premium and an increase in premiums in the Federal Employees Health
Benefits Program, due to strong enrollment through the first six months at 1997.
The increase in premiums is offset by a drop in group reinsurance premium.
Investment income for the six months ended June 30, 1997 was $204 million as
compared to $197 million for the same period a year ago, this increase can be
mainly attributed to a larger asset base generated from increased operating cash
flows. The fixed maturities segment of the life investment portfolio, which is
the primary investment segment, yielded 6.4% in the first half of 1997 compared
with 6.8% for the same period a year ago.
Life group revenues, excluding realized investment gains, were
down 4.13% to $812 million from $847 million for the second quarter of 1997 when
compared to the second quarter of 1996. The primary reasons for this decline are
a decrease in annuity business and group reinsurance business offset in part by
increases in Viaterm and Disability and Accident premium.
Pretax operating income for the life insurance subsidiaries, excluding
net realized investment gains/losses, was $73 million and $35 million for the
six and three months ended June 30, 1997, compared to $86 million and $40
million for the same periods in 1996.
CNA's life insurance subsidiaries' net operating income, excluding net
realized investment gains/losses was $47 million and $24 million for the six and
three months ended June 30, 1997 compared to $55 million and $26 million for the
(17)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
same period in 1996. Net realized investment gains for the six and three months
ended June 30, 1997 were $44 million and $26 million, compared to $57 million
and $8 million for the same periods of 1996.
INVESTMENTS:
<TABLE>
<CAPTION>
|--------------------------------------------------------------------------------------------------------|
|SUMMARY OF GENERAL ACCOUNT INVESTMENTS SIX MONTHS ENDED JUNE 30, 1997|
| ------------------------------|
| AT MARKET VALUE CHANGE IN |
| JUNE 30 DECEMBER 31 NET UNREALIZED REALIZED |
|(In millions of dollars) 1997 1996 GAINS(LOSSES) GAINS(LOSSES) |
|--------------------------------------------------------------------------------------------------------|
|FIXED MATURITY SECURITIES: |
<S> <C> <C> <C> <C>
|U. S. Treasury securities and |
| obligations of government agencies $ 10,460 $ 9,835 $ (72) $ 49 |
|Asset-backed securities 4,634 6,292 15 9 |
|Tax exempt securities 4,425 4,951 20 2 |
|Taxable securities 6,421 6,643 (53) 84 |
| -------- -------- ----- ---- |
| Total fixed maturity securities 25,940 27,721 (90) 144 |
|Stocks 657 859 (41) 39 |
|Short-term investments and other 9,944 6,830 (11) 13 |
|Derivative security investments 1 2 -- (1) |
| -------- -------- ---- ---- |
| TOTAL INVESTMENTS $ 36,542 $ 35,412 (142) 195 |
| ======== ======== |
|Separate accounts and discontinued operations (15) 42 |
|Participating policyholders' interest (3) (5) |
|Income tax benefit (expense ) 31 (82) |
| ---- ---- |
| NET INVESTMENT GAINS (LOSSES) $(129) $ 150 |
| |
|--------------------------------------------------------------------------------------------------------|
|
|-----------------------------------------------------------------------|
|SHORT-TERM INVESTMENTS: |
|-----------------------------------------------------------------------|
|Security repurchase collateral $ 1,626 $ 101 |
|Escrow 1,092 1,062 |
|Commercial paper 3,707 3,207 |
|Money markets 813 746 |
|Other 1,765 738 |
|-----------------------------------------------------------------------|
| TOTAL SHORT-TERM INVESTMENTS $ 9,003 $ 5,854 |
|-----------------------------------------------------------------------|
</TABLE>
CNA's general account investment portfolio is managed to maximize
after-tax investment return, while minimizing credit risks, with investments
concentrated in high quality securities to support its insurance underwriting
operations.
CNA has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of CNA's asset/liability strategies or
to take advantage of investment opportunities generated by changing interest
rates, prepayments, tax and credit considerations, or other similar factors.
Accordingly, the fixed maturity securities are classified as available for sale.
<PAGE>
CNA has a securities lending program where securities are loaned to
third parties, primarily major brokerage firms. Borrowers of these securities
must deposit cash or securities in excess of 100% of the fair value of the
securities borrowed. Cash deposits from these transactions are invested in
short-term investments (primarily commercial paper). CNA continues to receive
the interest on loaned debt securities, as beneficial owner, and accordingly,
loaned debt securities are included within fixed maturity securities. The
liabilities for securities sold subject to repurchase agreements are recorded at
their contractual repurchase amounts.
On December 30, 1993, CNA deposited $987 million in an escrow account,
pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note C.
The funds are included in short-term investments and are invested mainly in U.S.
Treasury securities. The escrow account at June 30, 1997 amounted to $1.094
billion as compared to $1.071 billion at year end 1996.
(18)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
In addition to interest rate swaps used to covert CNA's acquisition
debt from a variable rate to a fixed rate, CNA holds derivative financial
instruments for purposes of enhancing income and total return. The derivative
securities are marked-to-market with valuation changes reported as realized
investment gains and losses. CNA's investment in, and risk in relation to,
derivative securities is not significant.
The general account portfolio consists primarily of high quality
marketable fixed maturity securities, approximately 94% of which are rated as
investment grade. At June 30, 1997, tax-exempt securities and short-term
investments, excluding collateral for securities sold under repurchase
agreements, comprised approximately 12% and 20%, respectively, of the general
account's total investment portfolio compared to 14% and 16%, respectively, at
December 31, 1996. Historically, CNA has maintained short-term assets at a level
that provided for liquidity to meet its short-term obligations, as well as
reasonable contingencies and anticipated claim payout patterns. At June 30,
1997, the major components of the short-term investment portfolio consist
primarily of high-grade commercial paper and U.S. Treasury bills. Collateral for
securities sold under repurchase agreements increased $1,525 million to $1,626
million.
As of June 30, 1997, the market value of CNA's general account
investments in fixed maturities was $25.9 billion and was greater than amortized
cost by approximately $91 million. This compares to a market value of $27.7
billion and $181 million of net unrealized investment gains at December 31,
1996. The gross unrealized investment gains and losses for the fixed maturity
securities portfolio at June 30, 1997, were $323 million and $232 million,
respectively, compared to $444 million and $263 million, respectively, at
December 31, 1996. The decline in unrealized investment gains is attributable,
in large part, to increases in interest rates which have an adverse effect on
bond values.
Net unrealized investment losses on general account fixed maturities at
June 30, 1997 include net unrealized losses on high yield securities of $10
million, compared to net unrealized gains of $41 million at December 31, 1996.
High yield securities are bonds rated as below investment grade by bond rating
agencies, plus private placements and other unrated securities which, in the
opinion of management, are below investment grade. Fair values of high yield
securities in the general account were $1.46 billion at June 30, 1997 as
compared to $2.02 billion at December 31, 1996.
At June 30, 1997, total Separate Account cash and investments amounted
to $5.8 billion with taxable fixed maturity securities representing
approximately 83% of the separate accounts' portfolio. Approximately 77% of
separate account investments are used to fund guaranteed investments for which
Continental Assurance Company guarantees principal and a specified return to the
contractholders. The duration of fixed maturity securities included in the
guaranteed investment portfolio are matched approximately with the corresponding
payout pattern of the guaranteed investment contracts. The fair value of all
fixed maturity securities in the guaranteed investment portfolio was $4.0
billion at June 30, 1997 compared to $3.8 billion at December 31, 1996. At June
30, 1997, fair value was greater than the amortized cost by approximately $9
million. This compares to an unrealized loss of $1 million at December 31, 1996.
The gross unrealized investment gains and losses for the guaranteed investment
fixed maturity securities portfolio at June 30, 1997 were $45 million and $36
million, respectively.
<PAGE>
Carrying values of high yield securities in the guaranteed investment
portfolio were $444 million at June 30, 1997 and $472 million December 31, 1996.
Net unrealized investment losses on such high yield securities held were $6
million at June 30, 1997, and December 31, 1996.
(19)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
High yield securities generally involve a greater degree of risk than
that of investment grade securities. Expected returns should, however,
compensate for the added risk. The risk is also considered in the interest rate
assumptions in the underlying insurance products. As of June 30, 1997, CNA's
investment in high yield bonds, including Separate Accounts, was approximately
3.3% of total assets. In addition, CNA's investment in mortgage loans and
investment real estate are substantially below the industry average,
representing less than one quarter of one percent of its total assets.
Included in CNA's fixed maturity securities at June 30, 1997 (general
and guaranteed investment portfolios) are $7.1 billion of asset-backed
securities, consisting of approximately 52% in collateralized mortgage
obligations ("CMOs"), 9% in corporate asset-backed obligations, and 39% in U.S.
Government issued pass-through certificates. The majority of CMOs held are U.S.
Government agency issues, which are actively traded in liquid markets and are
priced monthly by broker-dealers. At June 30, 1997, the fair value of
asset-backed securities was more than amortized cost by approximately $22
million compared to net unrealized investment losses of $5 million at December
31, 1996. CNA limits the risks associated with interest rate fluctuations and
prepayment by concentrating its CMO investments in early planned amortization
classes with relatively short principal repayment windows.
Over the last few years, much concern has been raised regarding the
quality of insurance company invested assets. At June 30, 1997, 46% of the
general account's fixed maturity securities portfolio was invested in U.S.
Government securities, 30% in other AAA rated securities and 13% in AA and A
rated securities. CNA's guaranteed investment portfolio includes fixed maturity
securities comprised of 4% U.S. Government securities, 62% in other AAA rated
securities and 13% in AA and A rated securities. These ratings are primarily
from Standard & Poor's.
FINANCIAL CONDITION:
|------------------------------------------------------------------------|
|FINANCIAL POSITION JUNE 30 DECEMBER 31|
|(In millions of dollars, except per share data) 1997 1996 |
|------------------------------------------------------------------------|
| |
|Assets $ 62,585 $ 60,735 |
|Stockholders' equity 7,340 7,060 |
|Unrealized net appreciation included |
| in stockholders' equity 170 299 |
|Book value per common share 116.35 111.81 |
|------------------------------------------------------------------------|
CNA's assets increased approximately $1.85 billion from December 31,
1996 to $62.6 billion as of June 30, 1997. This change was primarily the result
of an increase in securities sold under repurchase agreements of approximately
$1.5 billion.
During the first six months of 1997, CNA's stockholders' equity
increased by $280 million, or 4.0%, to $7.3 billion. The major component of this
change was net income of $412 million which was offset by a $129 million decline
in net unrealized investment gains.
When compared to December 31, 1996, the statutory surplus of the
property/casualty subsidiaries remained at approximately $6.4 billion. The
statutory surplus of the life insurance subsidiaries remained at approximately
$1.2 billion, when compared to year end 1996.
(20)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES:
The liquidity requirements of CNA have been met primarily by funds
generated from operations. The principal operating cash flow sources of CNA's
property/casualty and life insurance subsidiaries are premiums and investment
income and sales and maturities of investments. The primary operating cash flow
uses are payments for claims, policy benefits and operating expenses.
CNA's operating activities generated net negative cash flows of
approximately $670 million and $113 million for the six months ended June 30,
1997 and 1996, respectively. Negative cash flows in 1997 are primarily the
result of substantial claim payments resulting from the settlement of the
Fibreboard litigation. CNA believes that future liquidity needs will be met
primarily by cash generated from operations.
Net cash flows from operations are invested in marketable securities.
Investment strategies employed by CNA's insurance subsidiaries consider the cash
flow requirements of the insurance products sold and the tax attributes of the
various types of marketable investments.
CNA and the insurance industry are exposed to liability for
environmental pollution, primarily related to toxic waste site clean-up. Refer
to Note C to the Condensed Consolidated Financial Statements for further
discussion of environmental pollution exposures.
ACCOUNTING STANDARDS:
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statements on Financial Accounting Standards (SFAS) 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. This Statement
has been amended and is now effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 or
1997, depending on the type of transaction. This Statement will not have a
significant impact on CNA.
In January 1997, the Securities and Exchange Commission approved
amendments to Regulation S-X, Regulation S-K, Regulation S-B, and various forms
to clarify and expand existing disclosure requirements
with respect to derivative financial instruments and derivative commodity
instruments. The new rules require enhanced descriptions in the footnotes to the
financial statements of accounting policies for derivative financial instruments
and derivative commodity instruments. They also require disclosure outside the
financial statements of qualitative and quantitative information about market
risk related to derivative financial instruments, other financial instruments,
and derivative commodity instruments. These amendments are effective for the
year end 1997 financial statements and will not have a significant impact on
CNA.
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONCLUDED
In February 1997, the FASB issued SFAS 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS), which simplifies the computations originally established in APB Opinion
No. 15, "Earnings per Share" and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with basic EPS, which
excludes dilution. It also requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation between the two computations. This
Statement is effective for financial statements issued for periods ending after
December 15, 1997. This Statement will not have a significant impact on CNA.
In February 1997, the FASB issued SFAS 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing information
about an entity's capital structure. The Statement consolidates existing
disclosure requirements for ease of retrieval and greater visibility to
nonpublic entities. The new Statement contains no change in disclosure
requirements for companies previously subject to the requirements of APB Opinion
No. 10, "Omnibus Opinion--1966," APB Opinion No. 15, "Earnings per Share," and
FASB Statement 47, "Disclosure of Long-Term Obligations." It applies to all
entities and is effective for financial statements issued for periods ending
after December 15, 1997. This Statement has no impact on CNA.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income," which establishes accounting standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997. This
Statement is not expected to result in a significant change on CNA's
disclosures.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
interim and annual financial statements. It requires that those enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items, and segment assets, and that the enterprises reconcile the total of those
amounts to the general-purpose financial statements. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997. This Statement will redefine CNA's
business segment disclosure.
(22)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Set forth below is information relating to the 1997 Annual Meeting of
Shareholders of CNA Financial Corporation.
The annual meeting was called to order at 10:00 A.M., May 7, 1997. Represented
at the meeting, in person or by proxy, were 57,238,056 shares, approximately
92.621% of the issued and outstanding shares entitled to vote.
The following business was transacted:
Election of Directors
Over 99.0% of the votes cast for directors were votes for the election of the
following directors. The number of votes cast FOR and WITHHELD with respect to
each director were as follows:
Votes For Votes Withheld
----------- ---------------
Antoinette Cook Bush 57,164,043 74,013
Dennis H. Chookaszian 57,164,043 74,013
Philip L. Engel 57,164,043 74,013
Robert P. Gwinn 57,164,003 74,053
Walter F. Mondale 57,163,924 74,132
Edward J. Noha 57,164,043 74,013
Joseph Rosenberg 57,164,043 74,013
Richard L. Thomas 57,164,043 74,013
James S. Tisch 57,164,043 74,013
Laurence A. Tisch 57,164,043 74,013
Preston R. Tisch 57,164,043 74,013
Marvin Zonis 57,164,043 74,013
Ratification of the Appointment of Independent Certified Public Accountants
The appointment of Deloitte & Touche LLP as independent public auditors for the
Company was ratified by a vote of 57,223,432 shares or 99.975% of the shares
voting. 12,350 shares or approximately 0.021% of the shares voting, were cast
against, and 2,274 shares, or approximately 0.004% of the shares voting,
abstained.
(23)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Description of Exhibit
Exhibit Page
Number Number
------- ------
(11) Computation of Net Income per Common Share 11 27
(12.1) Computation of Ratio of Earnings to Fixed Charges 12.1 28
(12.2) Computation of Ratio of Net Income,
As Adjusted, to Fixed Charges 12.2 28
(27) Financial Data Schedule 27 29
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the three months ended June 30,
1997.
(24)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - CONCLUDED
SIGNATURES
Pursuant to the requirements 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
Date: August 14, 1997 By: S/PATRICIA L. KUBERA
--------------- --------------------------------
Patricia L. Kubera
Group Vice President, and
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
- --------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS
(In millions, except per share data) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Earnings per share:
Net income ................................... $ 235 $ 202 $ 412 $ 531
Less preferred stock dividends................ 1 1 3 3
----- ---- ---- ------
Net income available to common stockholders.. $ 234 $ 201 $ 409 $ 529
===== ==== ==== =====
Weighted average shares outstanding........... 61.8 61.8 61.8 61.8
===== ==== ==== =====
Net income per common share................... $ 3.78 $ 3.25 $ 6.63 $ 8.55
===== ==== ===== =====
- --------------------------------------------------------------------------------
(26)
<PAGE>
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
- ---------------------------------------------------------------------------
PERIOD ENDED JUNE 30 1997 1996
(In millions of dollars, except ratios)
- ---------------------------------------------------------------------------
Income before income tax and cumulative effect
of accounting changes.................................. $ 570 $ 772
Adjustments:
Interest expense......................................... 96 105
Interest element of operating lease rental............... 12 18
---- -----
Income before income tax and cumulative effect of
accounting changes, as adjusted........................ $ 678 $ 895
==== =====
Fixed charges:
Interest expense......................................... $ 96 $ 105
Interest element of operating lease rental............... 12 18
---- ----
Fixed charges............................................... $ 108 $ 123
==== ====
Ratio of earnings to fixed charges (1)...................... 6.3 7.3
- ---------------------------------------------------------------------------
(1) For purposes of computing this ratio, earnings consist of income before
income taxes and cumulative effect of accounting changes plus fixed charges
of consolidated companies. Fixed charges consist of interest and that
portion of operating lease rental expense which is deemed to be an interest
factor for such rentals.
EXHIBIT 12.2
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF NET INCOME,
AS ADJUSTED, TO FIXED CHARGES
- --------------------------------------------------------------------------
PERIOD ENDED JUNE 30, 1997 1996
(In millions of dollars, except ratios)
- --------------------------------------------------------------------------
Net income...................................................$ 412 $ 531
Adjustments:
Interest expense, after tax............................... 62 68
Interest element of operating lease rental, after tax..... 8 12
----- -----
Net income, as adjusted......................................$ 482 $ 611
==== =====
Fixed charges:
Interest expense, after tax...............................$ 62 $ 68
Interest element of operating lease rental, after tax..... 8 12
----- ----
Fixed charges................................................$ 70 $ 80
===== ====
Ratio of net income, as adjusted, to fixed charges (1)....... 6.9 7.6
- --------------------------------------------------------------------------
(1) For purposes of computing this ratio, net income has been adjusted to
include fixed charges of consolidated companies, after tax. Fixed charges
consist of interest and that portion of operating lease rental expense
which is deemed to be an interest factor for such rentals.
(27)
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<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
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0
150
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6,695
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<EPS-PRIMARY> 6.63
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<RESERVE-OPEN> 23,734
<PROVISION-CURRENT> 3,933
<PROVISION-PRIOR> 91
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