- --------------------------------------------------------------------------------
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 March 31, 1998 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 May 1, 1998
- ---------------------------- --------------------------
Common Stock, Par value $2.50 61,798,262
- --------------------------------------------------------------------------------
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 (Unaudited) and DECEMBER 31, 1997................... 3
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997................. 4
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997................. 5
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997................. 6
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS (Unaudited) MARCH 31, 1998.............................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 17
PART II. OTHER INFORMATION
- -------- ------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................ 30
SIGNATURES........................................................... 31
EXHIBIT 11. COMPUTATION OF NET INCOME PER COMMON SHARE............... 32
EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED
CHARGES.................................................. 33
EXHIBIT 12.2 COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED,
TO FIXED CHARGES......................................... 33
EXHIBIT 27. FINANCIAL DATA SCHEDULE.................................. 34
(2)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MARCH 31 DECEMBER 31
1998 1997
(In millions of dollars) (Unaudited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale (cost: $29,327 and $29,020)............... $29,797 $29,548
Equity securities available for sale (cost: $802 and $695).................... 982 814
Mortgage loans and real estate (less accumulated depreciation: $1 and $1)..... 84 85
Policy loans................................................................. 178 177
Other invested assets........................................................ 780 695
Short-term investments ...................................................... 4,895 4,884
------- --------
Total investments......................................................... 36,716 36,203
Cash............................................................................ 201 383
Receivables:
Reinsurances................................................................. 5,773 5,726
Insurance ................................................................. 6,730 6,086
Other trade ................................................................. 276 248
Less allowance for doubtful accounts......................................... (305) (303)
Deferred acquisition costs...................................................... 2,291 2,142
Accrued investment income....................................................... 407 389
Receivables for securities sold................................................. 538 744
Federal income taxes recoverable (includes $23 and $26 due from Loews).......... 15 18
Deferred income taxes........................................................... 1,069 1,070
Property and equipment at cost (less accumulated depreciation:$605 and $553).... 744 747
Prepaid reinsurance premiums.................................................... 367 202
Intangibles..................................................................... 625 620
Other assets.................................................................... 940 1,182
Separate Account business....................................................... 5,736 5,812
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $62,123 $61,269
==============================================================================================================
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET - CONTINUED
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MARCH 31 DECEMBER 31
1998 1997
(In millions of dollars) (Unaudited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Claim and claim expense........................................................ 29,401 $29,227
Unearned premiums.............................................................. 5,268 4,700
Future policy benefits......................................................... 4,982 4,829
Policyholders' funds........................................................... 757 742
Securities sold under repurchase agreements....................................... 546 153
Payables for securities purchased................................................. 752 648
Participating policyholders' equity............................................... 136 132
Long-term debt.................................................................... 2,893 2,897
Other liabilities................................................................. 3,136 3,820
Separate Account business......................................................... 5,736 5,812
-------- --------
TOTAL LIABILITIES............................................................. 53,607 52,960
======== ========
Commitments and contingent liabilities - Notes C and D
Stockholders' equity:
Common stock ($2.50 par value; Authorized - 200,000,000 shares;
Issued - 61,841,969 shares Outstanding - 61,798,262 shares)...................... 155 155
Money market cumulative preferred stock........................................... 150 150
Additional paid-in capital........................................................ 435 435
Retained earnings................................................................. 7,215 6,983
Accumulated other comprehensive income............................................ 564 589
Treasury stock, at cost........................................................... (3) (3)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................................... 8,516 8,309
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $62,123 $61,269
==============================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(3)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
- -------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1998 1997
(In millions of dollars, except per share data)
- -------------------------------------------------------------------------
Revenues:
Premiums....................................... $3,368 $3,347
Net investment income.......................... 562 564
Realized investment gains ..................... 183 66
Other.......................................... 215 155
------- --------
4,328 4,132
------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits... 2,850 2,892
Amortization of deferred acquisition costs..... 588 520
Other operating expenses....................... 504 443
Interest expense............................... 55 49
------- --------
3,997 3,904
------- --------
Income before income tax..................... 331 228
Income tax expense............................. 98 50
------- --------
Net income $ 233 $ 178
- ------------------------------------------------------------------------
EARNINGS PER SHARE
- ------------------
Net income .................................... $ 3.75 $ 2.85
======= ========
Weighted average outstanding shares of
common stock (in millions of shares)........... 61.8 61.8
========================================================================
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(4)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL COMPREHENSIVE OTHER TOTAL
COMMON PREFERRED TREASURY PAID IN INCOME RETAINED COMPREHENSIVE STOCKHOLDERS'
(in millions of dollars) STOCK STOCK STOCK CAPITAL (LOSS) EARNINGS INCOME (LOSS) EQUITY
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,JANUARY 1, 1997 $ 155 $ 150 $ (3) $ 435 $6,024 $ 299 $7,060
Comprehensive income:
Net income................ - - - - $ 178 178 - 178
Other comprehensive income
(loss):
Unrealized investment
gains/losses net of
reclassification adjustment
and taxes................. - - - - (363) - (363) (363)
---------
Total Comprehensive income... $ (185)
=========
Preferred dividends........ - - - - (2) - (2)
- --------------------------- ------ ------- ------- --------- ------- -------- -------
BALANCE, MARCH 31, 1997 $ 155 $ 150 $ (3) $ 435 $6,200 $ (64) $6,873
================================================================= =================================
BALANCE, DECEMBER 31, 1997 $ 155 $ 150 (3) 435 $6,983 $ 589 $8,309
Comprehensive income:
Net income................ - - - - $ 233 233 - 233
Other comprehensive income
(loss):
Unrealized investment
gains/losses net of
reclassification adjustment - - - - (25) - (25) (25)
and taxes...................
---------
Total Comprehensive income.... $ 208
=========
Preferred dividends....... - - - - (1) - (1)
- --------------------------- ------ ------- -------- ------- -------- -------- -------
BALANCE, MARCH 31, 1998 $ 155 $ 150 $ (3) $ 435 $7,215 $ 564 $8,516
================================================================= ================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(5)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1998 1997
(In millions of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................................. $ 233 $ 178
Adjustments to reconcile net income to net cash flows from operating activities:
Net realized investment gains, pre-tax ................................................. (183) (66)
Participating policyholders' interest................................................... 7 2
Amortization of intangibles............................................................. 9 7
Amortization of bond discount........................................................... (20) (64)
Depreciation............................................................................ 48 33
Changes in:
Insurance receivables, net............................................................. (717) (230)
Deferred acquisition costs............................................................. (149) (130)
Accrued investment income.............................................................. (18) 33
Federal income taxes................................................................... 3 (48)
Deferred income taxes.................................................................. 10 87
Prepaid reinsurance premiums........................................................... (165) 35
Insurance reserves..................................................................... 916 574
Other liabilities...................................................................... (401) (1,080)
Other, net............................................................................ 187 (68)
-------- --------
Total adjustments ............................................................... (473) (915)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES ........................................ (240) (737)
-------- --------
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1998 1997
(In millions of dollars)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities............................................................ (8,340) (8,493)
Proceeds from fixed maturities:
Sales................................................................................... 7,809 8,708
Maturities, calls and redemptions....................................................... 676 603
Purchases of equity securities........................................................... (307) (409)
Proceeds from sale of equity securities.................................................. 192 301
Change in short-term investments......................................................... (182) (1,664)
Purchases of property and equipment ..................................................... (51) (45)
Change in securities sold under repurchase agreements.................................... 393 1,853
Change in other investments.............................................................. (117) 47
Other, net............................................................................... (5) (12)
--------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES ........................................ 68 889
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to preferred stockholders.................................................. (1) (2)
Receipts from investment contracts credited to policyholder account balances............. 1 3
Return of policyholder account balances on investment contracts.......................... (6) (7)
Principal payments on long-term debt..................................................... (301) (1)
Proceeds from issuance of long-term debt................................................. 297 -
--------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES......................................... (10) (7)
--------- --------
Net cash flows.................................................................... (182) 145
Cash at beginning of period............................................................... 383 257
- ----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 201 $ 402
=======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Interest ................................................................................ $ (45) $ (42)
Federal income taxes..................................................................... (70) -
=======================================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE A. Basis of Presentation:
The consolidated financial statements (unaudited) include CNA Financial
Corporation ("CNAF" 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), collectively CNA. Loews Corporation (Loews) owns
approximately 84% of the outstanding common stock of CNAF.
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 CNAF's Annual Report to Shareholders (incorporated by reference in
Form 10-K) for the year ended December 31, 1997 (filed with the Commission on
March 31, 1998) 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 periods have been reclassified to conform to
classifications followed in 1998. 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 consolidated financial position, results of operations and
cash flows.
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 March 31, 1998, the escrow account amounted to $1.1 billion. The
majority of the funds are included in short-term investments and are invested
primarily in U. S. Treasury Securities.
(7)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C. Legal Proceedings and Contingent Liabilities:
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.
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 to 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 to 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 to the Global
Settlement Agreement, and remanded the matter to the Fifth Circuit for
reconsideration in light of the Supreme Court's decision in Amchem Products Co.
V. Windsor.
On January 27, 1998, a panel of United States Fifth Circuit Court of
Appeals again approved the Global Settlement Agreement by a 2 to 1 vote. Two
sets of Objectors filed petitions for certiorari, which were docketed on April
16 and 17, 1998, by the United States Supreme Court. The Settling Parties will
file papers in opposition of the petitions on May 18, 1998.
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
(8)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 has been approved by the Fifth Circuit a second
time, but the Objectors have petitioned the Supreme Court for review of the
decision. There is limited precedent with settlements which determine the rights
of future personal injury claimants to seek relief.
Through March 31, 1998, Casualty, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 135,400 claims, for an
estimated settlement amount of approximately $1.6 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under these settlements. Approximately $1.6 billion (including interest of
$182 million) was paid through March 31, 1998. Such payments have been partially
recovered from Pacific Indemnity. Casualty may negotiate other agreements for
unsettled claims.
Final court approval of the Trilateral Agreement and its implementation
resolved Casualty's exposure with respect to the Fibreboard asbestos claims.
Casualty does not anticipate further material exposure with respect to the
Fibreboard matter, and subsequent adverse reserve adjustments, if any, are not
expected to materially affect the results of operations or equity of CNA.
TOBACCO LITIGATION
CNA's primary property/casualty subsidiaries have been named as
defendants as part of a "direct action" lawsuit, Richard P. Ieyoub v. The
American Tobacco Company, et al., filed by the Attorney General for the State of
Louisiana, in state court, Calcasieu Parish, Louisiana. In that suit, filed
against certain tobacco manufacturers and distributors (the "Tobacco
Defendants") and over 100 insurance companies, the State of Louisiana seeks to
recover medical expenses allegedly incurred by the State as a result of
tobacco-related illnesses.
The original suit was filed on March 13, 1996, against the Tobacco
Defendants only. The insurance companies were added to the suit in March 1997
under a "direct action" procedure in Louisiana. Under the direct action statute,
the Louisiana Attorney General is pursuing liability claims against the Tobacco
Defendants and their insurers in the same suit, even though none of the Tobacco
Defendants has made a claim for insurance coverage.
In June of 1997, the United States District Court for the Western
District of Louisiana, Lake Charles Division, granted a petition to remove this
litigation to the federal district court. The district court's decision is
currently on appeal to the United States Fifth Circuit Court of Appeals. During
the pending appeal, all proceedings in state court and in the federal district
court are stayed. Because of the uncertainties inherent in assessing the risk of
liability at this very early stage of the litigation, management is unable to
make a meaningful estimate of the amount of range of any loss that could result
from an unfavorable outcome of the pending litigation. However, management
believes that the ultimate outcome of the pending litigation should 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.
(9)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ENVIRONMENTAL AND ASBESTOS
The CNA property/casualty insurance companies have potential exposures
related to environmental pollution and asbestos 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" ("PRPs"). Superfund and the mini-Superfunds (Environmental
Clean-up Laws or "ECLs") establish mechanisms to pay for clean-up 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 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 (NPL). The addition of new clean-up sites to the
NPL has slowed in recent years. Many clean up sites have been designated by
state authorities as well.
Many policyholders have made claims against various CNA insurance
subsidiaries for defense costs and indemnification in connection with
environmental pollution matters. CNA and the insurance industry are disputing
coverage for many such claims. Key coverage issues include whether clean-up
costs are considered damages under the policies, trigger of coverage,
applicability of pollution exclusions and owned property exclusions, the
potential for joint and several liability and 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 in 1997 and it is unclear
as to what positions the Congress or the Administration will take and 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 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 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 liability of CNA for
environmental pollution claims may vary substantially from the amount currently
recorded.
As of March 31, 1998 and December 31, 1997, CNA carried approximately $701
million and $773 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, after
which CNA adopted the Simplified Commercial General Liability coverage form
which includes an absolute pollution exclusion. There was no unfavorable
environmental pollution reserve development for the three months ended March 31,
1998 and 1997.
(10)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CNA's insurance subsidiaries have exposure to asbestos claims, including
those attributable to CNA's litigation with Fibreboard Corporation. Estimation
of asbestos claim 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 March 31, 1998 and December 31, 1997, CNA
carried approximately $1.3 billion and $1.4 billion, respectively, of claim and
claim expense reserves, net of reinsurance recoverables, for reported and
unreported asbestos-related claims. Unfavorable asbestos claim reserve
development for the periods ended March 31, 1998 and 1997 totaled $14 million
and $12 million, respectively.
|-----------------------------------------------------------------------------|
|RESERVE SUMMARY MARCH 31, 1998 DECEMBER 31, 1997 |
| ---------------------- -----------------------|
| ENVIRONMENTAL ENVIRONMENTAL |
|(In millions of dollars) POLLUTION ASBESTOS POLLUTION ASBESTOS|
|-----------------------------------------------------------------------------|
| |
| Reported claims: |
| Gross reserves $318 $1,228 $279 $ 1,384 |
| Less reinsurance recoverable (42) (106) (36) (117)|
| ----- ------ ----- --------|
| Net reported claims 276 1,122 243 1,267 |
| Net unreported claims 425 178 530 133 |
|-----------------------------------------------------------------------------|
|NET RESERVES $701 $1,300 $773 $ 1,400 |
|=============================================================================|
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 these liabilities and make further
adjustments as warranted.
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
|-----------------------------------------------------------------------------|
|THREE MONTHS ENDED MARCH 31 EARNED PREMIUMS ASSUMED/ |
| ------------------------------------ |
| NET |
|(In millions of dollars) DIRECT ASSUMED CEDED NET % |
|------------------------------ ----------------------------------------------|
| |
|1998 |
| Property/casualty $ 1,817 $ 373 $ 138 $ 2,052 18.2 % |
| Accident and health 1,091 78 91 1,078 7.2 |
| Life 251 36 49 238 15.1 |
|-----------------------------------------------------------------------------|
| TOTAL PREMIUMS $ 3,159 $ 487 $ 278 $ 3,368 14.5 % |
|=============================================================================|
| |
|1997 |
| Property/casualty $ 2,164 $ 236 $ 228 $ 2,172 10.9 % |
| Accident and health 945 29 31 943 3.1 |
| Life 227 29 24 232 12.5 |
|=============================================================================|
| TOTAL PREMIUMS $ 3,336 $ 294 $ 283 $ 3,347 8.8 % |
|=============================================================================|
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
recoverable of $179 million and $248 million for the three months ending March
31, 1998 and 1997, respectively.
(12)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E. Debt:
Borrowings consisted of the following:
<TABLE>
<CAPTION>
|--------------------------------------------------------------------------------------------------|
| DEBT March 31 December 31 |
| (In millions of dollars) 1998 1997 |
|--------------------------------------------------------------------------------------------------|
<S> <C> <C>
| Variable Rate Debt: |
| Credit Facility $ 250 $ 400 |
| Commercial Paper 675 675 |
| Credit Facility - CNA Surety 118 118 |
| Senior Notes: |
| 8.875%, due March 1, 1998 - 150 |
| 6.45% due January 15, 2008 149 - |
| 6.95% due January 15, 2018 148 - |
| 8.25%, due April 15, 1999 101 102 |
| 7.25%, due March 1, 2003 147 146 |
| 6.25%, due November 15, 2003 249 249 |
| 6.75%, due November 15, 2006 248 248 |
| 8.375%, due August 15, 2012 98 98 |
| 7.25% Debenture, due November 15, 2023 247 247 |
| 11% Secured Mortgage Notes, due June 1, 2013 389 389 |
| 6.90% - 16.29% Secured Capital Leases, due December 31, 2011 46 47 |
| Other debt, due 1998 through 2019 (rates of 1% to 12.71%) 28 28 |
| -------------------------------------------------------------------------------------------------|
| TOTAL DEBT $ 2,893 $ 2,897 |
|==================================================================================================|
</TABLE>
The Company has in place a revolving credit facility that was used to
finance the acquisition of The Continental Corporation (Continental). The
interest rate for the credit 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
credit facility at March 31, 1998 was 5.85% compared to 5.61% at March 31, 1997.
To take advantage of favorable interest rates, CNA established a
commercial paper program to replace borrowings under the revolving credit
facility. The commercial paper borrowings are classified as long-term as $675
million of the committed bank facility will support the commercial paper
program. The weighted-average interest rate on commercial paper at March 31,
1998 and 1997, respectively, was 5.80% and 5.67%.
As of May 1, 1998, there were no outstanding loans under the revolving
credit facility. There was no unused borrowing capacity under the facility after
the effects of the commercial paper program.
To offset the variable rate characteristics of the facility, CNA
entered into interest rate swap agreements with several banks which terminate
from May 2000 to December 2000. These agreements provide that CNA pay interest
at a fixed rate, averaging 6.07% at March 31, 1998, 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 $0.3 million for the three months
ended March 31, 1998.
The weighted average interest rate (interest and facility fees) on the
variable acquisition debt, which includes the revolving credit facility,
commercial paper, and the effect of the interest rate swaps was 6.12% at March
31, 1998 and 6.26% at March 31, 1997.
(13)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On August 18, 1997, CNAF filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission relating to $1 billion of senior and
subordinated debt and preferred stock that became effective on October 22, 1997.
This new shelf registration incorporated $250 million of securities remaining
available for issuance from a prior shelf registration. On January 8, 1998, the
Company issued $150 million principal amount of 6.45% senior notes, due January
15, 2008, and $150 million principal amount of 6.95% senior notes, due January
15, 2018. The net proceeds were used to pay down bank loans under the Company's
revolving credit facility.
On April 15, 1998, the Company issued $500 million principal amount of
6.50% senior notes, due April 15, 2005. The net proceeds were used to
refinance the existing bank debt outstanding under the Company's revolving
credit facility and to refinance a portion of the Company's outstanding
commercial paper.
On September 30, 1997, CNA Surety, a 62% owned subsidiary of CNA,
entered into a $130 million, 5 year revolving credit facility. The interest on
credit facility borrowings is based on LIBOR plus 20 basis points. Additionally,
there is a credit facility fee of 10 basis points annually. At March 31, 1998,
the outstanding borrowings under this credit facility were $118 million and the
weighted average interest rate was 5.89%.
(14)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F. Other Comprehensive Income:
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which established standards for reporting
and display of comprehensive income and its components in the financial
statements. Comprehensive income is comprised of all changes to stockholders'
equity, including net income, except those changes resulting from investments by
owners and distributions to owners. The change in the components of other
comprehensive income (loss) are reported net of income tax as shown below:
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------|
| TAX |
| THREE MONTHS ENDED MARCH 31, 1998 PRE-TAX (EXPENSE) |
| (In millions of dollars) AMOUNT BENEFIT NET |
| AMOUNT |
|----------------------------------------------------------------------------------- |
<S> <C> <C> <C>
| |
| |
|------------------------------------------------------------------------------------|
| Net unrealized gains (losses) on investment securities: |
| Net unrealized holding gains (losses) arising |
| during the period 106 (37) 69 |
| Reclassification adjustment for (gains) losses |
| included in net income (149) 52 (97) |
| |
| |
| Adjustment for : |
| Participating policyholder liabilities 4 (1) 3 |
|------------------------------------------------------------------------------------|
| Total Other Comprehensive Income (39) 14 (25) |
|====================================================================================|
</TABLE>
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------|
| TAX |
| THREE MONTHS ENDED MARCH 31, 1997 PRE-TAX (EXPENSE) |
| (In millions of dollars) AMOUNT BENEFIT NET |
| AMOUNT |
|------------------------------------------------------------------------------------|
<S> <C> <C> <C>
| |
| |
| Net unrealized gains (losses) on investment securities: |
| Net unrealized holding gains (losses) arising |
| during the period (453) 141 (312) |
| Reclassification adjustment for (gains) losses |
| included in net income (88) 31 (57) |
| |
| |
| Adjustment for : |
| Participating policyholder liabilities 9 (3) 6 |
|------------------------------------------------------------------------------------|
| Total Other Comprehensive Income (532) 169 (363) |
|====================================================================================|
</TABLE>
(15)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
NOTE G. Subsequent Events:
- --------------------------
Proposed Acquisition:
- --------------------
On April 7, 1998, a subsidiary of the Company entered into an agreement to
acquire Maritime Insurance Co., a U.K. - based insurer, for 56 million British
Pounds (approximately $94 million as of April 1, 1998). Maritime Insurance Co.
is a marine, aviation and transportation insurer. The completion of the
acquisition is subject to certain regulatory approvals, and no assurance can be
given that the acquisition will be consummated.
Stock Split:
- ------------
On May 6, 1998, CNA's Board of Directors approved a three for one split of
the Company's common shares of stock, and authorized a commensurate increase in
the outstanding common shares from 61,798,262 to 185,394,786. The shares will be
distributable on June 1, 1998, subject to the approval of the New York, Pacific
and Chicago stock exchanges, at a rate of three shares for each one held by
shareholders of record at the close of business on May 22, 1998.
(16)
<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 condensed consolidated financial statements and notes thereto found on
pages 3 to 16, which contain additional information helpful in evaluating
operating results and financial condition.
CNA Financial Corporation is a holding company whose primary
subsidiaries consist of property/casualty and life insurance companies,
collectively CNA. This holding company's primary subsidiaries include
Continental Casualty Company, primarily a commercial lines writer, Continental
Assurance Company, a life insurance subsidiary, and The Continental Insurance
Company, primarily a personal lines and ocean marine writer. CNA is one of the
largest writers of commercial property/casualty insurance and one of the ten
largest insurance organizations in the United States.
CNA serves businesses and individuals with a broad range of insurance
and other risk management products and services. Insurance products include
property and casualty coverages; life, accident and health insurance; and
pension products and annuities. CNA services include risk management,
information services, health care management and claims administration. CNA
products and services are marketed through agents, brokers, general agents and
direct sales.
<PAGE>
RESULTS OF OPERATIONS:
The following chart summarizes key components of operating results for
the three months ended March 31, 1998 and 1997.
|---------------------------------------------------------------------|
|THREE MONTHS ENDED MARCH 31 1998 1997|
|In millions of dollars) |
|---------------------------------------------------------------------|
| |
|OPERATING SUMMARY (EXCLUDING REALIZED INVESTMENT |
|GAINS/LOSSES): |
|Revenues: |
| Premiums: |
| Property/Casualty $ 2,527 $ 2,463 |
| Life 841 884 |
| -------- -------- |
| Total premiums 3,368 3,347 |
| Net investment income 562 564 |
| Other 215 155 |
| -------- ---------|
| Total revenues 4,145 4,066 |
|Benefits and expenses 3,993 3,901 |
| Operating income before income tax 152 165 |
|Income tax expense (35) (29) |
| -------- ---------|
| Net operating income $ 117 $ 136 |
| ======== =========|
| |
|Supplemental Financial Data: |
|Net operating income (loss) by group: |
| Property/Casualty $ 126 $ 139 |
| Life 18 23 |
| Other (27) (26) |
| -------- ---------|
| $ 117 $ 136 |
| -------- ---------|
|Net realized investment gains by group: |
| Property/Casualty $ 86 $ 12 |
| Life 30 18 |
| Other - 12 |
| -------- ---------|
| $ 116 $ 42 |
| -------- ---------|
|Net income (loss) by group: |
| Property/Casualty $ 212 $ 151 |
| Life 48 41 |
| Other (27) (14) |
| -------- --------|
| $ 233 $ 178 |
|=====================================================================|
(17)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Consolidated Results
- --------------------
Consolidated revenues, which consist of premium, net investment income,
realized investment gains and other revenues, were $4.3 billion for the first
three months of 1998, up from $4.1 billion for the same period in 1997. For the
first quarter of 1998 revenues reflect an increase in earned premium of $21
million, resulting from an increase in property/casualty of $64 million, offset
in part by a decline in life premium of $43 million. Investment income was down
$2 million in the first quarter of 1998 compared to 1997. Other revenues
increased by $60 million or 38.7% to $215 million for the first quarter of 1998
due to increased revenue from the non-insurance affiliates, primarily in the
auto-warranty and agency software businesses.
Net operating income, which excludes net realized investment gains, for the
first quarter of 1998 was $117 million, or $1.87 per share, compared to net
operating income of $136 million, or $2.18 per share, for the first three months
of 1997. CNA's net income in the first quarter of 1998 reflects after tax losses
of $16 million related to catastrophe claims; catastrophe losses in the first
quarter of 1997 were $20 million, after tax.
Net realized investment gains for the first quarter of 1998 were $116
million, or $1.88 per share, compared to net realized investment gains for the
first quarter of 1997 of $42 million, or $0.67 per share. This substantial
increase is indicative of CNA's well established investment approach of managing
its portfolio on a total return basis, taking gains in periods of favorable
market conditions. The components of the net realized investment gains (losses)
are as follows:
|---------------------------------------------------------------------|
|REALIZED INVESTMENT GAINS(LOSSES) |
|THREE MONTHS ENDED MARCH 31 1998 1997 |
|(In millions of dollars) |
|---------------------------------------------------------------------|
|Bonds: |
| U.S. Government $ 50 $ 6 |
| Tax-exempt 16 1 |
| Asset-backed 13 7 |
| Taxable 29 10 |
| --- -- |
| Total bonds 108 24 |
|Stocks (4) 30 |
|Derivative securities (7) 3 |
|Separate accounts and other 86 9 |
| --- --- |
| Realized investment gains reported in 183 66 |
| revenues |
|Participating policyholders' interest (4) (3)|
|Income tax expense (63) (21)|
|---------------------------------------------------------------------|
| NET REALIZED INVESTMENT GAINS $ 116 $ 42 |
|=====================================================================|
Net income for the first three months of 1998 was $233 million, or $3.75
per share, compared to $178 million, or $2.85 per share, for the first three
months of 1997.
(18)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Property/Casualty Operations
- ----------------------------
|---------------------------------------------------------------------------|
|PROPERTY/CASUALTY GROUP |
|THREE MONTHS ENDED MARCH 31 1998 1997 |
|(In millions of dollars) |
|---------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING NET |
|REALIZED INVESTMENT GAINS/LOSSES): |
| Revenues: |
| Premiums $ 2,527 $2,463 |
| Net investment income 453 461 |
| Other 185 133 |
| ------- ----- |
| 3,165 3,057 |
| Benefits and expenses 3,000 2,889 |
| ------- ----- |
| Income before income tax 165 168 |
|Income tax expense (39) (29) |
|---------------------------------------------------------------------------|
| |
| |
|NET OPERATING INCOME (EXCLUDING NET |
|REALIZED INVESTMENT GAINS/LOSSES) $ 126 $ 139 |
|===========================================================================|
Property/casualty revenues, excluding net realized investment
gains/losses, increased 3.5% for the three months ended March 31, 1998 to $3.2
billion compared to the same period a year ago. Property/casualty earned premium
increased $64 million, or 2.6% from the prior years comparable period.
The growth in earned premiums is attributable to an increase in involuntary
risk premium of approximately $138 million and an increase in personal lines
premium of approximately $42 million, offset in part by a decrease in commercial
lines premium of approximately $116 million. Involuntary risk premium for the
1st quarter 1997 was $(75) million, reflecting reductions in estimates of
premiums for 1996 and prior periods, primarily in the workers' compensation line
of business. The decrease in involuntary risk premium in 1997 stemmed from a
greater willingness on the part of the involuntary market, including CNA, to
write these types of risks. The increase in personal lines continues the trend
seen in 1997 and is attributable to growth in private passenger automobile
business and individual long-term care. The decrease in commercial lines is
primarily due to a decrease in accident and health business.
Pretax operating income, excluding net realized investment gains/losses,
for the property/casualty insurance subsidiaries was $165 million for the first
three months of 1998 compared to $168 million for the same period a year ago.
The decrease in operating income stems primarily from reduced investment income,
including a reduction in tax-exempt interest and dividends, which was partially
offset by lower catastrophe losses. Underwriting losses for the three months
ended March 31, 1998 were $288 million, compared to $293 million for the same
period in 1997. Pre-tax catastrophe losses were approximately $24 million in the
first quarter of 1998 as compared to $31 million in the first quarter of 1997.
Investment income decreased 1.7% for the three months ended March 31, 1998 to
$453 million from $461 million for the comparable period a year ago due to lower
yielding investments. The bond segment of the investment portfolio yielded 6.4%
in the first quarter of 1998 compared with 6.7% for the same period a year ago.
<PAGE>
The net operating income of CNA's property/casualty insurance
subsidiaries, excluding net realized investment gains/losses, was $126 million
for the first three months of 1998, compared to $139 million for the same period
in 1997. Net realized investment gains for the first quarter of 1998 were $86
million compared to $12 million in the first three months of 1997.
(19)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Life Operations
- ---------------
|-----------------------------------------------------------------------------|
|LIFE GROUP |
|THREE MONTHS ENDED MARCH 31 1998 1997|
|(In millions of dollars) |
|-----------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING NET REALIZED |
|INVESTMENT GAINS/LOSSES): |
|Revenues: |
| Premiums $ 841 $ 885 |
| Net investment income 111 105 |
| Other 29 23 |
| ------ ----- |
| 981 1,013 |
|Benefits and expenses 952 975 |
| ------ ----- |
| Income before income tax 29 38 |
|Income tax expense (11) (15)|
|-----------------------------------------------------------------------------|
|NET OPERATING INCOME (EXCLUDING NET REALIZED |
|INVESTMENT GAINS/LOSSES) $ 18 $ 23 |
|=============================================================================|
CNA sells a variety of individual and group insurance products. The
individual insurance products consist primarily of term, universal life,
participating policies, annuity products and variable products, including
annuity and universal life products. Group insurance products include life,
accident and health consisting primarily of major medical and hospitalization,
as well as variable annuities and pension products, such as guaranteed
investment contracts and annuities. CNA has undertaken a number of initiatives
to enhance service, manage health care utilization demand and quality, and
strengthen CNA's networks of physicians, hospitals and other providers.
Life group revenues, excluding net realized investment gains, were $981
million, down 3.0% for the three months ended March 31, 1998 compared to the
same period a year ago. Life group earned premium was $841 million, down 5.0%
compared to the quarter ended March 31, 1997, with the growth in term business
more than offset by a reduction in individual annuities and Federal Employees
Health Benefit Plan (FEHBP) premiums. The decrease in individual annuity
premiums is mainly due to a shift in marketing efforts towards more profitable
products. The decrease in FEHBP premiums is the result of lower claims submitted
during the first three months of 1998 as compared to the same period for 1997.
Investment income increased 5.7% compared to the same period a year ago due to a
larger asset base generated from increased cash flows. The bond segment of the
life investment portfolio yielded approximately 6.9% in the first quarter of
1998 compared to 6.8% in the first quarter of 1997.
Pre-tax operating income for the life insurance subsidiaries, excluding net
realized investment gains/losses, was $29 million for the first three months of
1998, compared to $38 million for the same period in 1997. The decrease in
pretax operating income is primarily due to lower premium revenue, as noted
above, and higher losses in group business during the first three months of 1998
as compared to the same period in 1997.
Net realized investment gains for the first three months of 1998 were
$30 million, compared to $18 million in the first three months of 1997, as the
Company took advantage of favorable market conditions.
(20)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
INVESTMENTS:
<TABLE>
<CAPTION>
|--------------------------------------------------------------------|--------------------------------|
|SUMMARY OF GENERAL ACCOUNT INVESTMENTS | Change in |
| AT CARRYING VALUE MARCH 31 DECEMBER 31 | Unrealized Realized |
| 1998 1997 | Gains(Losses) Gains(Losses) |
|(In millions of dollars) | |
|--------------------------------------------------------------------|--------------------------------|
<S> <C> <C> <C> <C>
|FIXED MATURITY SECURITIES: | |
|U. S. Treasury securities and | |
| obligations of government agencies $ 12,373 $ 12,980 | $ (37) $ 50 |
|Asset-backed securities 5,370 4,804 | (8) 13 |
| | |
|Tax-exempt securities 5,148 4,724 | (37) 16 |
|Taxable 6,906 7,040 | 24 29 |
| --------- --------- | ------ ----- |
| Total fixed maturity securities 29,797 29,548 | (58) 108 |
|Stocks 982 814 | 62 (4) |
|Short-term investments 4,895 4,884 | - - |
|Other investments 1,031 945 | (34) 68 |
|Derivative security investments 11 12 | - (7) |
| --------- --------- | ------ ------ |
| TOTAL INVESTMENTS $ 36,716 $ 36,203 | (30) 165 |
| ========= ========= | |
|Separate accounts and discontinued | |
|operations | (7) 18 |
|Participating policyholders' interest | 4 (4) |
|Income tax benefit (expense) | 8 (63) |
| | ------ ------ |
| NET INVESTMENT GAINS (LOSSES) | $ (25) $ 116 |
|====================================================================|================================|
|--------------------------------------------------------------------|
|SHORT-TERM INVESTMENTS: |
|--------------------------------------------------------------------|
|Security repurchase collateral $ 548 $ 154 |
|Escrow 990 1,065 |
|U.S. Treasuries 510 558 |
|Commercial paper 2,064 1,850 |
| |
|Money markets 261 624 |
| |
|Other 522 633 |
| |
|--------------------------------------------------------------------|
| TOTAL SHORT-TERM INVESTMENTS $ 4,895 $ 4,884 |
|====================================================================|
</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.
CNA invests from time to time in certain derivative financial
instruments primarily to reduce its exposure to market risk (principally
interest rate, equity price, and foreign currency risk). CNA also uses
derivatives to mitigate the risk associated with its indexed group annuity
contract by purchasing S&P 500 futures contracts in a notional amount equal to
the original customer deposit.
CNA considers its derivatives as being held for purposes other than
trading. Derivative securities, except for interest rate swaps associated with
certain corporate borrowings, are recorded at fair market value at the reporting
date with changes in market value reflected in realized gains and losses. The
interest rate swaps on corporate borrowings are accounted for using accrual
accounting with the related income or expense recorded as an adjustment to
interest expense; the changes in fair value are not recorded.
The general account portfolio consists primarily of high quality marketable
fixed maturity securities, approximately 95.6% of which are rated as investment
grade. At March 31, 1998, tax-exempt securities and short-term investments,
excluding collateral for securities sold under repurchase agreements, comprised
approximately 14.0% and 11.8%, respectively, of the general account's total
investment portfolio compared to 13.1% and 13.1%, respectively, at December 31,
1997. Historically, CNA has
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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. Short-term investments at both March 31, 1998 and
December 31, 1997 are substantially higher than historical levels in
anticipation of additional Fibreboard-related claim payments. The increase in
short-term investments at March 31, 1998 compared to December 31, 1997, is due
to increased collateral related to security repurchase transactions. Collateral
for securities sold under repurchase agreements increased $394 million to $548
million. At March 31, 1998, the major components of the short-term investment
portfolio consist primarily of high-grade commercial paper and U.S. Treasury
bills.
As of March 31, 1998, the market value of CNA's general account
investments in fixed maturities was $29.8 billion and was greater than amortized
cost by approximately $470 million. This compares to a market value of $29.5
billion and $528 million of net unrealized investment gains at December 31,
1997. The gross unrealized investment gains and losses for the fixed maturity
securities portfolio at March 31, 1998 were $579 million and $109 million,
respectively, compared to $644 million and $116 million, respectively, at
December 31, 1997. The decline in unrealized investment gains is attributable,
in large part, to the Company taking advantage of favorable market conditions
and by selling securities and realizing investment gains.
Net unrealized investment gains on general account fixed maturities at
March 31, 1998 include net unrealized gains on high yield securities of $31
million, compared to net unrealized losses of $2 million on such securities at
December 31, 1997. 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 decreased $200 million to
approximately $1.3 billion at March 31, 1998 when compared to December 31, 1997.
At March 31, 1998, total separate account cash and investments amounted
to $5.6 billion with taxable fixed maturity securities representing
approximately 80% of the separate accounts' portfolios. Approximately 70.6% 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 liabilities of the guaranteed investment contracts. The
fair value of all fixed maturity securities in the guaranteed investment
portfolio was $3.6 billion at March 31, 1998 and $3.8 billion at December 31,
1997. At March 31, 1998, amortized cost was less than the fair value by
approximately $88 million. This compares to a gain of approximately $71 million
at December 31, 1997. The gross unrealized investment gains and losses for the
guaranteed investment fixed maturity securities portfolio at March 31, 1998,
were $102 million and $14 million, respectively, as compared to a gain of $87
million and a loss of $16 million at December 31, 1997.
Carrying values of high yield securities in the guaranteed investment
portfolio were $220 million at March 31, 1998 and $310 million at December 31,
1997. Net unrealized investment losses on high yield securities held in such
separate accounts were $2 million at March 31, 1998, and $1 million on December
31, 1997.
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 March 31, 1998, CNA's concentration in
(22)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
high yield bonds, including separate accounts, was approximately 2.8% 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 March 31, 1998 (general and
guaranteed investment portfolios) are $7.7 billion of asset-backed securities,
consisting of approximately 36.5% in collateralized mortgage obligations
("CMOs"), 28.4% in corporate asset-backed obligations, 24.6% incorporate
mortgage backed security pass thru obligations, and 10.5% in U.S. Government
agency issued pass-through certificates. The majority of CMOs held are corporate
mortgage backed securities, which are actively traded in liquid markets and are
priced by broker-dealers. At March 31, 1998, the fair value of asset-backed
securities exceeded the amoritized cost by approximately $119 million compared
to net unrealized investment gains of $114 million at December 31, 1997. 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.
At March 31, 1998, 43.1% of the general account's fixed maturity
securities portfolio was invested in U.S. Government securities, 33.1% in other
AAA rated securities and 13.0% in AA and A rated securities. CNA's guaranteed
investment fixed maturity securities portfolio is comprised of 4.4% U.S.
Government securities, 63.2% in other AAA rated securities and 13.9% in AA and A
rated securities. These ratings are primarily from Standard & Poor's (95.6% of
the general account and 93.8% of the guaranteed investment fixed maturity
account).
(23)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
MARKET RISK:
Market risk is a broad term related to economic losses due to adverse
changes in the fair value of a financial instrument. Market risk is inherent to
all financial instruments, and accordingly, the Company's risk management
policies and procedures include all market risk sensitive financial instruments.
A significant component of market risk is price risk. Price risk
relates to changes in the level of prices due to changes in interest rates,
equity prices, foreign exchange rates or other factors that relate to market
volatility of the rate, index, or price underlying the financial instrument. The
Company's primary market risk exposures are to changes in interest rates,
although the Company has certain exposures to changes in equity prices and
foreign currency exchange rates.
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.
The Company's market risk sensitive instruments presented in the table
below are classified as held for purposes other than trading. The Company does
not generally hold or issue derivatives for trading purposes.
The Company has exposure to economic losses due interest rate risk,
arising from changes in the level or volatility of interest rates. The Company
attempts to mitigate its exposure to interest rate risk through active portfolio
management. The Company may also reduce this risk by utilizing instruments such
as interest rate swaps, interest rate caps, commitments to purchase securities,
options, futures and forwards. This exposure is also mitigated by the Company's
asset/liability matching strategy.
The Company is exposed to equity price risk as a result of its
investment in equity securities and equity derivatives. Equity price risk
results from changes in the level or volatility of equity prices which affect
the value of equity securities or instruments which derive their value from such
securities or indexes. CNA attempts to mitigate its exposure to such risks by
limiting its investment in any one security or index.
Foreign exchange rate risk arises from the possibility that changes in
foreign currency exchange rates will impact the value of financial instruments.
The Company has foreign exchange exposure when it buys or sells foreign
currencies or financial instruments denominated in a foreign currency. The
Company's foreign transactions are primarily denominated in Canadian Dollars,
British Pounds, German Deutsch Marks, and Japanese Yen. This exposure is
mitigated by the Company's asset/liability matching strategy and through the use
of forwards for those instruments which are not matched.
Sensitivity Analysis:
CNA monitors its sensitivity to interest rate risk by evaluating the
change in its financial assets and liabilities relative to fluctuations in
interest rates. The evaluation is made using an instantaneous parallel 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 changes 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
(24)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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 analysis assumes that the composition of the Company's interest
sensitive assets and liabilities existing at the beginning of the period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the time to maturity. Also the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Accordingly, the analysis may not be indicative of, is not intended to
provide, and does not provide a precise forecast of the effect of changes of
market interest rates on the Company's income or stockholders' equity. Further,
the computations do not contemplate any actions CNA would undertake in response
to changes in interest rates.
The sensitivity analysis assumes an instantaneous shift in market
interest rates, with scenarios of interest rates increasing and decreasing 100
and 150 basis points from their levels at March 31, 1998 with all other
variables held constant. A 100 and 150 basis point increase in market interest
rates would result in a pre-tax decrease in the net financial instrument
position of $1.7 billion and $2.5 billion, respectively. Similarly a 100 and 150
basis point decrease in market interest rates would result in a pre-tax increase
in the net financial instrument position of $1.7 billion and $2.5 billion,
respectively.
The Company's long-term debt, including interest rate swap agreements,
as of March 31, 1998 is denominated in U.S. dollars. Approximately 91% of the
Company's long-term debt has been issued at fixed rates or has been effectively
converted into fixed rate debt by interest rate swap arrangements which mature
in May through December of 2000. As such, interest expense on this indebtedness
would not be impacted by interest rate shifts. The impact of a 100 and 150 basis
point increase in market interest rates would result in a decrease in the market
value of the fixed rate debt by $139 million and $198 million, respectively. The
impact of a 100 and 150 basis point increase in market interest rates on the
variable rate debt would result in additional interest expense of $2.6 million
and $3.8 million, respectively, per year. A 100 and 150 basis point decrease in
interest rates would lower interest expense by $2.6 million and $3.8 million,
respectively, per year.
Equity price risk was measured assuming an instantaneous 10% and 25%
change in the Standard & Poor's 500 Index (the Index) from its level of March
31, 1998, with all other variables held constant. The Company's equity holdings
were assumed to be perfectly correlated with this index. A 10% and 25% decrease
in the Index would result in a $212 million and $529 million decrease,
respectively, in the net financial instrument position. Of these amounts, $80
million and $200 million, respectively, would be offset by decreases in
liabilities to customers under variable annuity contracts. Similarly, increases
in the index would result in like increases in the net financial instrument
position.
The sensitivity analysis also assumes an instantaneous 10% and 20%
change in the foreign currency exchange rates versus the U.S. Dollar from their
levels at March 31, 1998, with all other variables held constant. A 10% and 20%
strengthening of the U.S. dollar versus other currencies would result in
decreases of $172 million and $343 million in the net financial instrument
position. Weakening of the U.S. dollar versus all other currencies would result
in like increases in the net financial instrument position.
(25)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The following table reflects an increase in interest rates of 100 basis
points, a 10% decline in the S&P 500 index, and a decline of 10% in foreign
currency exchange rates.
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
|MARCH 31, 1998 Market Interest Currency Equity |
|(In millions of dollars) Value Rate Risk Risk Risk |
|-----------------------------------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
|Held for Other Than Trading Purposes |
| General accounts |
| Fixed maturity securities $ 29,797 $ (1,454) $ (95) $ - |
| Equity securities 982 - (24) (105) |
| Short term investments 4,895 (6) (31) (1) |
| Interest rate swaps (1) 13 - - |
|-----------------------------------------------------------------------------------------------------------------|
| Total general accounts 35,673 (1,447) (150) (106) |
|-----------------------------------------------------------------------------------------------------------------|
| Separate accounts |
| Fixed maturity securities 4,490 (205) (20) (3) |
| Equity securities 225 - - (23) |
| Short term investments 737 (1) (2) - |
| Equity index futures - 2 - (80) |
|-----------------------------------------------------------------------------------------------------------------|
| Total separate accounts 5,452 (204) (22) (106) |
|-----------------------------------------------------------------------------------------------------------------|
| Total all securities $ 41,125 $ (1,651) $ (172) $ (212) |
|=================================================================================================================|
|Long term debt $ (2,907) $ 139 $ - $ - |
==================================================================================================================|
</TABLE>
<PAGE>
The following table reflects an increase in interest rates of 150 basis
points, a 25% decline in the S&P 500 index, and a decline of 20% in foreign
currency exchange rates.
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
|MARCH 31, 1998 Market Interest Currency Equity |
|(In millions of dollars) Value Rate Risk Risk Risk |
|-----------------------------------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
|Held for Other Than Trading Purposes |
| General accounts |
| Fixed maturity securities $ 29,797 $ (2,166) $ (190) $ - |
| Equity securities 982 - (47) (263) |
| Short term investments 4,895 (10) (61) (1) |
| Interest rate swaps (1) 20 - - |
|-----------------------------------------------------------------------------------------------------------------|
| Total general accounts 35,673 (2,156) (298) (264) |
|-----------------------------------------------------------------------------------------------------------------|
| Separate accounts |
| Fixed maturity securities 4,490 (312) (40) (9) |
| Equity securities 225 - (1) (56) |
| Short term investments 737 (1) (4) - |
| Equity index futures - 3 - (200) |
|-----------------------------------------------------------------------------------------------------------------|
| Total separate accounts 5,452 (310) (45) (265) |
|-----------------------------------------------------------------------------------------------------------------|
| Total all securities $ 41,125 $ (2,466) $ (343) $ (529) |
|=================================================================================================================|
|Long term debt $ (2,907) $ 198 $ - $ - |
==================================================================================================================|
</TABLE>
(26)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -continued
FINANCIAL CONDITION:
|--------------------------------------------------------------------------|
|Financial Position MARCH 31 DECEMBER 31 |
|(In millions of dollars, 1998 1997 |
|except per share data) |
|--------------------------------------------------------------------------|
| |
| |
| |
|Assets $ 62,123 $ 61,269 |
|Stockholders' Equity 8,516 8,309 |
|Accumulated Other Comprehensive |
| Income Included in Stockholders' Equity 564 589 |
|Book Value per Common Share 135.37 132.02 |
|--------------------------------------------------------------------------|
CNA's assets increased approximately $854 million to $62.1 billion as of
March 31, 1998. This change was primarily the result of an increase in
investments related to an increase in securities sold under repurchase
agreements of $394 million, and an increase in insurance receivables of $644
million due to an increase in net written premium of approximately $900 million
to $3.0 billion for the 3 months ended March 31, 1998 from $2.1 billion 3 months
ended December 31, 1997.
The statutory surplus of the property/casualty subsidiaries was
approximately $7.0 billion, compared to approximately $7.1 billion on December
31, 1997. The statutory surplus of the life insurance subsidiaries remained at
$1.2 billion.
LIQUIDITY AND CAPITAL RESOURCES:
The liquidity requirements of CNA have been met primarily by funds
generated from operating, investing and financing activities. In early 1998, CNA
was able to take advantage of favorable market conditions to refinance, on a
fixed rate basis, a portion of its existing debt under the Company's revolving
credit facility. Additionally, on April 15, 1998, the Company issued $500
million principal amount of 6.50% senior notes due April 15, 2005. The net
proceeds were used to refinance the existing bank debt outstanding under the
Company's revolving credit facility and to refinance a portion of the Company's
outstanding commercial paper.
The principal cash flow sources of CNA's property/casualty and life
insurance subsidiaries are premiums, investment income, and sales and maturities
of investments. The primary operating cash flow uses are payments for claims,
policy benefits and operating expenses.
Net cash flows from operations are primarily 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.
For the quarter ended March 31, 1998, CNA's operating cash flows were a
negative $240 million, compared to a negative $737 million for the quarter ended
March 31, 1997. The Company had substantially lower operating cash flow in 1997,
primarily due to claim payments resulting from the settlement of the Fibreboard
litigation.
(27)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -continued
IMPACT OF YEAR 2000:
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. The Company is in the process of
replacing many of its legacy systems to accommodate business for the year 2000
and beyond. Based upon its current assessment, the Company estimates that the
total cost to replace and upgrade its systems to accommodate year 2000
processing will be approximately $60 to $70 million. The Company believes that
it will be able to resolve the year 2000 issue in a timely manner. However, due
to the interdependent nature of computer systems, the company may be adversely
impacted depending upon whether it or other entities not affiliated with the
Company (vendors and business partners) address this issue successfully. To
mitigate this impact, the Company is communicating with its vendors and business
partners to coordinate the year 2000 conversion.
In addition, property/casualty insurance companies may have an
underwriting exposure related to year 2000. Although CNA has not received any
claims for coverage from its policyholders based on losses resulting from year
2000 issues, there can be no assurances that policyholders will not suffer
losses of this type and seek compensation under CNA's insurance polices. If any
claims are made, coverage, if any, will depend on the facts and circumstances of
the claim and the provisions of the policy. At this time, the Company is unable
to determine whether the adverse impact, if any, in connection with the
foregoing circumstances would be material to the Company.
(28)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -continued
ACCOUNTING STANDARDS:
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 need not be applied to
interm financial statements in the initial year of its application. This
Statement will redefine CNA's business segment disclosure.
In December 1997, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued SOP 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which provides guidance on accounting by entities that are subject
to insurance-related assessments. It requires that entities recognize
liabilities for insurance-related assessments when all of the following criteria
have been met: an assessment has been imposed or a probable assessment will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial statements; and the amount
of the assessment can be reasonably estimated. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. CNA is
currently evaluating the effects of this SOP on its accounting for
insurance-related assessments.
In February 1998, the FASB issued SFAS No.132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes disclosure
requirements for pension and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. The Statement also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The Statement changes
disclosure only and does not address measurement or recognition. It is effective
for fiscal years beginning after December 15, 1997. CNA is currently evaluating
the effects of this Statement on its benefit plan disclosures.
In March 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance on accounting for costs of computer
software developed or obtained for internal use and for determining whether
computer software is for internal use. For purposes of this SOP, internal-use
software is software acquired, internally developed or modified solely to meet
the entity's internal needs for which no substantive plan exists or is being
developed to market the software externally during the software's development or
modification. Accounting treatment for costs associated with software developed
or obtained for internal use, as defined by this SOP, is based upon a number of
factors, including the point in time during the project that costs are incurred
as well as the types of costs incurred. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. CNA is currently
evaluating the effects of this SOP.
(29)
<PAGE>
CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Description of Exhibit
Exhibit Page
Number Number
-------- -------
Computation of Net Income per Common Share 11 32
Computation of Ratio of Earnings to Fixed Charges 12.1 33
Computation of Ratio of Net Income
As Adjusted, to Fixed Charges 12.2 33
Financial Data Schedule 27 34
(b) REPORTS ON FORM 8-K:
On February 4, 1998, CNA Financial Corporation filed a report on Form
8-K related to a February 2, 1998 press release announcing that Bernard
Hengesbaugh was named executive vice president and chief operating officer of
CNA's insurance and insurance-related operations.
(30)
<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: May 15, 1998 By:S/W. JAMES MACGINNITIE
------------ --------------------
W. James MacGinnitie
Senior Vice President and
Chief Financial Officer
(31)
<PAGE>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
- -----------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1998 1997
(In millions, except per share data)
- -----------------------------------------------------------------------
Earnings per share:
Net income .................................... $ 233 $ 178
Less preferred stock dividends................. 1 2
----- -----
Net income available to common stockholders... $ 232 $ 176
===== =====
Weighted average shares outstanding............ 61.8 61.8
................................................
Net income per common share................... $3.75 $2.85
====== =====
- -----------------------------------------------------------------------
(32)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
=============================================================================================================
THREE MONTHS ENDED MARCH 31 1998 1997
(In millions of dollars, except ratios)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before income tax and cumulative effect of accounting changes.................. $ 331 $ 228
Adjustments:
Interest expense................................................................... 55 49
Interest element of operating lease rental......................................... 10 9
Income before income tax and cumulative effect of
accounting changes, as adjusted.................................................. 396 286
Fixed charges:
Interest expense................................................................... 55 49
Interest element of operating lease rental......................................... 10 9
Fixed charges......................................................................... 65 58
Ratio of earnings to fixed charges (1)................................................ 6.1 4.9
==============================================================================================================
<FN>
(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.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.2
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF NET INCOME,
AS ADJUSTED, TO FIXED CHARGES
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1998 1997
(In millions of dollars, except ratios)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income............................................................................ $ 233 $ 178
Adjustments:
Interest expense, after tax........................................................ 35 32
Interest element of operating lease rental, after tax.............................. 7 6
Net income, as adjusted............................................................... 275 216
Fixed charges:
Interest expense, after tax........................................................ 35 32
Interest element of operating lease rental, after tax.............................. 7 6
Fixed charges......................................................................... 42 38
Ratio of net income, as adjusted, to fixed charges (1)................................ 6.5 5.7
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
(33)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 29,797
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 982
<MORTGAGE> 79
<REAL-ESTATE> 5
<TOTAL-INVEST> 36,716
<CASH> 201
<RECOVER-REINSURE> 5,773
<DEFERRED-ACQUISITION> 2,291
<TOTAL-ASSETS> 62,123
<POLICY-LOSSES> 29,401
<UNEARNED-PREMIUMS> 5,268
<POLICY-OTHER> 136
<POLICY-HOLDER-FUNDS> 757
<NOTES-PAYABLE> 2,893
0
150
<COMMON> 155
<OTHER-SE> 8,211
<TOTAL-LIABILITY-AND-EQUITY> 62,123
3,368
<INVESTMENT-INCOME> 562
<INVESTMENT-GAINS> 183
<OTHER-INCOME> 215
<BENEFITS> 2,850
<UNDERWRITING-AMORTIZATION> 588
<UNDERWRITING-OTHER> 504
<INCOME-PRETAX> 331
<INCOME-TAX> (98)
<INCOME-CONTINUING> 233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233
<EPS-PRIMARY> 3.75
<EPS-DILUTED> 3.75
<RESERVE-OPEN> 23,245
<PROVISION-CURRENT> 2,492
<PROVISION-PRIOR> 21
<PAYMENTS-CURRENT> 328
<PAYMENTS-PRIOR> 1,733
<RESERVE-CLOSE> 23,697
<CUMULATIVE-DEFICIENCY> 21
</TABLE>
