- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 September 30, 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 November 2, 1998
- ------------------------------------- -------------------------------
Common Stock, Par value $2.50 183,889,569
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page (1) of (41)
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 (Unaudited) and DECEMBER 31, 1997.................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997....... 4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997..... 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997................. 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) SEPTEMBER 30, 1998............................. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................. 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 37
SIGNATURES....................................................... 38
EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE.................. 39
EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES..................................... 40
EXHIBIT 12.2 COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED,
TO FIXED CHARGES..................................... 40
EXHIBIT 27 FINANCIAL DATA SCHEDULE..................................... 41
(2)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SEPTEMBER DECEMBER 31
1998 1997
(In millions of dollars, except share data) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturities available for sale (cost: $28,446 and $29,020).............. $29,322 $29,548
Equity securities available for sale (cost: $970 and $695)................... 1,362 814
Mortgage loans and real estate (less accumulated depreciation: $1 and $1).... 65 85
Policy loans................................................................. 176 177
Other invested assets........................................................ 831 695
Short-term investments ...................................................... 4,549 4,884
-------- --------
TOTAL INVESTMENTS......................................................... 36,305 36,203
Cash........................................................................... 135 383
Receivables:
Reinsurance.................................................................. 6,235 6,057
Insurance ................................................................... 6,686 6,086
Other ....................................................................... 270 208
Less allowance for doubtful accounts......................................... (305) (303)
Deferred acquisition costs..................................................... 2,359 2,142
Accrued investment income...................................................... 418 389
Receivables for securities sold................................................ 1,289 744
Federal income taxes recoverable (includes $102 and $26 due from Loews)........ 82 18
Deferred income taxes.......................................................... 899 1,070
Property and equipment at cost (less accumulated depreciation: $676 and $553).. 790 747
Prepaid reinsurance premiums................................................... 292 202
Intangibles.................................................................... 595 620
Other assets................................................................... 1,135 1,222
Separate Account business...................................................... 5,381 5,812
------ ------
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $62,566 $61,600
==========================================================================================================
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SEPTEMBER DECEMBER 31
1998 1997
(In millions of dollars, except share data) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
<S> <C> <C>
Claim and claim expense .................................................... $29,369 $29,558
Unearned premiums........................................................... 5,084 4,700
Future policy benefits...................................................... 5,262 4,829
Policyholders' funds........................................................ 767 742
Securities sold under repurchase agreements.................................... 58 153
Payables for securities purchased.............................................. 1,072 648
Participating policyholders' equity............................................ 150 132
Long-term debt................................................................. 2,967 2,897
Other liabilities.............................................................. 3,483 3,820
Separate Account business...................................................... 5,381 5,812
-------- --------
TOTAL LIABILITIES......................................................... 53,593 53,291
-------- --------
Commitments and contingent liabilities - Notes C and D
Stockholders' equity:
Common stock ($2.50 par value;
Authorized - 200,000,000 shares;
Issued - 185,525,907 shares;
Outstanding - 183,704,086 shares)............................................ 464 464
Money market cumulative preferred stock........................................ 150 150
Additional paid-in capital..................................................... 126 126
Retained earnings.............................................................. 7,408 6,983
Accumulated other comprehensive income......................................... 892 589
Treasury stock, at cost........................................................ (67) (3)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................................ 8,973 8,309
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $62,566 $61,600
===========================================================================================================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited)
</FN>
</TABLE>
(3)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars, except per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Premiums........................................ $ 3,300 $ 3,336 $10,135 $10,031
Net investment income........................... 521 530 1,641 1,641
Realized investment gains ...................... 97 237 512 475
Other........................................... 211 206 598 537
--------- --------- --------- --------
Total Revenues 4,129 4,309 12,886 12,684
--------- --------- --------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits.... 2,774 2,854 8,561 8,607
Amortization of deferred acquisition costs...... 545 621 1,804 1,738
Other operating expenses(Note H)................ 783 384 1,764 1,223
Interest expense................................ 53 57 168 153
--------- --------- --------- --------
Total Benefits and Expenses 4,155 3,916 12,297 11,721
--------- --------- --------- --------
Income (loss) before income tax................. (26) 393 589 963
Income tax expense (benefit)..................... (12) 119 160 276
--------- --------- --------- --------
Net (loss) income $ (14) $ 274 $ 429 $ 687
=================================================================================================
EARNINGS PER SHARE
Net (loss) income ............................... $ (0.09) $ 1.47 $ 2.29 $ 3.68
========= ========= ========= ========
Weighted average outstanding shares of
common stock (in millions of shares)............. 185.2 185.4 185.2 185.4
=================================================================================================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited)
</FN>
</TABLE>
(4)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PREFERRED TREASURY PAID IN COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDERS'
(In millions of dollars) STOCK STOCK STOCK CAPITAL INCOME EARNINGS INCOME EQUITY
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,JANUARY 1, 1997 $ 464 $ 150 $ (3) $ 126 $6,024 $ 299 $ 7,060
Comprehensive income:
Net income................. - - - - $ 687 687 - 687
Other comprehensive income:
Change in other comprehensive
income...................... - - - - 175 - 175 175
--------
Total comprehensive income $ 862
========
Preferred dividends.......... - - - - (5) - (5)
- ----------------------------- ------- ------- ------- -------- -------- -------- ----------
BALANCE, SEPTEMBER 30, 1997 $ 464 $ 150 $ (3) $ 126 $ 6,706 $ 474 $ 7,917
================================================================== ================================
BALANCE, DECEMBER 31, 1997 $ 464 $ 150 $ (3) $ 126 $ 6,983 $ 589 $ 8,309
Comprehensive income:
Net income.................. - - - - $ 429 429 - 429
Other comprehensive income:
Change in other comprehensive
income...................... - - - - 303 - 303 303
--------
Total comprehensive income $ 732
========
Purchase of Treasury Stock - - (64) - - - (64)
Preferred dividends........ - - - - (4) - (4)
- ----------------------------- ------- ------- ------- -------- -------- -------- ----------
BALANCE, SEPTEMBER 30, 1998 $ 464 $ 150 $ (67) $ 126 $ 7,408 $ 892 $ 8,973
================================================================== ================================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited)
</FN>
</TABLE>
(5)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 1998 1997
(In millions of dollars)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 429 $ 687
Adjustments to reconcile net income to net cash flows from operating activities:
Net realized investment gains, pre-tax ......................................... (512) (475)
Participating policyholders' interest........................................... 15 2
Amortization of intangibles..................................................... 85 20
Amortization of bond discount................................................... (165) (81)
Depreciation.................................................................... 124 132
Changes in:
Insurance receivables, net..................................................... (838) (413)
Deferred acquisition costs..................................................... (217) (369)
Accrued investment income...................................................... (29) 98
Federal income taxes........................................................... (64) 165
Deferred income taxes.......................................................... (2) 156
Prepaid reinsurance premiums................................................... (90) (77)
Insurance reserves............................................................. 666 993
Reinsurance payables........................................................... (111) (60)
Other liabilities.............................................................. 67 (991)
Other, net..................................................................... (88) (146)
------------ ----------
Total adjustments ......................................................... (1,159) (1,046)
------------ ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES .................................. (730) (359)
------------ ----------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- continued
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 1998 1997
(In millions of dollars)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from investing activities:
Purchases of fixed maturities.................................................... (28,438) (28,756)
Proceeds from fixed maturities:
Sales........................................................................... 26,686 27,545
Maturities, calls and redemptions............................................... 2,655 1,668
Purchases of equity securities................................................... (792) (854)
Proceeds from sale of equity securities.......................................... 509 937
Change in short-term investments................................................. 419 (993)
Purchases of property and equipment ............................................. (175) (195)
Change in securities sold under repurchase agreements............................ (95) 1,075
Change in other investments...................................................... (229) 173
Investment in affiliates......................................................... - (65)
Other, net....................................................................... (47) (151)
------------ ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES .................................. 493 384
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to preferred stockholders......................................... (5) (5)
Acquisition of treasury stock.................................................... (65) -
Receipts from investment contracts credited to policyholder account balances..... 19 7
Return of policyholder account balances on investment contracts.................. (30) (18)
Principal payments on long-term debt............................................. (942) (4)
Proceeds from issuance of long-term debt......................................... 1,012 109
------------ ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES.................................. (11) 89
------------ ---------
Net cash flows........................................................ (248) 114
Cash at beginning of period....................................................... 383 257
- ----------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 135 $ 371
==========================================================================================================
Supplemental disclosures of cash flow information:
Cash (paid)received:
Interest ........................................................................$ (147) $ (148)
Federal income taxes............................................................. (187) 50
==========================================================================================================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited)
</FN>
</TABLE>
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
NOTE A. Basis of Presentation:
The condensed consolidated financial statements (unaudited) include CNA
Financial Corporation (CNAF) and its subsidiaries which include
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, or the Company. As of September 30, 1998, Loews Corporation
(Loews) owns approximately 85% 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 customers, including small, medium and
large businesses; associations, professionals, groups and individuals.
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 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, CNAF deposited $987 million in an escrow account,
pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note C
below. The escrow account amounted to approximately $1.08 billion at September
30, 1998 and $1.10 billion at December 31, 1997. The majority of the funds are
included in short-term investments and are invested substantially 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 both of
these decisions. On July 25, 1996, a panel of the United States Fifth Circuit
Court of Appeals in New Orleans affirmed the judgment approving the Global
Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the
Trilateral Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and
Suggestions for Rehearing by the entire Fifth Circuit Court of Appeals as
respects the decision on the Global Settlement Agreement were denied. Two
petitions for certiorari were filed in the Supreme Court as respects the Global
Settlement Agreement. On June 27, 1997, the Supreme Court granted these
petitions, vacated the Fifth Circuit's judgment as respects the Global
Settlement Agreement, and remanded 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. On June 22, 1998, the
Supreme Court granted the petition for certiorari filed by one of the sets of
objectors. The Supreme Court has set oral argument for December 8, 1998.
No further appeal was filed with respect to the Trilateral Agreement;
therefore, court approval of the Trilateral Agreement has become final.
SETTLEMENT AGREEMENTS
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.
(8)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
On August 27, 1993, the Settling Parties reached an agreement in
principle for an omnibus settlement to resolve all future asbestos-related
bodily injury claims involving Fibreboard. The Global Settlement Agreement was
executed on December 23, 1993. The agreement calls for contribution by Casualty
and Pacific Indemnity of an aggregate of $1.53 billion to a trust fund for a
class of all future asbestos claimants, defined generally as those persons whose
claims against Fibreboard were neither filed nor settled before August 27, 1993.
An additional $10 million is to be contributed to the fund by Fibreboard. As
indicated above, the Global Settlement Agreement has been approved by the Fifth
Circuit a second time, but the Supreme Court has granted a petition for
certiorari filed by one of the sets of objectors to the settlement.
On October 12, 1993, Casualty, Pacific Indemnity and Fibreboard entered
into the Trilateral Agreement to settle the coverage litigation to operate in
the event that the Global Settlement Agreement is disapproved. The Trilateral
Agreement calls for payment by Casualty and Pacific Indemnity of an aggregate
$2.0 billion, of which Casualty's portion is approximately $1.46 billion, to
Fibreboard to resolve all claims by Fibreboard and all future and unsettled
present asbestos claimants arising under the policy issued to Fibreboard by
Casualty.
Under either the Global Settlement Agreement or the Trilateral
Agreement, Casualty is also obligated to pay prior settlements of present
asbestos claims. As a result of the final approval of the Trilateral Agreement,
such obligation has become final.
Through September 30, 1998, Casualty, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 135,200 claims, for an
estimated settlement amount of approximately $1.63 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under these settlements. Approximately $1.67 billion (including interest of
$184 million) was paid through September 30, 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's management 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
CNAF.
TOBACCO LITIGATION
Several of CNA's 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.
(9)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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 or 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 CNAF.
OTHER LITIGATION
CNAF and its subsidiaries are also parties to other litigation arising
in the ordinary course of business. The outcome of such other litigation will
not, in the opinion of management, materially affect the results of operations
or equity of CNAF.
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 1998 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
(10)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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 September 30, 1998 and December 31, 1997, CNA carried $646
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. Unfavorable environmental
pollution reserve development for the nine months ended September 30, 1998 was
$58 million. There was no environmental pollution reserve development for the
nine months ended September 30, 1997.
CNA's property/casualty 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
September 30, 1998 and December 31, 1997, CNA carried $1.46 billion and $1.40
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 nine months ended September 30, 1998
and 1997 totaled $205 million and $40 million, respectively.
The unfavorable reserve development on environmental and asbestos reserves
in 1998 was more than offset by favorable reserve development in other lines,
primarily commercial and specialty coverages. Excluding environmental and
asbestos reserves, favorable loss and allocated loss adjustment expense reserve
development approximated $380 million and $340 million for the nine months ended
September 30, 1998 and 1997, respectively. Premium development for these same
periods approximated $30 million favorable and $165 million unfavorable,
respectively. The large unfavorable premium development in 1997 is primarily
attributable to reductions in residual market premiums.
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------|
|RESERVE SUMMARY SEPTEMBER 30, 1998 DECEMBER 31, 1997 |
| -------------------------- ----------------------|
| ENVIRONMENTAL ENVIRONMENTAL |
|(In millions of dollars) POLLUTION ASBESTOS POLLUTION ASBESTOS |
|-------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
|Reported claims: |
| Gross Reserves $ 279 $ 1,308 $ 279 $ 1,198 |
| Less reinsurance recoverable (52) (101) (36) (117)|
| ------ ------- ------- ---------|
| Net reported claims 227 1,207 243 1,081 |
|Net unreported claims 419 248 530 319 |
|-------------------------------------------------------------------------------------|
|NET RESERVES $ 646 $ 1,455 $ 773 $ 1,400 |
|=====================================================================================|
</TABLE>
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
The results of operations in future years may continue to be adversely
affected by environmental pollution and asbestos claims and claim expenses.
Management will continue to monitor these liabilities and make further
adjustments as warranted.
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.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------|
|NINE MONTHS ENDED SEPTEMBER 30 EARNED PREMIUMS ASSUMED/|
| ------------------------------------- |
| NET |
|(In millions of dollars) DIRECT ASSUMED CEDED NET % |
|------------------------------------------------------------------------------|
<S> <C> <C> <C> <C> <C>
|1998 |
|------------------------------------------------------------------------------|
|Property and Casualty $ 6,261 $ 1,114 $ 481 $ 6,894 16.2 %|
|Accident and Health 2,624 153 202 2,575 5.9 %|
|Life 742 112 188 666 16.8 %|
|------------------------------------------------------------------------------|
| TOTAL PREMIUMS $ 9,627 $ 1,379 $ 871 $10,135 13.6 %|
|==============================================================================|
|1997 |
|------------------------------------------------------------------------------|
|Property and Casualty $ 6,087 $ 1,078 $ 549 $ 6,616 16.3 %|
|Accident and Health 2,806 73 115 2,764 2.6 %|
|Life 649 92 90 651 14.1 %|
|------------------------------------------------------------------------------|
| TOTAL PREMIUMS $ 9,542 $ 1,243 $ 754 $10,031 12.4 %|
|==============================================================================|
</TABLE>
In the table above, life premium revenue is principally from long
duration contracts, property/casualty earned premium is from short duration
contracts, and approximately three-quarters of accident and health earned
premiums are from short duration contracts.
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $721 and $618 million for the nine months ended September 30, 1998
and September 30, 1997, respectively.
(12)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE E. Debt:
Borrowings consisted of the following:
|---------------------------------------------------------------------------|
| LONG-TERM DEBT SEPTEMBER 30 DECEMBER 31 |
| (In millions of dollars) 1998 1997 |
|---------------------------------------------------------------------------|
| |
| Variable Rate Debt: |
| Credit Facility - CNAF $ 85 $ 400 |
| Commercial Paper 650 675 |
| Credit Facility - CNA Surety 118 118 |
| Senior Notes: |
| 8.875%, due March 1, 1998 - 150 |
| 8.25%, due April 15, 1999 101 102 |
| 7.25%, due March 1, 2003 147 146 |
| 6.25%, due November 15, 2003 249 249 |
| 6.50%, due April 15, 2005 497 - |
| 6.75%, due November 15, 2006 248 248 |
| 6.45%, due January 15, 2008 149 - |
| 8.375%, due August 15, 2012 98 98 |
| 6.95%, due January 15, 2018 148 - |
| 7.25%, Debenture, due November 15, 2023 247 247 |
| 11% Secured Mortgage Notes, due June 1, 2013 158 389 |
| 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%) 26 28 |
|---------------------------------------------------------------------------|
| TOTAL LONG-TERM DEBT $ 2,967 $ 2,897 |
|===========================================================================|
CNAF has in place an $875 million committed revolving credit facility,
under which borrowing capacity is reduced by CNAF's commercial paper program. As
of November 2, 1998, outstanding loans under the credit facility were $235
million and outstanding commercial paper was $500 million. At November 2, 1998,
there was $140 million of unused borrowing capacity under the facility. 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 loans under the credit
facility at September 30, 1998 was 5.72% compared to 5.82% at September 30,
1997.
The commercial paper borrowings are classified as long-term as the
program is fully supported by the committed credit facility. The
weighted-average interest rate on commercial paper at September 30, 1998 and
1997, respectively, was 5.79 % and 5.82%.
(13)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- continued
To offset the variable rate characteristics of the credit facility,
CNAF entered into interest rate swap agreements with several banks. The
agreements terminate from May 2000 to December 2000. These agreements provide
that CNAF pays interest at a fixed rate, averaging 6.07% at September 30, 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 $1
million and $3 million for the nine months ended September 30, 1998 and
September 30, 1997, respectively.
The weighted average interest rate (interest and facility fees) on
CNAF's revolving credit facility and commercial paper, which reflects the effect
of the interest rate swaps, was 6.19% at September 30, 1998 and 6.28% at
September 30, 1997.
On August 18, 1997, CNAF filed a Registration Statement on Form S-3
with the Securities and Exchange Commission relating to the issuance of $1.0
billion of senior and subordinated debt and preferred stock that became
effective on October 22, 1997. This shelf registration incorporated $250 million
of securities remaining available for issuance from a prior shelf registration.
On January 8, 1998, CNAF 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 repay a portion of
the revolving credit facility.
On April 15, 1998, CNAF issued $500 million principal amount of 6.50%
senior notes, due April 15, 2005. The net proceeds were used to prepay a portion
of the secured mortgage notes, pay down a portion of the existing bank debt
outstanding under CNAF's revolving credit facility, provide refinancing of
senior notes and provide funds for acquisitions.
On September 30, 1997, CNA Surety Corporation, 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
September 30, 1998, the outstanding borrowings under this credit facility were
$118 million and the weighted average interest rate was 5.73%.
(14)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE F. Accumulated Other Comprehensive Income:
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 accumulated
other comprehensive income are shown below:
|------------------------------------------------------------------------------|
| TAX |
|THREE MONTHS ENDED SEPTEMBER 30, 1998 PRE-TAX (EXPENSE) NET |
|(In millions of dollars) AMOUNT BENEFIT AMOUNT|
|------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investment securities: |
| Net unrealized holding gains (losses) arising |
| during the period $ 414 $ (159) $ 255 |
| Adjustment for gains(losses) included in |
| net income (4) 1 (3) |
|Foreign currency translation adjustments 10 (1) 9 |
|Adjustment for participating policyholder liabilities 7 (3) 4 |
|==============================================================================|
|TOTAL OTHER COMPREHENSIVE INCOME $ 427 $ (162) $ 265 |
|==============================================================================|
|------------------------------------------------------------------------------|
| TAX |
|THREE MONTHS ENDED SEPTEMBER 30, 1997 PRE-TAX (EXPENSE) NET |
|(In millions of dollars) AMOUNT BENEFIT AMOUNT|
|------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investment securities: |
| Net unrealized holding gains (losses) arising |
| during the period $ 484 $ (176) $ 308 |
| Adjustment for gains(losses) included in |
| net income - - - |
|Foreign currency translation adjustments (1) - (1) |
|Adjustment for participating policyholder liabilities (4) 1 (3) |
|==============================================================================|
|TOTAL OTHER COMPREHENSIVE INCOME $ 479 $ (175) $ 304 |
|==============================================================================|
<PAGE>
|------------------------------------------------------------------------------|
| TAX |
|NINE MONTHS ENDED SEPTEMBER 30, 1998 PRE-TAX (EXPENSE) NET |
|(In millions of dollars) AMOUNT BENEFIT AMOUNT|
|------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investment securities: |
| Net unrealized holding gains (losses) arising |
| during the period $ 752 $ (277) $ 475 |
| Adjustment for gains(losses) included in |
| net income (281) 98 (183) |
|Foreign currency translation adjustments 6 - 6 |
|Adjustment for participating policyholder liabilities 8 (3) 5 |
|==============================================================================|
|TOTAL OTHER COMPREHENSIVE INCOME $ 485 $ (182) $ 303 |
|==============================================================================|
|------------------------------------------------------------------------------|
| TAX |
|NINE MONTHS ENDED SEPTEMBER 30, 1997 PRE-TAX (EXPENSE) NET |
|(In millions of dollars) AMOUNT BENEFIT AMOUNT|
|------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investment securities: |
| Net unrealized holding gains (losses) arising |
| during the period $ 455 $ (166) $ 289 |
| Adjustment for gains(losses) included in |
| net income (175) 61 (114) |
|Foreign currency translation adjustments - - - |
|Adjustment for participating policyholder liabilities - - - |
|==============================================================================|
|TOTAL OTHER COMPREHENSIVE INCOME $ 280 $ (105) $ 175 |
|==============================================================================|
(15)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE G. Stockholders' Equity
On May 6, 1998, CNA's Board of Directors approved a three-for-one split
of CNAF'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 were
distributed on June 1, 1998 at a rate of three shares for each one held by
shareholders of record at the close of business on May 22, 1998. The table below
reflects the effect of this stock split as if it had occurred on December 31,
1997.
|-----------------------------------------------------------------------------|
|SUMMARY OF CAPITAL STOCK |
|-----------------------------------------------------------------------------|
| NUMBER OF SHARES |
| ------------------------------------------|
| SEPTEMBER 30 DECEMBER 31 |
|AS OF 1998 1997 |
|-----------------------------------------------------------------------------|
|Preferred stock, without par value, non-voting: |
| Authorized 12,500,000 12,500,000 |
|Money market cumulative preferred stock, |
| without par value, non-voting: |
| Issued and outstanding: |
| Series E (stated value $100,000 per share) 750 750 |
| Series F (stated value $100,000 per share) 750 750 |
|Common stock, par value of $2.50 voting stock: |
| Authorized 200,000,000 200,000,000 |
| Issued 185,525,907 185,525,907 |
| Outstanding 183,704,086 185,394,786 |
| Treasury stock 1,821,821 131,121 |
| |
|-----------------------------------------------------------------------------|
The dividend rate on money market preferred stock is determined
approximately every 49 days by auction. The money market preferred stock is
redeemable at CNAF's option, as a whole or in part, at $100,000 per share plus
accrued and unpaid dividends. As of September 30, 1998 preferred dividends
declared were approximately $4 million.
On August 5, 1998, CNAF's board of directors approved a plan to
purchase, in the open market or through privately negotiated transactions, its
outstanding common stock from time to time, as the company's management deems
appropriate. During the third quarter of 1998, pursuant to its announced Share
Repurchase Program, CNAF purchased 1,690,700 shares of its common stock for
approximately $64 million. Total shares purchased by CNAF and classified on the
September 30, 1998 balance sheet as treasury stock are 1,821,821 for a decrease
in stockholders' equity of approximately $67 million. As of November 2, 1998,
CNAF has repurchased 2,734,800 shares of its common stock at an aggregate cost,
including commissions, of $102 million.
(16)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- concluded
NOTE H. Restructuring and Other Related Charges
In the third quarter of 1998, the Company finalized and approved a plan
to restructure its operations. In connection with this plan, the Company
recorded pre-tax restructuring and other related charges totaling $220 million.
The restructuring plan focused primarily on a net reduction in current
workforce, the consolidation of certain processing centers, the closing of
various facilities and the exiting of certain businesses. The Company's plan
calls for a reduction in the current workforce of approximately 4,500 employees
resulting in a net reduction of approximately 2,400 employees upon completion of
the plans activities. The charges recorded in the third quarter relate to
employee termination benefits ($72 million), the writedown of certain assets to
their fair values ($74 million), lease abandonment costs ($42 million) and
losses related to the exiting of businesses ($32 million).
NOTE I. Subsequent Events
On October 9, 1998, CNAF filed a Registration Statement on Form S-8
with the Securities and Exchange Commission registering $60 million of $2.50 par
value common stock, to be offered pursuant to the CNAF Officer Stock Ownership
Plan. On October 9, 1998, prior to the opening of the trading session on the New
York Stock Exchange, CNAF sold 1,229,583 shares of common stock that was held in
treasury stock to certain senior officers of CNAF at the average of the highest
and lowest sale price on the New York Stock Exchange, composite transactions,
which was a price of $34.91 per share. The purchases were financed by full
recourse collateralized loans from CNAF totaling approximately $43 million. The
loans are ten year notes which bear interest at the Applicable Federal Rate for
October 1998 (5.39%), compounding semi-annually.
(17)
<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 17, which contain additional information helpful in evaluating
operating results and financial condition.
CNA Financial Corporation (CNAF) is a holding company whose primary
subsidiaries consist of property/casualty and life insurance companies,
collectively CNA or the Company. CNAF's primary subsidiaries include Continental
Casualty Company, primarily a commercial lines writer, Continental Assurance
Company and Valley Forge Life Insurance Company, life insurance subsidiaries,
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, loss control and claims
administration. CNA products and services are marketed through agents, brokers,
general agents and direct sales.
(18)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
RESULTS OF OPERATIONS:
The following chart summarizes key components of operating results for
the three and nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1998 1997 1998 1997 |
|-------------------------------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED |
|INVESTMENT GAINS/LOSSES): |
|Revenues: |
| Premiums: |
<S> <C> <C> <C> <C>
| Property/Casualty $ 2,514 $ 2,489 $ 7,707 $ 7,489 |
| Life 786 847 2,428 2,542 |
| -------- ------- ------- ------- |
| 3,300 3,336 10,135 10,031 |
| Net investment income 521 530 1,641 1,641 |
| Other 211 206 598 537 |
| -------- ------- ------- ------- |
| 4,032 4,072 12,374 12,209 |
|Benefits and expenses 4,152 3,911 12,287 11,712 |
| -------- ------- ------- ------- |
| Operating (loss) income before income tax (120) 161 87 497 |
|Income tax benefit (expense) 50 (40) 24 (114) |
| -------- ------- ------- ------- |
| Net operating (loss) income $ (70) $ 121 $ 111 $ 383 |
| ======== ======= ======= ======= |
| |
| |
|SUPPLEMENTAL FINANCIAL DATA: |
|Net operating income (excluding restructuring |
|and other related charges) by group: |
| Property/Casualty $ 100 $ 121 $ 300 $ 385 |
| Life 6 24 44 71 |
| Other, primarily interest expense (25) (24) (82) (73) |
| ======== ======= ======= ======= |
| $ 81 $ 121 $ 262 $ 383 |
|Net operating (loss) income by group: |
| Property/Casualty $ (25) $ 121 $ 175 $ 385 |
| Life (20) 24 18 71 |
| Other, primarily interest expense (25) (24) (82) (73) |
| -------- ------- ------- ------- |
| $ (70) $ 121 $ 111 $ 383 |
| -------- ------- ------- ------- |
|Net realized investment gains (losses) by group: |
| Property/Casualty $ 55 $ 126 $ 263 $ 221 |
| Life 1 29 56 73 |
| Other - (2) (1) 10 |
| -------- ------- ------- ------- |
| $ 56 $ 153 $ 318 $ 304 |
| -------- ------- ------- ------- |
|Net (loss) income by group: |
| Property/Casualty $ 30 $ 247 $ 438 $ 606 |
| Life (19) 53 74 144 |
| Other, primarily interest expense (25) (26) (83) (63) |
| -------- ------- ------- ------- |
| $ (14) $ 274 $ 429 $ 687 |
|=======================================================================================================|
</TABLE>
(19)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
On August 5, 1998, CNA announced estimates of the financial
implications of its initiatives to achieve world-class performance. "World-class
performance", as defined by the Company, refers to the Company's intention to
position each of its strategic business units (SBUs) as a market leader by
sharpening its focus on customers and employing new technology to work smarter
and faster. As a result of these initiatives, the Company is reorganizing a
number of its SBUs and corporate support areas.
In the third quarter of 1998, the Company finalized and approved a plan
to restructure its operations. In connection with this plan, the Company
recorded pre-tax restructuring and other related charges totaling $220 million.
The restructuring plan focused on a net reduction in the current workforce of
approximately 4,500 employees resulting in a net reduction of approximately
2,400 employees, the consolidation of certain processing centers, the closing of
various facilities, and the exiting of certain businesses. The charges recorded
in the third quarter relate to employee termination benefits ($72 million), the
writedown of certain assets to their fair values ($74 million), lease
abandonment costs ($42 million) and losses related to the exiting of businesses
($32 million). These activities and changes are more fully discussed below.
Within its risk management business, pre-tax restructuring and other
related charges totaled approximately $79 million for the third quarter. The
charges relate to costs associated with the consolidation of claim offices in
approximately 36 market territories totaling approximately $8 million (lease
abandonment costs), employee termination benefits related to the net reduction
in workforce of approximately 200 employees at a cost of approximately $7
million and the writedown of fixed and intangible assets of approximately $64
million.
Within its commercial insurance business, pre-tax restructuring and
other related charges for the third quarter totaled approximately $57 million.
The charges relate primarily to the consolidation of four regional offices into
two zone offices and a reduction of claim processing offices from 24 to 8 at a
cost of approximately $21 million (lease abandonment costs). The charges also
consist of approximately $31 million of employee termination benefits related to
the net reduction in workforce of approximately 1,200 employees and an
additional $5 million relating to fixed asset writedowns.
Within its group insurance business, pre-tax restructuring and other
related charges for the third quarter totaled approximately $38 million. The
charges relate primarily to the Employer Health and Affinity lines of business
that the Company decided to exit and include the employee termination benefit
costs related to the net reduction in its current workforce of approximately 400
employees.
For various other departments within the Company, pre-tax restructuring
and other related charges totaled approximately $25 million and relate primarily
to the closing of leased facilities and employee termination benefits related to
the reductions in the current workforce. Additionally, the Company recorded
approximately $21 million in incremental benefit plan expenses associated with
the reductions in the Company's workforce.
The Company expects to record an additional $125 million to $175
million in charges over the next 12 to 15 months, primarily relate to employee
related expenses, computer systems, consulting fees and other related costs.
While such costs relate to the Company's overall plans of reorganization,
generally accepted accounting principles do not allow for accrual of these in
the period the plan is adopted. Rather, such costs will be recorded in the
period which they are incurred.
(20)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
While the Company has not yet completed its analysis of anticipated
cost savings, it estimates that its world-class initiatives, which include the
restructuring plan as well as revenue enhancements and operating efficiencies,
will result in anticipated reductions of approximately 200 basis points in the
Company's expense ratio and savings of approximately $300 to $350 million on an
annualized basis. The Company expects a portion of the anticipated savings will
be realized beginning in the latter part of 1998 and to achieve the full expense
ratio reduction within 15 months.
As part of the risk management business initiatives, the Company
introduced its new risk management service organization, RSKCoSM in the fourth
quarter of 1998. This new organization was created through the unification of
its existing claims service organizations and the integration of the new claims
group with loss control, medical cost management and information services
businesses. RSKCoSM will employ one of the largest claims technical staff in the
insurance industry, and expects to achieve cost savings through economies of
scale.
Related to its decision to exit the Employer Health and Affinity Health
lines of business, the Company actively explored the sale of these lines of
business. In the fourth quarter, the Company entered into two separate
agreements to sell a majority of its Employer Health book of business.
Consolidated Results
- --------------------
Consolidated revenues, which consist of premium, net investment income,
realized investment gains and other revenue, were $12.89 billion for the first
nine months of 1998, up slightly from $12.68 billion for the same period in
1997. For the first nine months of 1998, revenues, as compared to the same
period in 1997, reflect an increase in earned premium of $104 million, resulting
from an increase in property/casualty premiums of $218 million, offset by a
decline in life premium of $114 million. Investment income was approximately
$1.64 billion for both the first nine months of 1998 and 1997. Other revenues
were $598 million for the first nine months of 1998 as compared to $537 million
for the same period in 1997, primarily due to increased revenues from several
subsidiaries of the Company.
Net operating income, which excludes net realized investment gains, was
$111 million, or $0.57 per share, for the first nine months of 1998, compared to
net operating income of $383 million, or $2.04 per share, for the same period in
1997. Net operating income for the first nine months of 1998 includes after-tax
restructuring and other related charges of $151 million, or $0.82 per share.
Excluding these charges, net operating income for the period ended September 30,
1998 was $262 million, or $1.39 per share. The Company recorded a net operating
loss of $70 million, or $0.39 per share, for the third quarter of 1998, compared
to net operating income of $121 million, or $0.64 per share, for the same
quarter in 1997. The net operating loss for the third quarter of 1998 includes
the after-tax restructuring and other related charges of $151 million. Excluding
these charges, net operating income for the period was $81 million, or $0.43 per
share.
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Realized investment gains, net of tax, for the first nine months of
1998 were $318 million, or $1.72 per share, compared to net realized investment
gains for the first nine months of 1997 of $304 million, or $1.64 per share.
Realized investment gains, net of tax, for the third quarter of 1998 were $56
million, or $0.30 per share, compared to net realized investment gains for the
third quarter of 1997 of $153 million, or $0.83 per share. The components of the
net realized investment gains (losses) are as follows:
|-----------------------------------------------------------------------------|
|NET REALIZED INVESTMENT GAINS(LOSSES) |
|NINE MONTHS ENDED SEPTEMBER 30 1998 1997 |
|(In millions of dollars) |
|-----------------------------------------------------------------------------|
|Bonds: |
| U.S. Government $ 165 $ 103 |
| Tax exempt 58 26 |
| Asset-backed 30 18 |
| Taxable 83 102 |
| --------- ----- |
| Total bonds 336 249 |
|Stocks 12 57 |
|Derivative security investments 28 2 |
|Separate Accounts and other 136 167 *|
| --------- ----- |
| Realized investment gains reported in revenues 512 475 |
|Participating policyholders' interest (9) (8) |
|Income tax expense (185) (163) |
| --------- ----- |
| NET REALIZED INVESTMENT GAINS $ 318 $ 304 |
|=============================================================================|
*INCLUDES A REALIZED INVESTMENT GAINS OF $89 MILLION ON THE MERGER OF CNA SURETY
CORPORATION AND CAPSURE HOLDINGS CORP.
Net income for the first nine months of 1998 was $429 million, or $2.29
per share, compared to $687 million, or $3.68 per share, for the first nine
months of 1997. Net income for the first nine months of 1998, excluding the
after-tax restructuring and other related charges of $151 million, or $0.82 per
share, was $580 million, or $3.11 per share. The Company recorded a net loss for
the third quarter of $14 million, or $0.09 per share, compared to net income of
$274 million, or $1.47 per share, for the third quarter of 1997. Excluding the
restructuring and other related charges, net income for the third quarter was
$137 million, or $0.73 per share. The Company's net income for the first nine
months of 1998 includes after-tax catastrophe losses of $141 million; after-tax
catastrophe losses in the first nine months of 1997 were $51 million. After-tax
catastrophe losses were $43 million for the third quarter of 1998 as compared to
$2 million for the same period in 1997.
(22)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Property/Casualty Operations
- ----------------------------
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------|
|PROPERTY/CASUALTY GROUP |
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1998 1997 1998 1997 |
|-------------------------------------------------------------------------------------|
|Operating Summary (excluding realized |
|investment gains/losses): |
|Revenues: |
<S> <C> <C> <C> <C>
| Premiums $2,514 $ 2,489 $7,707 $ 7,489 |
| Net investment income 412 432 1,313 1,343 |
| Other 181 173 516 448 |
| ------ ------- ------ -------|
| 3,107 3,094 9,536 9,280 |
|Benefits and expenses 3,161 2,936 9,351 8,781 |
| ------ ------- ------ -------|
| (Loss) income before income tax (54) 158 185 499 |
|Income tax recovery (expense) 29 (37) (10) (114)|
| ------ ------- ------ -------|
| NET OPERATING (LOSS) INCOME (EXCLUDING REALIZED |
| INVESTMENT GAINS/LOSSES) $ (25) $ 121 $ 175 $ 385 |
|=====================================================================================|
</TABLE>
Property/casualty revenues for the nine months ended September 30,
1998, excluding net realized investment gains/losses, increased 2.8%, to $9.54
billion compared to $9.28 billion in the same period a year ago.
Property/casualty earned premium increased $218 million, or 2.9% from the
comparable period in the prior year. The increase in earned premium is due
primarily to increases in involuntary risk premium of approximately $207
million, personal lines premium of $92 million, $80 million of premium from CNA
Surety Corporation which was formed in September of 1997, and $48 million of
premium from Omega Aseguradora de Reisgo de Trabajo, an Argentinean worker's
compensation carrier that was acquired in June of 1997. These increases were
partially offset by a decrease in commercial lines premium of approximately $150
million and group lines of approximately $92 million.
Lower involuntary premium levels in 1997 reflected reductions in
estimates of premium for 1996 and prior periods, primarily in the workers'
compensation line of business, and a greater willingness on the part of the
voluntary market, including CNA, to write these types of risks. The 1998
estimated premiums reflect a return to historical levels. The increase in
personal lines premium is attributable to increases in California Earthquake
Authority premium of $34 million as well as an increase of $45 million across
various lines. The decrease in commercial lines is primarily due to competitive
pricing pressures throughout the industry. The decrease in group lines is mainly
due to the decision to exit the Employer Health and Affinity Health lines of
business.
Investment income decreased $30 million or 2.2% for the nine months
ended September 30, 1998 as compared to the same period for 1997 due primarily
to lower yielding investments. The fixed maturities segment of the investment
portfolio yielded 6.1% in the first nine months of 1998 as compared to 6.3% for
the first nine months of 1997.
Other revenues increased to $516 million or 15.2% for the nine months
ended September 30, 1998, as compared to $448 million for the same period in
1997. This increase is primarily due to increased revenues from CNA's computer
leasing, professional employers organization and automobile warranty businesses.
(23)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Pre-tax operating income, excluding net realized gains/losses, for the
property/casualty insurance subsidiaries was $185 million for the nine months
ended September 30, 1998, compared to $499 million for the same period one year
ago. Underwriting losses for the nine and three months ended September 30, 1998,
were $1.1 billion and $465 million, compared to $844 million and $273 million
for the same periods in 1997. The increase in 1998 underwriting losses is
primarily due to the restructuring and other related charges recorded during the
third quarter, as well as an increase in pre-tax catastrophe losses for the
first nine months of 1998 of approximately $138 million.
Pre-tax catastrophe losses for the nine months ended September 30, 1998
were $217 million, as compared to $79 million for the same period in 1997. The
increase in catastrophe losses is mainly due to spring storms throughout the
United States and hurricane damage sustained during the third quarter. Pre-tax
catastrophe losses for the three months ended September 30, 1998 and September
30, 1997 were $66 million and $3 million, respectively.
CNA's property/casualty insurance subsidiaries recorded net operating
income, excluding net realized investment gains/losses, of $175 for the nine
months ended September 30, 1998, and a net operating loss of $25 million for the
three months ended September 30, 1998. This compares to net operating income of
$385 million and $121 million for the nine and three months ended September 30,
1997, respectively. Net realized investment gains for the nine and three months
ended September 30, 1998 were $263 million and $55 million, compared to $221
million and $126 million in the comparable periods of 1997.
(24)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Life Operations
- ---------------
<TABLE>
<CAPTION>
|---------------------------------------------------------------------------------------------|
|LIFE GROUP |
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1998 1997 1998 1997 |
|---------------------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED |
| INVESTMENT GAINS/LOSSES): |
|Revenues: |
<S> <C> <C> <C> <C>
| Premiums $ 786 $ 847 $ 2,428 $ 2,544 |
| Net investment income 111 102 335 306 |
| Other 30 33 82 89 |
| ------ ------ ------- ---------|
| 927 982 2,845 2,939 |
|Benefits and expenses 955 943 2,818 2,827 |
| ------ ------ ------- ---------|
| (Loss) income before income tax (28) 39 27 112 |
|Income tax recovery (expense) 8 (15) (9) (41)|
| ------ ------ ------- ---------|
| NET OPERATING (LOSS) INCOME (EXCLUDING REALIZED |
| INVESTMENT GAINS/LOSSES) $ (20) $ 24 $ 18 $ 71 |
|=============================================================================================|
</TABLE>
Life group revenues, excluding realized investment gains/losses, were
approximately $2.85 billion, down 3.2% for the nine months ended September 30,
1998 compared to the same period a year ago. Revenues for the third quarter of
1998 were $927 million as compared to $982 million for the same period in 1997,
representing a decrease of $55 million or 5.6%. Life group earned premium was
$2.43 billion in the first nine months of 1998, down 4.6% as compared to $2.54
billion for the nine months ended September 30, 1997. For the three months ended
September 30, 1998, earned premium decreased 7.2% to $786 million from $847
million for the same period in 1997. The decreases in earned premiums are
primarily due to lower premiums for the Federal Employees Health Benefit Plan
(FEHBP). The decrease in FEHBP premiums is due to improved claim experience upon
which premiums are based and continues the trend from the first half of this
year.
Investment income for the nine months ended September 30, 1998 was $335
million as compared to $306 million for the same period a year ago. The fixed
maturities segment of the life investment portfolio yielded 6.4% in the first
nine months of 1998 and 6.3% for the first nine months of 1997.
Pre-tax operating income for the life insurance subsidiaries, excluding
net realized investment gains/losses, was $27 million for the nine months ended
September 30, 1998, compared to $112 million for the same period in 1997. For
the three months ended September 30, 1998, the life insurance subsidiaries
recorded a pre-tax operating loss of $28 million as compared to pre-tax
operating income of $39 million for the same period in 1997. The decrease in
pre-tax operating income is primarily due to lower premium revenue and higher
losses in the group medical business for the first nine months of 1998 as
compared to the same period in 1997. Additionally, pre-tax operating income was
reduced by restructuring and other related charges of approximately $38 million
attributable to the Employer Health and Affinity Health lines of business that
the Company decided to exit which include the employee termination benefit costs
related to the net reduction in its current workforce of approximately 400
employees.
Net realized investment gains for the nine and three months ended September
30, 1998 were $56 million and $1 million, compared to $73 million and $29
million for the same periods in 1997.
(25)
<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 | NINE MONTHS ENDED |
|AT CARRYING VALUE | SEPTEMBER 30, 1998 |
| |------------------------------|
| | CHANGE IN | |
| SEPTEMBER 30, DECEMBER 31, | NET UNREALIZED | REALIZED |
|(In millions of dollars) 1998 1997 | GAINS(LOSSES)|GAINS(LOSSES)|
|-----------------------------------------------------------------------|----------------|-------------|
|FIXED MATURITY SECURITIES: | | |
<S> <C> <C> <C> <C>
|U.S. Treasury securities and | | |
| obligations of government agencies $ 10,075 $ 12,980 | $ 236 | $ 165 |
|Asset-backed securities 6,766 4,804 | 137 | 30 |
|Tax exempt securities 6,144 4,724 | 98 | 58 |
|Taxable securities 6,337 7,040 | (124)| 83 |
| ---------- ----------- | ----------| --------|
| Total fixed maturity securities 29,322 29,548 | 347 | 336 |
|Stocks 1,362 814 | 272 | 12 |
|Short-term investments 4,549 4,884 | - | (14)|
|Other investments 1,064 945 | (107)| 113 |
|Derivative security investments 8 12 | - | 28 |
| ---------- ----------- | ----------| --------|
| TOTAL INVESTMENTS $ 36,305 $ 36,203 | 512 | 475 |
| ========== =========== | | |
|Other, principally Separate Accounts | 9 | 37 |
|Participating policyholders' interest | (6)| (9)|
|Income tax expense | (180)| (185)|
| | ----------| --------|
| NET INVESTMENT GAINS | $ 335 | $ 318 |
|=======================================================================|================|=============|
|-----------------------------------------------------------------------|
|SHORT-TERM INVESTMENTS: |
|-----------------------------------------------------------------------|
|Security repurchase collateral $ 58 $ 154 |
|Escrow 1,049 1,065 |
|U.S. Treasuries 525 558 |
|Commercial paper 1,981 1,850 |
|Money markets 312 624 |
|Other 624 633 |
|-----------------------------------------------------------------------|
| TOTAL SHORT-TERM INVESTMENTS $ 4,549 $ 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.
<PAGE>
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.
(26)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The general account portfolio consists primarily of high quality
marketable fixed maturity securities, approximately 93.7% of which are rated as
investment grade. At September 30, 1998, tax-exempt securities and short-term
investments, excluding collateral for securities sold under repurchase
agreements, comprised approximately 16.9% and 12.4%, respectively, of the
general account's total investment portfolio compared to 13.1% and 13.1%,
respectively, at December 31, 1997. Historically, CNA has maintained short-term
assets at a level that provided for liquidity to meet its short-term
obligations, as well as reasonable contingencies and anticipated claim payout
patterns. Short-term investments at both September 30, 1998 and December 31,
1997 are substantially higher than historical levels in anticipation of
Fibreboard-related claim payments. At September 30, 1998, the major components
of the short-term investment portfolio consist primarily of high-grade
commercial paper and U.S. Treasury bills.
As of September 30, 1998, the market value of CNA's general account
investments in fixed maturities was $29.32 billion and was greater than
amortized cost by approximately $876 million. This compares to a market value of
$29.55 billion and approximately $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 September 30, 1998 were $1,138 million
and $262 million, respectively, compared to $644 million and $116 million,
respectively, at December 31, 1997.
Net unrealized investment gains on general account fixed maturities at
September 30, 1998 include net unrealized losses on high yield securities of
$137 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.
CNA's investment in high yield securities in the general account decreased $377
million to approximately $1.86 billion at September 30, 1998 when compared to
December 31, 1997.
At September 30, 1998, total Separate Account cash and investments
amounted to $5.25 billion with taxable fixed maturity securities representing
approximately 83.9% of the Separate Accounts' portfolios. Approximately 68.0% 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 is generally matched 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 $3.44 billion at September 30, 1998 and $3.83 billion at December
31, 1997. At September 30, 1998, fair value exceeded amortized cost by
approximately $101 million. This compares to an unrealized 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
September 30, 1998, were $118 million and $17 million, respectively, as compared
to unrealized gains of $87 million and unrealized losses of $16 million at
December 31, 1997.
Carrying values of high yield securities in the guaranteed investment
portfolio were $278 million at September 30, 1998 and $310 million at December
31, 1997. Net unrealized investment losses on high yield securities held in such
Separate Accounts were $19 million at September 30, 1998, and $1 million at
December 31, 1997.
(27)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
High yield securities generally involve a greater degree of risk than
that of investment grade securities. Expected returns should, however,
compensate for the added risk. The risk is also considered in the interest rate
assumptions in the underlying insurance products. As of September 30, 1998,
CNA's concentration in high yield bonds, including Separate Accounts, was
approximately 3.7% of total assets as compared to 3.2% at December 31, 1997. In
addition, CNA's investments in mortgage loans and 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 September 30, 1998
(general and guaranteed investment portfolios) are $9.01 billion of asset-backed
securities, consisting of approximately 54.5% in collateralized mortgage
obligations ("CMOs"), 15.2% in corporate asset-backed obligations, 16.6% in
corporate mortgage backed security pass thru obligations, and 13.7% 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 September 30, 1998, the fair value
of asset-backed securities exceeded the amortized cost by approximately $299
million compared to net unrealized investment gains of $114 million at December
31, 1997. CNA limits the risks associated with interest rate fluctuations and
prepayments by concentrating its CMO investments in early planned amortization
classes with relatively short principal repayment windows.
At September 30, 1998, 36.2% of the general account's fixed maturity
securities portfolio was invested in U.S. Government securities, 36.4% in other
AAA rated securities and 15.1% in AA and A rated securities. CNA's guaranteed
investment fixed maturity securities portfolio is comprised of 5.7% U.S.
Government securities, 61.9% in other AAA rated securities and 13.9% in AA and A
rated securities. These ratings are primarily from Standard & Poor's.
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
on page 31 are classified as held for purposes other than trading. The Company
does not generally hold or issue derivatives for trading purposes.
(28)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The Company has exposure to economic losses due to 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 that 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 Duetschmarks, 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 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 net income or stockholders' equity.
Further, the computations do not contemplate any actions CNA would undertake in
response to changes in interest rates.
(29)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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 September 30, 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 $1.60 billion and $2.38 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 $1.67 billion and $2.53
billion, respectively.
The Company's long-term debt, including interest rate swap agreements,
as of September 30, 1998 is denominated in U.S. dollars. Approximately 93% 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 2000 through December 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 $138 million and $201
million, respectively. The impact of a 100 and 150 basis point decrease in
market interest rates would result in an increase in the market value of the
fixed rate debt by $154 million and $237 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 $2.2 million and $3.2
million, respectively, per year. A 100 and 150 basis point decrease in interest
rates would lower interest expense by $2.2 million and $3.2 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
September 30, 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 $240 million and $599 million decrease,
respectively, in the net financial instrument position. Of these amounts, $82
million and $205 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 September 30, 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 $196 million and $391 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.
(30)
<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 decline of 10% in foreign currency exchange rates and a 10% decline in
the S&P 500 index.
|------------------------------------------------------------------------------|
| |
|SEPTEMBER 30, 1998 MARKET INTEREST CURRENCY EQUITY |
|(In millions of dollars) VALUE RATE RISK RISK RISK |
|------------------------------------------------------------------------------|
|Held for Other Than Trading Purposes |
| General accounts |
| Fixed maturity securities $ 29,322 $ (1,450) $(135) $ - |
| Equity securities 1,362 - (1) (136)|
| Short-term investments 4,549 (6) (36) - |
| Interest rate swaps (15) 11 - - |
|------------------------------------------------------------------------------|
| Total general accounts 35,218 (1,445) (172) (136)|
|------------------------------------------------------------------------------|
| Separate Accounts |
| Fixed maturity securities 4,405 (157) (22) (3)|
| Equity securities 186 - - (19)|
| Short-term investments 457 (1) (2) - |
| Equity index futures - 2 - (82)|
|------------------------------------------------------------------------------|
| Total Separate Accounts 5,048 (156) (24) (104)|
|------------------------------------------------------------------------------|
| Total all securities $ 40,266 $ (1,601) $(196) $ (240)|
|==============================================================================|
|LONG TERM DEBT $ (3,133) $ 138 $ - $ - |
|==============================================================================|
The following table reflects an increase in interest rates of 150 basis
points, a decline of 20% in foreign currency exchange rates, and a 25% decline
in the S&P 500 index.
|------------------------------------------------------------------------------|
| |
|SEPTEMBER 30, 1998 MARKET INTEREST CURRENCY EQUITY |
|(In millions of dollars) VALUE RATE RISK RISK RISK |
|------------------------------------------------------------------------------|
|Held for Other Than Trading Purposes |
| General accounts |
| Fixed maturity securities $ 29,322 $ (2,151) $ (269) $ - |
| Equity securities 1,362 - (2) (341)|
| Short-term investments 4,549 (9) (73) - |
| Interest rate swaps (15) 16 - - |
|------------------------------------------------------------------------------|
| Total general accounts 35,218 (2,144) (344) (341)|
|------------------------------------------------------------------------------|
| Separate Accounts |
| Fixed maturity securities 4,405 (236) (44) (7)|
| Equity securities 186 - - (46)|
| Short-term investments 457 (1) (3) - |
| Equity index futures - 3 - (205)|
|------------------------------------------------------------------------------|
| Total Separate Accounts 5,048 (234) (47) (258)|
|------------------------------------------------------------------------------|
| Total all securities $ 40,266 $ (2,378) $ (391) $ (599)|
|==============================================================================|
|LONG-TERM DEBT $ (3,133) $ 201 $ - $ - |
|==============================================================================|
(31)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
FINANCIAL CONDITION:
|------------------------------------------------------------------------------|
|FINANCIAL POSITION SEPTEMBER 30 DECEMBER 31|
|(in millions of dollars, except per share data) 1998 1997 |
|------------------------------------------------------------------------------|
| |
|Assets $ 62,566 $ 61,600 |
|Stockholders' equity 8,973 8,309 |
|Accumulated other comprehensive income 892 589 |
|Book value per common share 47.63 44.01 |
|==============================================================================|
CNA's assets increased approximately $960 million from December 31,
1997 to $62.57 billion as of September 30, 1998. The major components of this
increase were an increase of approximately $840 million in insurance receivables
and approximately $545 million for receivables for securities sold offset by a
decrease of approximately $170 million in deferred income taxes and a decrease
of approximately $430 million in separate account business.
During the first nine months of 1998, CNA's stockholders' equity
increased by $664 million, or 8.0%, to $8.97 billion. The major components of
this change were net income of $429 million and change in accumulated other
comprehensive income of $303 million.
The statutory surplus of the property/casualty subsidiaries was
approximately $7.0 billion at both September 30, 1998 and December 31, 1997.
Statutory surplus increased by net income of $291 million and a change in net
unrealized investment gains of $25 million. These increases were more than
offset by $367 million reductions in surplus, primarily dividends. The statutory
surplus of the life insurance subsidiaries was approximately $1.2 billion at
September 30, 1998 and December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES:
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 nine months ended September 30, 1998, CNA's operating cash flows
were a negative $730 million, compared to a negative $359 million for the nine
months ended September 30, 1997. Negative cash flows for 1998 are primarily the
result of reduced income from operations while negative cash flows for 1997 are
substantially the result of the settlement of asbestos and environmental claims,
including those attributable to the Fibreboard litigation.
(32)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
In early 1998, CNAF was able to take advantage of favorable market
conditions to refinance, on a fixed rate basis, $300 million of existing debt
under the its revolving credit facility. During the second quarter of 1998 the
Company issued $500 million principal amount of 6.50% senior notes, due April
15, 2005. The net proceeds were used to pay down existing debt, provide
refinancing of certain senior notes and provide funds for acquisitions. The net
effect of these transactions was an increase in cash flows from financing
activities of approximately $61 million
On August 5, 1998, CNAF's board of directors approved a plan to
repurchase, in the open market or through privately negotiated transactions, its
outstanding common stock from time to time as market conditions warrant. The
timing of stock purchases are made at the discretion of management. As of
September 30, 1998, CNAF has repurchased 1,690,700 shares at a cost of
approximately $64 million. Total shares purchased by CNAF and classified on the
September 30, 1998 balance sheet as treasury stock are approximately 1,821,821
at a cost of approximately $67 million. As of November 2, 1998 CNAF has
repurchased 2,734,800 shares of its common stock at an aggregate cost, including
commissions, of $102 million.
In the past five years, several rating agencies have lowered the Company's
ratings with regard to its debt and claims paying ability. Some of the factors
causing these downgrades include Casualty's obligations under the Fibreboard
settlement and the merger with The Continental Corporation in 1995. More
recently, rating agencies in their evaluations of Casualty have expressed
concern with regard to the intensely competitive environment in the U.S.
commercial insurance markets, among other factors.
The Company intends to take a number of steps to address the issue of
lowered ratings and, among other things, intends to enhance its capital
structure by approximately $500 million. It is anticipated that this will be
accomplished in the fourth quarter of 1998 and the first quarter of 1999 through
several transactions, including the issuance of preferred equity and debt
securities by CNAF. Loews has advised CNAF that it would be willing to purchase
approximately half of such securities.
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
renovating or replacing many of its legacy systems to accommodate business for
the year 2000 and beyond. In addition, the Company is checking embedded systems
in computer hardware and other infrastructure such as elevators, heating and
ventilating systems, and security systems. To date, 89% of all planned hours
have been expended, and a similar percentage of milestones have been completed.
Approximately 81% of the Company's internal systems have been internally
tested so far and expect to be running in a production environment by December
1, 1998. This deadline allows a full year for re-validation of already tested
and implemented Year 2000 remediated systems, as well as for shake-out of any
previously unidentified problems and for interacting with business partners and
vendors that are still working on making their programs Year 2000 ready.
(33)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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. As of September 30, 1998, approximately $48
million has been spent. However, prior to 1997, the Company did not specifically
separate technology charges for Year 2000 from other information technology
charges. In addition, while some hardware charges are included in the budget
figures, the Company's hardware costs are typically included as part of ongoing
technology updates and not specifically as part of the Year 2000 project. All
funds spent and to be spent will be financed from current operating funds.
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.
The Company has already sent Year 2000 information packages to more than 12,000
independent agents to encourage them to become Year 2000 ready on a timely
basis. The Company has also sent Year 2000 information to almost 300,000
business policyholders to increase their awareness of the Year 2000 issue.
Similar information packages have been sent to healthcare providers, lawyers and
others with whom the Company has business relationships. Because of the
interdependent nature of the issue, the Company cannot be sure that there will
not be a disruption in its business.
The Company has also developed business resumption plans to ensure that
the Company is able to continue critical processes through other means in the
event that it becomes necessary to do so. Formal strategies have been developed
within each business unit and support organization to include appropriate
recovery processes and use of alternative vendors. More than 200 strategies have
been developed to address recovery plans for approximately 400 processes. These
plans are being updated quarterly.
In addition, property/casualty insurance companies may have an
underwriting exposure related to Year 2000 issue. 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 insurance polices underwritten
by CNA. If any claims are made, coverage, if any, will depend on the facts and
circumstances of the claim and the provisions of the policy. The range of
potential insurance exposure created by the Year 2000 problem is sufficiently
broad that it is impossible to estimate with any degree of accuracy the extent
to which various types of policies issued by the Company may afford coverage for
loss or claims. At this time, in the absence of any claims experience, the
Company is unable to forecast the nature and range of the losses, the
availability of coverage for the losses, or the likelihood of significant
claims. As a result, the Company is unable to determine whether the adverse
impact, if any, in connection with the foregoing circumstances would be material
to the Company.
(34)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - concluded
ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 interim financial statements in the initial year of its
application. CNA intends to expand its business segment disclosure in connection
with the adoption of this standard.
In December 1997, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which provides guidance on accounting for
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 it is probable that an 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. Certain insurance industry information required
for compliance is not currently available and therefore the Company is studying
alternatives for estimating the accrual. While it is possible that the
cumulative effect of adoption could be material, the ongoing impact of this
standard is not expected to be material to the results of operations, liquidity
or financial position of the Company.
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 and 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.
(35)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
In March 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued 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.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for the
accounting and reporting for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. CNA is currently
evaluating the effects of this Statement on its accounting and reporting for
derivatives and hedges.
FORWARD-LOOKING STATEMENTS:
When included in management's discussion and analysis, the words
"believe", "expects", "intends", "anticipates", "estimates", and analogous
expressions are intended to identify forward-looking statements. Such statements
inherently are subject to a variety of risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and
uncertainties include, among others, general economic and business conditions,
competition, changes in financial markets (interest rate, credit, currency,
commodities and stocks), changes in foreign, political, social and economic
conditions, regulatory initiatives and compliance with governmental regulations,
judicial decisions and rulings, and various other matters, many of which are
beyond the Company's control. See the Company's discussions elsewhere in this
report on how these various risks may affect CNA. These forward-looking
statements speak only as of the date of this report. The Company expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any statement is based.
(36)
<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 39
Computation of Ratio of Earnings to Fixed Charges 12.1 40
Computation of Ratio of Net Income,
As Adjusted, to Fixed Charges 12.2 40
Financial Data Schedule 27 41
(b) REPORTS ON FORM 8-K:
On August 6, 1998, CNA Financial Corporation filed a report on Form
8-K, which reported second quarter earnings, estimates of reorganization charges
and an approval of a share repurchase program.
(37)
<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: November 13, 1998 By: S/W. JAMES MACGINNITIE
----------------- ---------------------
W. James MacGinnitie
Senior Vice President and
Chief Financial Officer
(38)
<PAGE>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
|----------------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars, except per share data) 1998 1997 1998 1997 |
|----------------------------------------------------------------------------------|
|Earnings per share: |
<S> <C> <C> <C> <C>
| Net (loss) income $ (14) $ 274 $ 429 $ 687 |
| Less preferred stock dividends 2 2 4 5 |
| ------ ------ ------ ------|
| Net (loss) income available to |
| common stockholder's (16) $ 272 $ 425 $ 682 |
| ====== ====== ====== ======|
| Weighted average shares outstanding 185.2 185.4 185.2 185.4 |
| ====== ====== ====== ======|
| Net (loss) income per common share $(0.09) $ 1.47 $ 2.29 $ 3.68 |
| ====== ====== ====== ======|
| |
|----------------------------------------------------------------------------------|
</TABLE>
(39)
<PAGE>
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
|------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 |
|(In millions of dollars, except ratios) 1998 1997 |
|------------------------------------------------------------------|
|Income before income tax and cumulative effect |
| of accounting changes $ 589 $ 963 |
|Adjustments: |
| Interest expense 168 153 |
| Interest element of operating lease rental 37 25 |
| ----- -------|
| Income before income tax, as adjusted $ 794 $ 1,141 |
| ===== =======|
| |
|Fixed charges: |
| Interest expense $ 168 $ 153 |
| Interest element of operating lease rental 37 25 |
| ----- -------|
|Fixed charges $ 205 $ 178 |
| ===== =======|
|Ratio of earnings to fixed charges (1) 3.9 6.4 |
|------------------------------------------------------------------|
(1) FOR PURPOSES OF COMPUTING THIS RATIO, EARNINGS CONSIST OF INCOME BEFORE
INCOME TAXES PLUS FIXED CHARGES OF CONSOLIDATED COMPANIES. FIXED CHARGES CONSIST
OF INTEREST AND THAT PORTION OF OPERATING LEASE RENTAL EXPENSE, WHICH IS DEEMED
TO BE AN INTEREST FACTOR FOR SUCH RENTALS.
EXHIBIT 12.2
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF NET INCOME,
AS ADJUSTED, TO FIXED CHARGES
|----------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 |
|(In millions of dollars, except ratios) 1998 1997 |
|----------------------------------------------------------------------------|
|Net Income $ 429 $ 687 |
|Adjustments: |
| Interest expense, after tax 109 100 |
| Interest element of operating lease rental, after tax 24 16 |
| ----- ---- |
|Net income, as adjusted $ 562 $ 803 |
| ===== ==== |
| |
|Fixed charges: |
| Interest expense, after tax $ 109 $ 100 |
| Interest element of operating lease rental, after tax 24 16 |
| ----- ---- |
|Fixed charges $ 133 $ 116 |
| ===== ==== |
|Ratio of net income, as adjusted, to fixed charges (1) 4.2 6.9 |
|--------------------------------------------------------------------------- |
(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.
(40)
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<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
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0
150
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10,135
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<INCOME-TAX> (160)
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</TABLE>
