<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999 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 No...
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 3, 1999
- ----------------------------- -----------------------------
Common Stock, Par value $2.50 184,211,446
===============================================================================
Page (1) of (48)
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 (Unaudited) and DECEMBER 31, 1998................ 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998...... 4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998.... 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998................ 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) JUNE 30, 1999........................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 21
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................... 44
SIGNATURES......................................... 45
EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE......... 46
EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES................................... 47
EXHIBIT 12.2 COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED,
TO FIXED CHARGES.................................... 47
EXHIBIT 27 FINANCIAL DATA SCHEDULE............................. 48
(2)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
JUNE 30, December 31,
1999 1998
(In millions of dollars, except share data) (UNAUDITED)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale (amortized cost:$29,264 and
$29,511)........................................................ $28,937 $30,073
Equity securities available-for-sale (cost: $1,019 and $1,055).. 3,203 1,970
Mortgage loans and real estate (less accumulated depreciation:
$1 and $1)...................................................... 57 62
Policy loans.................................................... 173 177
Other invested assets........................................... 947 858
Short-term investments ......................................... 6,327 4,037
-------- --------
TOTAL INVESTMENTS............................................. 39,644 37,177
Cash.............................................................. 235 217
Receivables:
Reinsurance..................................................... 5,935 6,365
Insurance ...................................................... 6,283 6,093
Less allowance for doubtful accounts............................ (328) (328)
Deferred acquisition costs........................................ 2,583 2,422
Prepaid reinsurance premiums...................................... 467 331
Accrued investment income......................................... 394 392
Receivables for securities sold................................... 644 255
Federal income taxes recoverable ($132 and $234 due from Loews)... 139 251
Deferred income taxes............................................. 881 995
Property and equipment at cost (less accumulated depreciation:
$767 and $695)................ ................................... 855 824
Intangibles....................................................... 364 368
Other assets...................................................... 1,368 1,794
Separate Account business......................................... 5,010 5,203
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $64,474 $62,359
==============================================================================================
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
JUNE 30, December 31,
1999 1998
(In millions of dollars, except share data) (UNAUDITED)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Claim and claim adjustment expense ............................ $28,512 $29,192
Unearned premiums.............................................. 5,437 5,039
Future policy benefits......................................... 5,702 5,418
Policyholders' funds........................................... 736 789
Collateral on loaned securities................................... 2,389 130
Payables for securities purchased................................. 620 316
Participating policyholders' equity............................... 122 140
Debt.............................................................. 3,050 3,160
Other liabilities................................................. 3,335 3,611
Separate Account business......................................... 5,010 5,203
-------- --------
TOTAL LIABILITIES............................................. 54,913 52,998
-------- --------
Commitments and contingent liabilities - Notes C and D
Minority Interest................................................... 218 204
Stockholders' equity:
Common stock ($2.50 par value;
Authorized - 200,000,000 shares;
Issued - 185,525,907 shares;
Outstanding as of June 30, 1999 - 184,211,446 shares,
Outstanding as of December 31, 1998 -183,889,569 shares)........ 464 464
Preferred stock................................................... 150 350
Additional paid-in capital........................................ 126 126
Retained earnings................................................. 7,399 7,258
Accumulated other comprehensive income............................ 1,310 1,064
Treasury stock, at cost........................................... (49) (61)
-------- --------
9,400 9,201
Notes receivable from officer stockholders........................ (57) (44)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................... 9,343 9,157
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $64,474 $62,359
=============================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(3)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars, except per share data) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums.................................................................$ 3,506 $3,478 $6,945 $6,909
Net investment income.................................................... 519 558 1,031 1,120
Realized investment gains, net of participating policyholders' interest.. 167 230 389 408
Other .................................................................. 192 189 391 370
---------------- ------- -------
Total revenues 4,384 4,455 8,756 8,807
---------------- ------- -------
Claims, benefits and expenses:
Insurance claims and policyholders' benefits............................. 3,013 2,981 5,923 5,862
Amortization of deferred acquisition costs............................... 531 605 1,108 1,095
Other operating expenses................................................. 557 519 1,132 1,108
Restructuring-related charges ........................................... 19 - 54 -
Interest expense......................................................... 46 60 108 115
---------------- ------- -------
Total claims, benefits and expenses 4,166 4,165 8,325 8,180
---------------- ------- -------
Income before income tax, minority interest and cumulative .............
effect of a change in accounting principle.............................. 218 290 431 627
Income tax expense........................................................ 55 74 90 172
Minority interest expense............................................... 9 6 15 12
---------------- -------- -------
Income before cumulative effect of a change in accounting principle..... 154 210 326 443
Cumulative effect of a change in accounting principle, net of tax....... - - (177) -
----------------- -------- -------
Net income..............................................................$ 154 $ 210 $ 149 $ 443
===============================================================================================================
EARNINGS PER SHARE
Net income................................................................$ 0.82 $ 1.12 $ 0.77 $ 2.37
======== ======= ======== =======
Net Income excluding accounting change....................................$ 0.82 $ 1.12 $ 1.73 $ 2.37
======== ======= ======== =======
Weighted average outstanding shares of
common stock (in millions of shares)..................................... 184.2 185.4 184.1 185.4
================================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(4)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Notes
Accumulated Receivable
Additional Other From Total
Common Preferred Paid in Comprehensive Retained Comprehensive Treasury Officer Stockholders'
(In millions of dollars)Stock Stock Capital Income Earnings Income Stock Stockholders Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $464 $150 $126 $6,983 $ 589 $(3) $ - $8,309
Comprehensive income:
Net income................. - - - $443 443 - - - 443
Other comprehensive income - - - 38 - 38 - - 38
------
Total comprehensive income $481
======
Preferred dividends........ - - - (3) - - - (3)
- --------------------------------------------- ------------------------------------------------------
BALANCE, JUNE 30, 1998 $464 $150 $126 $7,423 $ 627 $(3) $ - $8,787
============================================= ======================================================
BALANCE, JANUARY 1, 1999 $464 $350 $126 $7,258 $1,064 $(61) $ (44) $9,157
Comprehensive income:
Net income................ - - - $149 149 - - - 149
Other comprehensive income - - - 246 - 246 - - 246
------
Total comprehensive income $395
======
Sale of treasury stock and
issuance of notes receivable
from officer stockholders... - - - - - 12 (13) (1)
Redemption of preferred stock - (200) - - - - - (200)
Preferred dividends........ - - - (8) - - - (8)
- ----------------------------------------------- -------------------------------------------------------
BALANCE, JUNE 30, 1999 $464 $150 $126 $7,399 $1,310 $(49) $(57) $9,343
=============================================== ========================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(5)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 1999 1998
(In millions of dollars)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................$ 149 $ 443
--------- ---------
Adjustments to reconcile net income to net cash flows
from operating activities:............................................
Minority Interest .................................................... 15 6
Deferred income tax provision......................................... 69 40
Participating policyholders' interest................................. (5) 9
Net realized investment gains, pre-tax ............................... (389) (408)
Amortization of intangibles........................................... 11 18
Amortization of bond discount......................................... (88) (118)
Depreciation.......................................................... 92 81
Changes in:
Receivables, net..................................................... 240 (810)
Deferred acquisition costs........................................... (161) (237)
Accrued investment income............................................ (2) 14
Federal income taxes recoverable..................................... 113 (78)
Prepaid reinsurance premiums......................................... (137) (69)
Insurance reserves................................................... (48) 1,133
Other liabilities.................................................... (301) (90)
Other, net........................................................... 310 (513)
--------- ----------
Total adjustments ............................................... (282) (1,022)
--------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES ........................ (132) (579)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities.......................................... (24,444) (18,957)
Proceeds from fixed maturities:
Sales................................................................. 22,899 18,235
Maturities, calls and redemptions..................................... 1,639 1,043
Purchases of equity securities......................................... (376) (457)
Proceeds from sale of equity securities................................ 723 343
Change in short-term investments....................................... (2,200) 411
Purchases of property and equipment ................................... (113) (115)
Change in securities sold under repurchase agreements.................. 2,259 98
Change in other investments............................................ 99 (279)
Other, net............................................................. (16) (19)
--------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES ........................ 471 303
--------- -----------
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) - continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 1999 1998
(In millions of dollars)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to preferred shareholders............................... (8) (3)
Principal payments on long-term debt................................... (292) (944)
Proceeds from issuance of long-term debt............................... 177 1,005
Redemption of preferred stock.......................................... (200) -
Other.................................................................. 2 (9)
--------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES....................... (321) 49
--------- ----------
Net cash flows.............................................. 18 (227)
Cash at beginning of period............................................. 217 383
============================================================================================
CASH AT END OF PERIOD $ 235 $ 156
============================================================================================
Supplemental disclosures of cash flow information:
Cash (paid) received:
Interest expense.......................................................$ (101) $ (98)
Federal income taxes................................................... 119 (168)
Non-cash transactions:
Notes receivable from director/officer stockholders for sale of treasury
stock.................................................................. 13 -
Exchange of Canary Wharf Limited Partnership interest into common stock. 539 -
============================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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 June 30, 1999, Loews Corporation (Loews)
owned approximately 86% of the outstanding common stock of CNAF.
CNA serves a wide spectrum of customers, including small, medium and
large businesses, associations, professionals, groups and individuals with a
broad range of insurance and risk management products and services.
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 consolidated 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, 1998 (filed with the
Securities and Exchange Commission on March 31, 1999) 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 1999. All significant intercompany amounts have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of CNA's management, these statements include all adjustments that are
necessary for the fair presentation of the consolidated financial position,
results of operations and cash flows.
CNA, consistent with sound insurance reserving practices, regularly
adjusts its reserve estimates in subsequent reporting periods as new facts and
circumstances emerge that indicate the previous estimates need to be modified.
These adjustments, referred to as "reserve development", are inevitable given
the complexities of the reserving process and are recorded in the statement of
operations in the period the need for the adjustment becomes apparent.
(7)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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 $1.11 billion at June 30,
1999 and $1.13 billion at December 31, 1998. The majority of the funds are
included in short-term investments and are invested substantially in commercial
paper.
The Company's largest equity holding in a single issuer is Global Crossing,
Ltd. (Global Crossing) common stock. As of June 30, 1999, the Company owned 36.4
million shares, or 8.4% of the outstanding common stock, which was valued at
$1.6 billion. Unrealized gains associated with this security approximated $1.5
billion at June 30, 1999. On June 18, 1999, the Company sold 3.6 million shares
of Global Crossing common stock at a price of $62.75 per share under the tender
offer by US WEST Inc.. This transaction resulted in a pre-tax realized capital
gain for the Company of approximately $222 million.
In May, 1999, Global Crossing entered into a transaction to merge Frontier
Corporation (Frontier) into a subsidiary of Global Crossing. As part of the
Frontier merger agreement, certain shareholders of Global Crossing, including
the Company, entered into a voting agreement to limit their sales of Global
Crossing common stock to ensure that 51% of the outstanding shares of Global
Crossing would vote in favor of the merger. A large proportion of those
shareholders, including the Company, also agreed to suspend their rights under a
shareholders' agreement and a registration rights agreement until the closing of
the Frontier transaction. The Frontier merger is expected to close around
September 30, 1999. The Company has the right, after the closing (or termination
prior to closing) of the Frontier transaction and prior to the December 31,
1999, to require Global Crossing to register the Act up to 25% of the Company's
holdings. The Company's holdings of Global Crossing were not acquired in a
public offering, and may not be sold to the public unless the sale is registered
or exempt from the registration requirements of the Act. Such exemptions would
include sales pursuant to Rule 144 under the Act if such sales meet the
requirements of the Rule.
On March 25, 1999, Canary Wharf Group P.L.C. (CWG) shares were sold in an
initial public offering at a price of (pound)3.30 per share and listed on the
London Stock Exchange. CNA received approximately 100 million shares of CWG
stock and approximately $144 million in cash. At June 30, 1999, CNA had an
approximate 15% ownership interest in CWG and is accounted for as an
available-for-sale security, with a carrying value of approximately $630
million. The original investors, including CNA, have entered into an agreement
with the underwriters under which they may not sell their shares of CWG prior to
September 30, 1999 without the underwriters' consent.
<PAGE>
NOTE C. Legal Proceedings and Contingent Liabilities:
FIBREBOARD LITIGATION
CNAF'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, in 1993, 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") reached an agreement (the "Global Settlement Agreement") to resolve
all future asbestos-related bodily injury claims involving Fibreboard. The
Global Settlement Agreement by its terms required court approval.
Casualty, Fibreboard and Pacific Indemnity also reached an agreement
(the "Trilateral Agreement") on a settlement to resolve the coverage litigation
in the event the Global Settlement Agreement did 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
(8)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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. No further
appeal was filed with respect to the Trilateral Agreement; therefore, court
approval of the Trilateral Agreement has become final.
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 the 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 set of objectors.
The Supreme Court heard oral arguments on December 8, 1998.
On June 23, 1999, the Supreme Court reversed the Fifth Circuit decision
approving the Global Settlement Agreement by a 7 to 2 vote. While the decision
itself does not constitute final disapproval of the Global Settlement Agreement,
the Settling Parties anticipate such a final order will be issued in 1999.
Upon final disapproval of the Global Settlement Agreement, the Trilateral
Agreement becomes fully effective.
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.
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 was 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 certain
present asbestos claims arising under the policy issued to Fibreboard by
Casualty.
Under 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 June 30, 1999, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 133,000 claims, for an
estimated settlement amount of approximately $1.63 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligated Casualty to
pay under these settlements. Approximately $1.7 billion (including interest of
$185 million) was paid through June 30, 1999. Casualty has recovered
approximately $700 million of these payments from Pacific Indemnity. In
addition, approximately $300 million of these settlements will be deducted from
the $2.0 billion payable to Fibreboard.
<PAGE>
Final court approval of the Trilateral Agreement and its implementation
has substantially resolved Casualty's exposure with respect to asbestos claims
involving Fibreboard. While there does exist the possibility of further adverse
developments with respect to Fibreboard claims, management does not anticipate
subsequent reserve adjustments, if any, to materially affect the equity of CNAF.
Management will continue to monitor the potential liabilities with respect to
Fibreboard asbestos claims and will make adjustments to claim reserves if
warranted.
(9)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
TOBACCO LITIGATION
In 1997, CNA's primary property/casualty subsidiaries were named 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 ("The Ieyoub Litigation"). In that
suit, filed against certain manufacturers and distributors of tobacco products
and over 100 insurance companies, the State of Louisiana sought to recover
medical expenses allegedly incurred by the State as a result of tobacco-related
illnesses.
On November 23, 1998, the major United States cigarette manufacturers
and the attorneys general for 46 states and six other governmental entities
reached an agreement regarding the resolution of their health care cost
reimbursement claims that sought to recover medical expenses allegedly incurred
by the states as a result of tobacco related illnesses (the four other states
had previously settled). The manufacturers have agreed to make annual payments,
subject to certain adjustments, totaling approximately $206 billion through
2025. In exchange, the states have agreed to release their claims against the
manufacturers and have further agreed to release any claims that they may have
against distributors, retailers, component part manufacturers and the
manufacturers' insurers. None of these latter entities are parties to the
settlement agreement. As part of the settlement, the State of Louisiana
dismissed with prejudice the Ieyoub Litigation, thereby resolving CNA's exposure
in that case. However, the November 1998 settlement did not preclude the
manufacturers or other entities named as defendants in the various reimbursement
lawsuits from seeking coverage under insurance policies that may have been
issued to them. At this juncture, management is unable to make a meaningful
estimate of the amount or range of any loss that could result from any claim
that manufacturers may assert in the future.
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 POLLUTION AND OTHER MASS TORT AND ASBESTOS
The CNA property/casualty insurance companies have potential exposures
related to environmental pollution and other mass tort 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.
<PAGE>
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 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 (EPA) 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.
(10)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
Many policyholders have made claims against various CNA insurance
subsidiaries for defense costs and indemnification in connection with
environmental pollution matters. These claims relate to accident years 1989 and
prior, which coincides with CNA's adoption of the Simplified Commercial General
Liability coverage form, which included an absolute pollution exclusion. 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, allocation of liability among triggered policies,
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 in 1999 and
what legislation, if any, will result. If there is legislation, and in some
circumstances even if there is no legislation, the federal role in environmental
clean-up may be significantly reduced in favor of state action. Substantial
changes in the federal statute or the activity of the EPA may cause states to
reconsider their environmental clean-up statutes and regulations. There can be
no meaningful prediction of the pattern of regulation that would result.
Due to the inherent uncertainties described above, including the
inconsistency of court decisions, the number of waste sites subject to clean-up,
and the standards for clean-up and liability, the ultimate liability of CNA for
environmental pollution claims may vary substantially from the amount currently
recorded.
As of June 30, 1999 and December 31, 1998, CNA carried $661 million and
$787 million, respectively, of claim and claim expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims.
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 June 30,
1999 and December 31, 1998, CNA carried $1.5 billion of claim and claim expense
reserves, net of reinsurance recoverables, for reported and unreported
asbestos-related claims, including those related to Fibreboard. Unfavorable
asbestos claim reserve development for the six months ended June 30, 1999 and
1998 totaled $129 million and $29 million, respectively.
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------------|
|RESERVES SUMMARY |
| JUNE 30, 1999 December 31, 1998 |
| ------------------------------ -------------------------------|
| |
| ENVIRONMENTAL Environmental |
| POLLUTION AND OTHER Pollution and Other |
|(In millions of dollars) MASS TORT ASBESTOS Mass Tort Asbestos |
|--------------------------------------------------------------- -------------------------------|
<S> <C> <C> <C> <C>
|Reported claims: |
| Gross reserves $ 309 $1,532 $ 291 $1,305 |
| Less reinsurance recoverable (39) (303) (41) (91) |
| ---------------------------------------------------------------|
| Net reported claims 270 1,229 250 1,214 |
|Net unreported claims 391 275 537 242 |
|-------------------------------------------------------------------------------------------------|
|NET RESERVES $ 661 $1,504 $ 787 1,456 |
|=================================================================================================|
</TABLE>
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.
(12)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE D. Reinsurance:
CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, to provide greater diversification of
risk, and to minimize exposures on larger risks. The reinsurance coverages are
tailored to the specific risk characteristics of each product line with CNA's
retained amount varying by type of coverage. Generally, reinsurance coverage for
property risks is on an excess of loss, per risk basis. Liability coverages are
generally reinsured on a quota share basis in excess of CNA's retained risk.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in its states of domicile, CNA
receives collateral, primarily in the form of bank letters of credit, to secure
these recoverables.
|--------------------------------------------------------------------------|
|Six Months Ended June 30 Earned Premiums |
| ------------------------------------------------|
| Assumed/ |
|(In millions of dollars) Direct Assumed Ceded Net Net % |
|--------------------------------------------------------------------------|
| |
|1999 |
| Property/casualty $4,534 $ 835 $ 648 $4,721 17.7 % |
| Accident and health 1,923 83 204 1,802 4.6 |
| Life 534 87 199 422 20.6 |
|--------------------------------------------------------------------------|
| TOTAL PREMIUMS $6,991 $1,005 $1,051 $6,945 14.5 % |
|==========================================================================|
| |
|1998 |
| Property/casualty $3,938 $ 976 $ 262 $4,652 21.0 % |
| Accident and health 1,814 107 144 1,777 6.0 |
| Life 526 72 118 480 15.0 |
|--------------------------------------------------------------------------|
| Total premiums $6,278 $1,155 $ 524 $6,909 16.7 % |
|==========================================================================|
In the table above, life premiums are principally from long duration
contracts, property/casualty earned premiums are from short duration contracts,
and approximately 75% of accident and health earned premiums are from short
duration contracts.
Insurance claims and policyholders' benefit expenses are net of reinsurance
recoveries of $511 and $501 million for the six months ended June 30, 1999 and
June 30, 1998, respectively.
(13)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE E. Debt:
<TABLE>
<CAPTION>
|--------------------------------------------------------------------------------------------|
| |
|Debt June 30, December 31,|
|(In millions of dollars) 1999 1998 |
|--------------------------------------------------------------------------------------------|
<S> <C> <C>
| Variable Rate Debt: |
| Commercial Paper $ 675 $ 500 |
| Credit Facility - CNAF 77 235 |
| Credit Facility - CNA Surety 100 113 |
| Senior Notes: |
| 8.25%, due April 15, 1999 - 100 |
| 7.25%, due March 1, 2003 147 147 |
| 6.25%, due November 15, 2003 249 249 |
| 6.50% , due April 15, 2005 497 497 |
| 6.75%, due November 15, 2006 248 248 |
| 6.45%, due January 15, 2008 149 149 |
| 6.60%, due December 15, 2008 199 199 |
| 8.375%, due August 15, 2012 83 98 |
| 6.95%, due January 15, 2018 148 148 |
| 7.25% Debenture, due November 15, 2023 247 247 |
| 11.0% Secured Mortgage Notes, due June 30, 2013 157 157 |
| 6.9% -16.29% Secured Capital Leases, due through December 31, 2011 44 46 |
| Other debt, due through 2019 (rates of 1.0% to 12.71%) 30 27 |
|--------------------------------------------------------------------------------------------|
| TOTAL DEBT $3,050 $3,160 |
|============================================================================================|
</TABLE>
CNAF has a $795 million revolving credit facility that expires in May
2001. The amount available is reduced by CNAF's outstanding commercial paper
borrowings. As of June 30, 1999, there was $43 million of unused borrowing
capacity under the facility. The interest rate on the bank loans 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
bank loans under the credit facility at June 30, 1999 and 1998, respectively,
was 5.22% and 5.85%, respectively.
To offset the variable rate characteristics of the facility, CNAF
entered into interest rate swap agreements with several banks having a total
notional principal amount of $650 million at both June 30, 1999 and 1998, which
terminate from May 2000 to December 2000. These agreements provide that CNAF pay
interest at a fixed rate, averaging 6.07% at both June 30, 1999 and 1998,
respectively, 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 approximately $1.5 million and $0.7 million for the six month periods ended
June 30, 1999 and 1998, respectively.
Outstanding commercial paper borrowings were $675 million and $500
million for the periods ending June 30, 1999 and December 31, 1998,
respectively. The weighted average interest rate on commercial paper was 5.25%
at June 30, 1999 compared to 5.83% at June 30, 1998.
The weighted average interest rate (interest and facility fees) on the
combined revolving credit facility, commercial paper borrowings and interest
rate swaps was 6.13% and 6.19% at June 30, 1999 and 1998, respectively.
On April 15, 1999, CNAF paid at the due date $100 million of 8.25%
senior notes.
<PAGE>
CNA Surety, a 61% owned subsidiary of CNAF, has a $130 million
revolving credit facility that expires in September 2002. At June 30, 1999 and
December 31, 1998, the outstanding borrowings under this facility were $100
million and $113 million, respectively. The weighted average interest rate was
5.36% and 5.86% for the periods ending June 30, 1999 and 1998, respectively. The
interest rate on facility borrowings is based on LIBOR plus 20 basis points.
Additionally, there is a facility fee of 10 basis points annually.
(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
and distributions to owners. The change in the components of accumulated other
comprehensive income are shown below:
|----------------------------------------------------------------------------|
| |
|THREE MONTHS ENDED JUNE 30, 1999 Pre-tax amount Tax (expense) Net |
|(In millions of dollars) benefit amount|
|----------------------------------------------------------------------------|
| |
|Net unrealized gains (losses) on investments: |
| |
| Losses arising during the period $ (513) $ 150 $ (363) |
| |
| Allocated to minority interest 6 (2) 4 |
| |
| Allocated to participating policyholders 8 - 8 |
| |
| Reclassification adjustment for (gains) |
| losses included in net income (132) 47 (85) |
| |
|Foreign currency translation adjustment (12) - (12) |
|----------------------------------------------------------------------------|
| TOTAL OTHER COMPREHENSIVE (LOSS) $ (643) $ 195 $ (448) |
=============================================================================|
|----------------------------------------------------------------------------|
| |
|THREE MONTHS ENDED JUNE 30, 1998 Pre-tax amount Tax (expense) Net |
|(In millions of dollars) benefit amount|
|----------------------------------------------------------------------------|
| |
|Net unrealized gains (losses) on investments: |
| |
| Gains arising during the period $ 215 $ (74) $ 141 |
| |
| Allocated to participating policyholders (2) - (2) |
| |
| Reclassification adjustment for (gains) |
| losses included in net income (128) 45 (83) |
| |
|Foreign currency translation adjustment 7 - 7 |
|----------------------------------------------------------------------------|
| Total other comprehensive income $ 92 $ (29) $ 63 |
=============================================================================|
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
|----------------------------------------------------------------------------|
| |
|SIX MONTHS ENDED JUNE 30, 1999 Pre-tax amount Tax (expense) Net |
|(In millions of dollars) benefit amount|
|----------------------------------------------------------------------------|
| |
|Net unrealized gains (losses) on investments: |
| |
| Gains arising during the period $ 624 $ (248) $ 376 |
| |
| Allocated to minority interest 8 (3) 5 |
| |
| Allocated to participating policyholders 9 - 9 |
| |
| Reclassification adjustment for (gains) (253) 89 (164) |
| losses included in net income |
| |
|Foreign currency translation adjustment 20 - 20 |
|----------------------------------------------------------------------------|
| TOTAL OTHER COMPREHENSIVE INCOME $ 408 $ (162) $ 246 |
|============================================================================|
|----------------------------------------------------------------------------|
| |
|SIX MONTHS ENDED JUNE 30, 1998 Pre-tax amount Tax (expense) Net |
|(In millions of dollars) benefit amount|
|----------------------------------------------------------------------------|
| |
|Net unrealized gains (losses) on investments: |
| |
| Gains arising during the period $ 338 $ (117) $ 221 |
| |
| Allocated to participating policyholders 1 - 1 |
| |
| Reclassification adjustment for (gains) |
| losses included in net income (277) 97 (180) |
| |
|Foreign currency translation adjustment (4) - (4) |
|----------------------------------------------------------------------------|
| Total other comprehensive income $ 58 $ (20) $ 38 |
|============================================================================|
(15)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- continued
The following tables display the changes in and the components of
accumulated other comprehensive income included in the condensed consolidated
balance sheets and statements of stockholders' equity as of and for the periods
ended June 30, 1999 and 1998.
|----------------------------------------------------------------------------|
| Total |
| Foreign Net accumulated |
| currency unrealized other |
| translation gains on comprehensive |
|(In millions of dollars) adjustment investments income |
|----------------------------------------------------------------------------|
| |
|Beginning balance January 1, 1999 $ 73 $ 991 $1,064 |
| |
|Current period change 20 226 246 |
|----------------------------------------------------------------------------|
| ENDING BALANCE, JUNE 30, 1999 $ 93 $1,217 $1,310 |
|============================================================================|
| |
|Beginning balance January 1, 1998 $ 66 $ 523 $ 589 |
| |
|Current period change (4) 42 38 |
|----------------------------------------------------------------------------|
| Ending balance, June 30, 1998 $ 62 $ 565 $ 627 |
|============================================================================|
NOTE G. Business Segments:
The Company's reportable segments are strategic businesses that offer
different types of products and services.
The Company has seven operating segments: Agency Market Operations,
Specialty Operations, CNA Re, Global Operations, Risk Management, Group
Operations and Life Operations. Corporate results consist of interest expense on
corporate borrowings, certain run-off insurance operations, asbestos claims
related to Fibreboard Corporation, financial guarantee insurance contracts and
certain non-insurance operations, principally the operations of Agency
Management Systems, Inc., an information technology and agency software
development subsidiary.
The accounting policies of the segments are the same as those described
in Note A of the CNAF Annual Report to Shareholders (incorporated herein by
reference in Form 10-K) for the year ended December 31, 1998. The Company
manages its assets on a legal entity basis while segment operations are
conducted across legal entities, as such assets are not readily identifiable by
individual segment; distinct investment portfolios are not maintained for each
segment, and accordingly, allocation of assets to each segment is not performed.
Therefore, investment income and realized investment gains/losses are allocated
based on each segment's carried insurance reserves, as adjusted.
All significant intercompany income and expenses, as well as
intercompany dividends, have been eliminated.
(16)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- continued
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
| Agency |
| Market Specialty Global Risk |
| Operations Operations CNA Re Operations Management |
|Three Months Ended June 30, 1999 |
|-----------------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $1,337 $ 268 $ 278 $ 263 $ 212 |
| Net investment income 175 59 35 39 37 |
| Other 19 4 2 32 71 |
|-----------------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized investment gains 1,531 331 315 334 320 |
|Total benefits and expenses 1,568 295 294 285 306 |
|-----------------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (37) 36 21 49 14 |
|Income tax benefit (expense) 23 (10) (6) (15) (3) |
|-----------------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding realized |
| investment gains/losses) (14) 26 15 34 11 |
|Realized investment gains(losses), net of tax 62 21 14 2 12 |
|Minority interest - - - (7) - |
|-----------------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ 48 $ 47 $ 29 $ 29 $ 23 |
|=================================================================================================================|
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
| |
| |
| Group Life |
THREE MONTHS ENDED JUNE 30, 1999 Operations Operations Corporate Eliminations Total |
|-----------------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $ 942 $ 214 $ - $ (8) $3,506 |
| Net investment income 32 132 10 - 519 |
| Other 11 14 42 (3) 192 |
|-----------------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized investment gains $ 985 360 52 (11) 4,217 |
|Total benefits and expenses 962 312 155 (11) 4,166 |
|-----------------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax 23 48 (103) - 51 |
|Income tax benefit (expense) (7) (17) 38 - 3 |
|-----------------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding realized |
| investment gains/losses) 16 31 (65) - 54 |
|Realized investment gains(losses), net of tax - (30) 28 - 109 |
|Minority interest - - (2) - (9) |
|-----------------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ 16 $ 1 $ (39) $ - $ 154 |
|=================================================================================================================|
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- continued
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
| Agency |
| Market Specialty Global Risk |
| Operations Operations CNA Re Operations Management |
|Three Months Ended June 30, 1998 |
|-----------------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $1,316 $ 309 $ 297 $ 242 $ 203 |
| Net investment income 197 66 43 28 37 |
| Other 9 2 4 26 49 |
|-----------------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized investment gains 1,522 377 344 296 289 |
|Total benefits and expenses 1,497 356 307 285 305 |
|-----------------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax 25 21 37 11 (16) |
|Income tax benefit (expense) 3 (4) (6) (6) 7 |
|-----------------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding realized |
| investment gains/losses) 28 17 31 5 (9) |
|Realized investment gains(losses), net of tax 58 20 8 4 11 |
|Minority interest - - - (7) - |
|-----------------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ 86 $ 37 $ 39 $ 2 $ 2 |
|=================================================================================================================|
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
| |
| |
| Group Life |
Three Months Ended June 30, 1998 Operations Operations Corporate Eliminations Total |
|-----------------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $ 898 $ 232 $ (6) $ (13) $3,478 |
| Net investment income 36 130 21 - 558 |
| Other 6 20 73 - 189 |
|-----------------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized investment gains $ 940 382 88 (13) 4,225 |
|Total benefits and expenses 953 338 137 (13) 4,165 |
|-----------------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (13) 44 (49) - 60 |
|Income tax benefit (expense) 6 (11) 21 - 10 |
|-----------------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding realized |
| investment gains/losses) (7) 33 (28) - 70 |
|Realized investment gains(losses), net of tax 9 31 5 - 146 |
|Minority interest - - 1 - (6) |
|-----------------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ 2 $ 64 $ (22) $ - $ 210 |
|=================================================================================================================|
</TABLE>
(17)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- continued
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
| Agency |
| Market Specialty Global Risk |
| Operations Operations CNA Re Operations Management |
|SIX MONTHS ENDED JUNE 30, 1999 |
|-----------------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $2,696 $ 544 $ 531 $ 509 $ 420 |
| Net investment income 347 117 74 69 73 |
| Other 35 8 2 59 126 |
|-----------------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized investment gains 3,078 669 607 637 619 |
|Total benefits and expenses 3,184 594 567 555 578 |
|-----------------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (106) 75 40 82 41 |
|Income tax benefit (expense) 59 (20) (11) (24) (10) |
|-----------------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding realized |
| investment gains/losses) (47) 55 29 58 31 |
|Realized investment gains(losses), net of tax 130 43 24 11 22 |
|Minority interest - - - (14) - |
|-----------------------------------------------------------------------------------------------------------------|
| Income (loss) before cumulative effect of a |
| change in accounting principle 83 98 53 55 53 |
|Cumulative effect of a change in accounting principle, net |
|of tax (93) (3) - (3) (74) |
|-----------------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ (10) $ 95 $ 53 $ 52 $ (21) |
|=================================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
| |
| |
| Group Life |
|SIX MONTHS ENDED JUNE 30, 1999 Operations Operations Corporate Eliminations Total |
|-----------------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $1,809 $ 417 $ 35 $ (16) $6,945 |
| Net investment income 65 277 9 - 1,031 |
| Other 19 30 115 (3) 391 |
|-----------------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized investment gains $1,893 724 159 (19) 8,367 |
|Total benefits and expenses 1,867 621 378 (19) 8,325 |
|-----------------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax 26 103 (219) - 42 |
|Income tax benefit (expense) (6) (36) 94 - 46 |
|-----------------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding realized |
| investment gains/losses) 20 67 (125) - 88 |
|Realized investment gains(losses), net of tax 7 (18) 34 - 253 |
|Minority interest - - (1) - (15) |
|-----------------------------------------------------------------------------------------------------------------|
| Income (loss) before cumulative effect of a 27 49 (92) - 326 |
| change in accounting principle |
|Cumulative effect of a change in accounting principle, net |
|of tax (2) (2) - - (177) |
|-----------------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ 25 $ 47 $ (92) $ - $ 149 |
|=================================================================================================================|
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- continued
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
| Agency |
| Market Specialty Global Risk |
| Operations Operations CNA Re Operations Management |
|SIX MONTHS ENDED JUNE 30, 1998 |
|-----------------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $2,651 $ 588 $ 556 $ 460 $ 429 |
| Net investment income 394 131 84 56 75 |
| Other 18 10 6 36 99 |
|-----------------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized investment gains 3,063 729 646 552 603 |
|Total benefits and expenses 3,026 636 575 489 631 |
|-----------------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax 37 93 71 63 (28) |
|Income tax benefit (expense) 11 (25) (16) (22) 14 |
|-----------------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding realized |
| investment gains/losses) 48 68 55 41 (14) |
|Realized investment gains(losses), net of tax 99 33 12 9 18 |
|Minority interest - - - (13) - |
|-----------------------------------------------------------------------------------------------------------------|
| Income (loss) before cumulativeeffect of a |
| change in accounting principle 147 101 67 37 4 |
|Cumulative effect of a change in accounting principle, net |
|of tax - - - - - |
|-----------------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ 147 $ 101 $ 67 $ 37 $ 4 |
|=================================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------------------|
| |
| |
| Group Life |
|SIX MONTHS ENDED JUNE 30, 1998 Operations Operations Corporate Eliminations Total |
|-----------------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $1,800 $ 457 $ (10) $ (22) $6,909 |
| Net investment income 70 261 49 - 1,120 |
| Other 12 47 142 - 370 |
|-----------------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized investment gains $1,882 765 181 (22) 8,399 |
|Total benefits and expenses 1,883 674 288 (22) 8,180 |
|-----------------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (1) 91 (107) - 219 |
|Income tax benefit (expense) 3 (29) 38 - (26) |
|-----------------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding realized |
| investment gains/losses) 2 62 (69) - 193 |
|Realized investment gains(losses), net of tax 16 66 9 - 262 |
|Minority interest - - 1 - (12) |
|-----------------------------------------------------------------------------------------------------------------|
| Income (loss) before cumulative effect of a 18 128 (59) - 443 |
| change in accounting principle |
|Cumulative effect of a change in accounting principle, net |
|of tax - - - - - |
|-----------------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ 18 $ 128 $ (59) $ - $ 443 |
|=================================================================================================================|
</TABLE>
(18)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- continued
NOTE H. Restructuring-Related Charges:
As part of the Company's restructuring plan (the Plan) that was inititated
in August 1998, restructuring-related charges of $54 million were recorded in
the first half of 1999. These charges did not qualify for accrual under
generally accepted accounting principles at the end of the third quarter of 1998
and, therefore, have been expensed as incurred. The charges included the
following:
In the first six months of 1999, restructuring-related charges for
Agency Market Operations totaled approximately $37 million. The charges included
employee severance and outplacement costs of $15 million related to the planned
net reduction in the workforce. The Agency Market Operations charges also
included consulting costs of $5 million and parallel processing charges of $4
million. Other charges, including relocation and facility charges, totaled
approximately $13 million.
In the first six months of 1999, restructuring-related charges for Risk
Management totaled approximately $8 million. The charges included parallel
processing costs of approximately $3 million, employee severance and
outplacement costs of approximately $2 million and other charges, including
consulting and facility charges, totaling approximately $3 million.
In the first six months of 1999, restructuring-related charges for
Group Operations totaled approximately $5 million. These charges relate to
employee severance and other charges.
For the other segments of the Company, restructuring-related charges
totaled approximately $5 million for the first six months of 1999. These charges
were primarily for employee termination related costs.
The following table sets forth the major categories of
restructuring-related charges and the activity in the accrual for such costs
during 1999.
<TABLE>
<CAPTION>
|---------------------------------------------------------------------------------------------------|
| Employee Lease |
| Termination and Termination Business |
|(In millions of dollars) Related Benefit Costs Costs Exit Costs Total |
<S> <C> <C> <C> <C>
|---------------------------------------------------------------------------------------------------|
| |
|Accrued costs at December 31, 1998 $ 37 $ 42 $ 32 $111 |
| |
Less payments charged against liability (18) (6) (3) (27) |
|---------------------------------------------------------------------------------------------------|
|ACCRUED COSTS AT JUNE 30, 1999 $ 19 $ 36 $ 29 $ 84 |
|===================================================================================================|
</TABLE>
(19)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- concluded
NOTE I. Insurance Related Assessments:
In the first quarter of 1999, the Company recorded $177 million as an
after-tax cumulative effect charge for a change in accounting for
insurance-related assessments. This charge was a result of the adoption of the
American Institute of Certified Public Accountants' Accounting Standards
Executive Committee Statement of Position (SOP) 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." This SOP requires that
insurance companies recognize liabilities for insurance-related assessments when
an assessment is probable and will be imposed, when it can be reasonably
estimated, and when the event obligating an entity to pay an imposed or probable
assessment has occurred on or before the date of the financial statements. The
Company does not expect the ongoing effect of adopting SOP 97-3 to have a
material impact on the results of operations or the equity of CNA.
NOTE J. Sale of Personal Lines Business to Allstate:
On June 9, 1999, CNA announced that it was selling its personal lines
business to Allstate, via reinsurance agreements. The transaction is anticipated
to close by the end of 1999. Under the terms of the agreement, Allstate will
acquire the operations of CNA's personal lines business including the reserves
and the renewal rights to new business. CNA will receive from Allstate cash of
approximately $140 million at the time of closing as well as a royalty fee tied
to new and renewal premiums written through the newly created distribution
channel. Allstate will continue to sell CNA personal lines products through the
3,800 independent agents who are licensed to sell CNA products. CNA's personal
lines business had 1998 earned premiums of $1.7 billion. The personal lines'
surplus will remain with CNA. The Company believes there will be no material
effect on its operating earnings in 1999 and 2000 as a result of this
transaction.
NOTE K. Subsequent Event:
On August 4, 1999, CNAF filed a Registration Statement on Form S-8 with the
Securities and Exchange Commission registering $2 million of $2.50 par value
common stock, to be offered pursuant to the CNA Financial Corporation 2000
Long-Term Incentive Plan (The Plan). The plan provides compensation for certain
officers which is conditioned on meeting performance measures in the case of
cash awards and appreciation in the market price of the Company's common stock
in the case of options.
(20)
<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 7 to 20, which contain additional information helpful in evaluating
operating results and financial condition.
CNA is one of the largest insurance organizations in the United States
and based on 1997 net written premiums, is the third largest property/casualty
company and the thirty-second largest life insurance company.
CNA's overall goal is to create long-term enterprise value by pursuing
a strategy of profitable growth in the market segments in which it operates.
CNA conducts its operations through seven operating segments. These
operating segments reflect the way in which CNA distributes its products to the
marketplace and the way in which it manages operations and makes business
decisions.
Corporate results consist of interest expense on corporate borrowings,
certain run-off insurance operations, asbestos claims related to Fibreboard
Corporation, financial guarantee insurance contracts, and certain non-insurance
operations, principally the operations of Agency Management Systems, Inc. (AMS),
an information technology and agency software development subsidiary.
Pre-tax operating losses, excluding realized investment gains for Corporate
for the first six months of 1999, increased by approximately $112 million as
compared with the same period in 1998. Pre-tax operating losses, excluding
realized investment gains for the quarter ended June 30, 1999, increased
approximately $54 million as compared with the same period in 1998. The increase
was principally attributable to unfavorable loss reserve development in run-off
insurance lines (including Fibreboard), and a settlement of a computer services
contract.
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
OPERATING RESULTS:
The following chart summarizes key components of operating results for
the three and six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------|
| |
| CONSOLIDATED OPERATIONS THREE MONTHS SIX MONTHS |
| PERIOD ENDED JUNE 30 |
| (In millions of dollars) 1999 1998 1999 1998 |
|------------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
| OPERATING REVENUES |
| (excluding realized investment gains/losses): |
| Premiums $3,506 $3,478 $6,945 $6,909 |
| Net investment income 519 558 1,031 1,120 |
| Other 192 189 391 370 |
| -------- ------- ------- ------ |
| Total operating revenues (excluding realized 4,217 4,225 8,367 8,399 |
| investment gains/losses) |
| |
| Restructuring-related charges 19 - 54 - |
| Benefits and expenses 4,156 4,170 8,286 8,192 |
| -------- ------- ------- ------ |
| Operating income before income tax 42 55 27 207 |
| Income tax benefit (expense) 3 9 46 (26)|
| -------- ------- ------- -------|
| Net operating income (excluding realized investment 45 64 73 181|
| gains/losses) |
| Realized investment gains, net of tax 109 146 253 262|
| -------- ------- ------- -------|
| Income before cumulative effect of a change in 154 210 326 443|
| accounting principle |
| Cumulative effect of a change in accounting principle, |
| net of tax - - (177) -|
| -------- ------- ------- -------|
| NET INCOME $ 154 $ 210 $ 149 $ 443|
| ======== ======= ======= =======|
| |
|==========================================================================================|
</TABLE>
Net operating income, which excludes net realized investment gains and
a cumulative effect of a change in accounting principle, was $73 million, or
$0.35 per share, for the first half of 1999, compared with net operating income
of $181 million, or $0.96 per share, for the same period in 1998. This decline
was driven in part by a $58 million after-tax reduction in investment income,
caused primarily by a reduction in interest rates on debt securities. Net
operating income for the first half of 1999 also includes restructuring-related
charges of $35 million, or $0.19 per share. Net operating income for the first
six months of 1999 includes after-tax catastrophe losses of $64 million as
compared with after-tax catastrophe losses of $98 million for the six months
ended June 30, 1998, which reflected unusually severe spring storms. Net
operating income was $45 million, or $0.23, for the second quarter of 1999,
compared to $64 million, or $0.33 per share, for the same quarter in 1998.
Excluding after-tax restructuring-related charges of $13 million, net operating
income for the second quarter of 1999 was $58 million, or $0.29 per share. Net
operating income for the second quarter of 1999 includes after-tax catastrophe
losses of $35 million as compared with after-tax losses of $82 million for the
same period in 1998.
<PAGE>
Net income for the first six months of 1999 was $149 million, or $0.77 per
share, compared with net income of $443 million, or $2.37 per share, for the
first six months of 1998. Included in the net income for the six months ended
June 30, 1999 was a charge of $177 million, net of tax, or $0.96 per share, for
the cumulative effect of a change in accounting for insurance-related
assessments. Net income for the quarter ended June 30, 1999 was $154 million, or
$0.82 per share, compared with net income of $210 million, or $1.12 per share
for the same period in 1998.
(22)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
As part of the Company's restructuring plan (the Plan) that was
initiated in August of 1998, restructuring-related charges of $54 million were
recorded in the first half of 1999. These charges did not qualify for accrual
under generally accepted accounting principles at the end of the third quarter
of 1998 and, therefore, have been expensed as incurred. The charges included the
following:
In the first six months of 1999, restructuring-related charges for
Agency Market Operations totaled approximately $37 million. The charges included
employee severance and outplacement costs of $15 million related to the planned
net reduction in the workforce. The Agency Market Operations charges also
included consulting costs of $5 million and parallel processing charges of $4
million. Other charges, including relocation and facility charges, totaled
approximately $13 million.
In the first six months of 1999, restructuring-related charges for Risk
Management totaled approximately $8 million. The charges included parallel
processing costs of approximately $3 million, employee severance and
outplacement costs of approximately $2 million and other charges, including
consulting and facility charges, totaling approximately $3 million.
In the first six months of 1999, restructuring-related charges for
Group Operations totaled approximately $5 million. These charges relate to
employee severance and other charges.
For the other segments of the Company, restructuring-related charges
totaled approximately $5 million in aggregate for the first six months of 1999.
These charges related primarily to employee-related costs.
Agency Market Operations
Agency Market Operations provides small to mid-size businesses, as well
as individuals, a wide range of property/casualty products distributed through
one of the broadest independent agency networks in the U.S.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------|
| |
| THREE MONTHS SIX MONTHS |
| PERIOD ENDED JUNE 30 |
| (In millions of dollars, except ratio data) 1999 1998 1999 1998 |
<S> <C> <C> <C> <C>
|------------------------------------------------------------------------------------------|
| |
| Net written premiums $1,439 $1,466 $2,766 $2,878 |
| Earned premiums 1,337 1,316 2,696 2,651 |
| Underwriting loss (215) (172) (459) (360) |
| Net operating (loss) income (14) 28 (47) 48 |
|------------------------------------------------------------------------------------------|
|
| Combined Ratio 116.1 % 113.1 % 117.0 % 113.6 %|
| Loss/LAE Ratio 83.3 81.7 84.1 81.7 |
| Dividend Ratio 0.3 1.3 0.3 1.4 |
| Expense Ratio 32.5 30.1 32.6 30.5 |
| |
|------------------------------------------------------------------------------------------|
</TABLE>
<PAGE>
Agency Market Operations' net written premiums declined $112 million in
the first six months of 1999 as compared with the same period in 1998. This
decrease was comprised of $221 million in Commercial Insurance (CI) due to
aggressive action on rate improvement, re-underwriting and the expansion of CI's
reinsurance program to take advantage of a favorable reinsurance market. This
decrease was partially offset by an increase in Personal Insurance (PI) of $109
million, due in part to gains in agency premium volume driven by new agency
appointments and a new auto tiering program, which allows for the acceptance of
a broader range of customers for which to write business.
(23)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Net written premiums for the second quarter of 1999 declined $27
million from the same quarter in 1998, due primarily to the actions by CI as
noted above, offset by the growth in written premium in PI as noted above.
Underwriting losses increased by $99 million in the first six months of
1999 as compared with the same period in 1998. The combined ratio increased 3.4
points to 117.0. This increase was driven by an increase of 2.4 points in the
loss ratio due primarily to unfavorable loss and loss adjustment expense
development of $138 million for 1999 as compared with favorable development of
$60 million in 1998. Additionally, the 1999 loss ratio was favorably impacted by
an improvement in catastrophe losses of $48 million and the new reinsurance
treaties. The increase of 2.1 points in the expense ratio was due to
restructuring-related charges of $37 million in 1999 and a slightly higher agent
commission rate on new CI policies. This was offset by a reduction in the
dividend ratio of 1.1 points.
Underwriting losses for the quarter ended June 30, 1999 were $215
million as compared with $172 million for the same period in 1998. The combined
ratio increased 3.0 points to 116.1. The increase is attributable to an increase
in the loss ratio of 1.6 points due primarily to a favorable loss development of
$37 million in the second quarter of 1998. The expense ratio for the second
quarter of 1999 increased 2.4 points as compared with the same period in 1998,
primarily due to restructuring-related charges of $16 million in 1999 and a
slightly higher agent commission rate on new CI policies.
CNAF has entered into an agreement to sell its PI to Allstate, via
reinsurance agreements. The transaction is anticipated to close by the end of
1999. Under the terms of the agreement, Allstate will acquire the operations of
CNA's personal lines business including the reserves and the renewal rights to
new business. CNA will receive from Allstate cash of approximately $140 million
at the time of closing as well as a royalty fee tied to new and renewal premiums
written through the newly created distribution channel. Allstate will continue
to sell CNA personal lines products through the 3,800 independent agents who are
licensed to sell CNA products. CNA's personal lines business had 1998 earned
premiums of $1.7 billion. The personal lines' surplus will remain with CNA. The
Company believes there will be no material effect on its operating earnings in
1999 and 2000 as a result of this transaction.
(24)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Specialty Operations
Specialty Operations provides a broad array of professional, financial
and specialty property/casualty products and services distributed through
brokers, managing general agencies and independent agencies.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------|
| |
| THREE MONTHS SIX MONTHS |
| PERIOD ENDED JUNE 30 |
| (In millions of dollars, except ratio data) 1999 1998 1999 1998 |
|------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
| Net written premiums $241 $264 $508 $562 |
| Earned premiums 268 309 544 588 |
| Underwriting loss (20) (37) (34) (30) |
| Net operating income 26 17 55 68 |
|------------------------------------------------------------------------------------|
| |
| Combined Ratio 107.3% 112.0% 106.3% 105.1% |
| Loss/LAE Ratio 83.2 82.0 82.3 74.9 |
| Dividend Ratio 0.1 - 0.1 - |
| Expense Ratio 24.0 30.0 23.9 30.2 |
| |
|------------------------------------------------------------------------------------|
</TABLE>
Specialty Operations' net written premiums declined $54 million, or
approximately 10%, in the first six months of 1999, as compared with the same
period in 1998. Net written premiums for the quarter ended June 30, 1999
decreased $23 million as compared with the same period in 1998. These decreases
were attributable to Specialty's continued resolve to maintain underwriting
discipline and a decrease in premium due to the previously announced exit from
the agriculture and entertainment insurance lines of business.
Underwriting losses increased by $4 million in the first six months of
1999 as compared with the same period in 1998. The combined ratio increased 1.2
points to 106.3 and was principally driven by an increase of 7.4 points in the
loss ratio offset by a decrease in the expense ratio of 6.3 points. The increase
in the loss ratio was primarily due to favorable net reserve development of
approximately $46 million realized in 1998. The decrease in the expense ratio
was due primarily to lower acquisition costs as well as Specialty's continued
focus on expense reduction initiatives. Underwriting losses for the quarter
ended June 30, 1999 decreased by $17 million as compared with the same period in
1998. The combined ratio decreased 4.7 points to 107.3 for the quarter,
attributable to a 6.0 point decrease in the expense ratio offset by a 1.2 point
increase in the loss ratio. As mentioned above, the decrease in the expense
ratio was due primarily to lower acquisition costs as well as Specialty's
continued focus on expense reduction initiatives.
(25)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
CNA Re
CNA Re serves as a property/casualty reinsurer, offering primarily
traditional treaty reinsurance, with developing positions in facultative and
financial reinsurance.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------|
| |
| THREE MONTHS SIX MONTHS |
| PERIOD ENDED JUNE 30 |
| (In millions of dollars, except ratio data) 1999 1998 1999 1998 |
|------------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
| Net written premiums $258 $284 $674 $668 |
| Earned premiums 278 297 531 556 |
| Underwriting loss (21) (10) (42) (14) |
| Net operating income 15 31 29 55 |
| -----------------------------------------------------------------------------------------|
|
| Combined Ratio 107.5 % 103.3 % 108.0 % 102.4 %|
| Loss/LAE Ratio 74.7 71.3 76.1 72.6 |
| Expense Ratio 32.8 32.0 31.9 29.8 |
| |
|------------------------------------------------------------------------------------------|
</TABLE>
CNA Re's net written premiums were virtually unchanged in the first six
months of 1999, as compared with the same period in 1998.
For the second quarter of 1999, net written premiums decreased $26
million, or 9%, as compared with the same period in 1998. This decrease was
primarily attributable to a reduction in business written in the Lloyds market
due to inadequate pricing.
Underwriting losses increased by $28 million in the first six months of
1999 as compared with the same period in 1998. When compared to June 30, 1998
the June 30, 1999 combined ratio increased 5.6 points to 108.0. This increase
was driven by an increase of 3.5 points in the loss ratio due primarily to an
unfavorable change in net reserve development. The increase of 2.1 points in the
expense ratio was due primarily to an increase in commission expense in the
current year.
Underwriting losses for the second quarter of 1999 increased by $11
million as compared with the same period in 1998. The combined ratio increased
4.2 points to 107.5 primarily due to an increase in the loss ratio from 71.3 to
74.7. This increase was principally due to an unfavorable change in net reserve
development of $27 million.
(26)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Global Operations
Global Operations provides marine, commercial property & casualty,
surety, warranty and specialty products to both domestic and international
customers.
<TABLE>
<CAPTION>
|----------------------------------------------------------------------------------------------|
| |
| THREE MONTHS SIX MONTHS |
| PERIOD ENDED JUNE 30 |
| (In millions of dollars, except ratio data) 1999 1998 1999 1998 |
|----------------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
| Net written premiums $258 $270 $525 $492 |
| Earned premiums 263 242 509 460 |
| Underwriting income (loss) 3 (18) 2 1 |
| Net operating income (loss)* 27 (2) 44 28 |
| ---------------------------------------------------------------------------------------------|
| |
| Combined Ratio 99.1 % 107.3 % 99.5 % 99.9 % |
| Loss/LAE Ratio 53.4 61.4 54.7 58.9 |
| Dividend Ratio 0.3 1.0 0.3 0.2 |
| Expense Ratio 45.4 44.9 44.5 40.8 |
| |
|----------------------------------------------------------------------------------------------|
* includes minority interest expense
</TABLE>
Global Operations' net written premiums increased $33 million in the first
six months of 1999, as compared with the same period in 1998. The increase in
premiums is due to an increase in International premiums of $64 million, of
which $41 million was due to the acquisition of Maritime Insurance Co., Ltd. CNA
Surety also recorded an increase in premiums of $14 million. These increases
were partially offset by a $43 million decrease in Marine Office of America
Corp. (MOAC) premiums due primarily to adverse premium development in voluntary
pools and associations .
Net written premiums for the second quarter of 1999 decreased $12
million as compared with the same quarter in 1998. The decrease is due primarily
to a decrease in MOAC premiums of $23 million and a decrease in Warranty of $9
million, partially offset by an increase of $18 million due to the acquisition
of Maritime. The decrease in MOAC premiums is attributable to adverse premium
development from the voluntary pools whereas the decrease in Warranty stems from
an $8 million reversal of a first quarter premium accrual.
Underwriting income increased by $1 million in the first six months of
1999 as compared with the same period in 1998 and the combined ratio decreased
slightly to 99.5 as of June 30, 1999 from 99.9 for the same period in 1998. The
increase in the expense ratio of 3.7 points was due primarily to the effects of
the adverse premium development in the voluntary pools while the decrease in the
loss ratio of 4.2 points was attributable in large part to a voluntary pool
subrogation recovery.
Underwriting results for the second quarter of 1999 improved $21
million over the second quarter of 1998. The combined ratio also improved 8.2
points period over period, declining to 99.1 for the second quarter of 1999.
This improvement is primarily due to an 8.0 point improvement in the loss ratio
for the second quarter of 1999. This improvement is due primarily to favorable
premium and loss development in the voluntary pools.
(27)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Risk Management
Risk Management serves the property/casualty needs of large domestic
commercial businesses, offering customized, solution based strategies to address
risk management.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------|
| THREE MONTHS SIX MONTHS |
| PERIOD ENDED JUNE 30 |
| (In millions of dollars, except ratio data) 1999 1998 1999 1998 |
|------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
| Net written premiums $232 $229 $487 $585 |
| Earned premiums 212 203 420 429 |
| Underwriting loss (14) (44) (5) (86) |
| Non-insurance revenues 75 46 147 94 |
| Non-insurance income (loss) 5 (10) 6 (17) |
| Net operating income (loss) 11 (9) 31 (14) |
|------------------------------------------------------------------------------------|
| |
| Combined Ratio 106.8 % 121.6 % 101.1 % 120.0 %|
| Loss/LAE Ratio 82.0 89.8 75.3 92.9 |
| Dividend Ratio - 4.5 0.1 4.0 |
| Expense Ratio 24.8 27.3 25.7 23.1 |
| |
|------------------------------------------------------------------------------------|
</TABLE>
Net written premiums for Risk Management (RM) declined $98 million, or
approximately 17%, in the first six months of 1999, as compared with the same
period in 1998. This decrease was primarily due to RM's decision to take
advantage of a favorable reinsurance market and cede a larger portion of its
direct premiums, as well as the redesign of existing risk management programs.
Net written premiums in the second quarter of 1999 as compared to the same
period in 1998 were flat.
Underwriting results improved by $81 million in the first six months of
1999 as compared with the same period in 1998. The combined ratio decreased 18.9
points to 101.1 for the period as compared with 120.0 for the six months ended
June 30, 1998, driven in large part to RM's aforementioned decision to change
its pricing, capitalize on favorable reinsurance rates and concentrate on
program redesign. The increase of 2.7 points in the expense ratio was primarily
due to increased acquisition expense resulting from a change in business mix.
Underwriting results for the second quarter of 1999 improved by $30
million as compared with the same period in 1998. The combined ratio improved as
well, decreasing 14.8 points to 106.8. The improvement was driven by declines in
the loss ratio of 7.8 points, the dividend ratio of 4.5 points and the expense
ratio of 2.5 points.
Non-insurance operations are conducted by RSKCo, the new total risk
management services organization, CNA Risk Services, a captive management
operation and Investigative Options. Including restructuring and other related
charges, non-insurance operations continued its profit momentum in the second
quarter of 1999 and through six months ended June 30, 1999.
(28)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Group Operations
Group Operations provides a broad array of group life and health
insurance products and services to employers, affinity groups and other entities
that buy as a group. Group Operations also provides reinsurance for group and
individual life and health insurers.
|---------------------------------------------------------------------------|
| |
| THREE MONTHS SIX MONTHS |
| PERIOD ENDED JUNE 30 |
| (In millions of dollars) 1999 1998 1999 1998 |
|---------------------------------------------------------------------------|
| |
| Premiums $942 $898 $1,809 $1,800 |
| Net operating income (loss) 16 (7) 20 2 |
| |
|---------------------------------------------------------------------------|
Group Operations' premiums were flat for the first six months of 1999 as
compared with the same period in 1998, due primarily to an increase of $104
million in Federal Markets as well as an increase of $44 million in Special
Benefits and modest growth in Life Reinsurance and Provider Markets. This growth
was partially offset by a decline in Health Benefits of $159 million due to the
decision to exit the Employer Health and Affinity lines of businesses. Growth in
Federal Markets was primarily driven by a higher level of claims upon which
premiums are based while the growth in Special Benefits was mainly attributable
to disability and accident special risk lines of business.
Premiums for the second quarter of 1999 increased $44 million as
compared with the same period in 1998. The increase is primarily due to growth
in Federal Markets of $102 million and a $9 million increase in life
reinsurance, partially offset by a decrease of $73 million in Health Benefits
due primarily to the decision to exit certain business lines.
Net operating income increased by $18 million in the first six months
of 1999, as compared with the same period in 1998. This improvement is
attributable partially to a $7 million decrease in current year losses as a
result of Group Operations' decision to exit certain lines of business, as
mentioned above. In addition, Special Benefits results improved by $11 million
due primarily to improved loss experience on life and disability business.
Net operating income for the second quarter of 1999 was $16 million as
compared with a net operating loss of $7 million for the same period in 1998.
This change was again driven by improvement in Health Benefits of $5 million and
Special Benefits of $19 million.
(29)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Life Operations
Life Operations provides financial protection to individuals through a
full product line of insurance, including term life, universal life and long
term care as well as annuities and viatical settlements. Life Operations also
provides retirement products and administration services to pension plans and
other institutional buyers.
|---------------------------------------------------------------------------|
| |
| THREE MONTHS SIX MONTHS |
| PERIOD ENDED JUNE 30 |
| (In millions of dollars) 1999 1998 1999 1998|
|---------------------------------------------------------------------------|
| |
| Premiums $ 214 $ 232 $ 417 $ 457|
| Sales Volume 857 651 1,530 1,214|
| Net operating income 31 33 67 62|
| |
|---------------------------------------------------------------------------|
Life Operations' continued to have strong sales particularly within
retirement services as well as an increasing base of direct premiums for life
and long term care. Overall sales volume, which includes premium, pension
deposits and other sales not reported as premiums, increased from $1.2 billion
for the first six months of 1998 to $1.5 billion for the first six months of
1999. Second quarter 1999 sales were $857 million compared to $651 million in
1998.
Life Operations' premiums decreased $40 million for the first six
months of 1999 as compared with the same period in 1998. The decline was
primarily the result of a reinsurance treaty that was completed late in 1998.
Premiums for the second quarter of 1999 declined $18 million as compared with
the same period in 1998.
Net operating income for the first six months of 1999 was higher than
net operating income for the same period in 1998 due to a combination of lower
operating expenses, improved investment results in institutional pension
products, and the effect of the new reinsurance treaty. Net operating income for
the second quarter of 1999 decreased $2 million as compared with the same period
in 1998.
(30)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Investments:
Net investment income, as shown in the table below, was approximately
$1,031 million and $1,120 million for the six months ended June 30, 1999 and
1998, respectively. Net investment income, for the second quarter of 1999 and
1998 was approximately $519 million and $558 million, respectively. Lower net
investment income rates for the first six months of 1999 as compared to the same
period in 1998 was the result of declining market interest rates on fixed
maturities. The overall investment portfolio yielded 6.0% and 6.4% for the six
months ended June 30, 1999 and 1998, respectively.
|--------------------------------------------------------------------------|
|NET INVESTMENT INCOME |
| THREE MONTHS SIX MONTHS |
|PERIODS ENDED JUNE 30 1999 1998 1999 1998 |
|(In millions of dollars) |
|--------------------------------------------------------------------------|
|Fixed maturities: |
| Bonds: |
| Taxable $ 374 $ 373 $ 735 $ 764 |
| Tax-exempt 69 94 149 166 |
| Redeemable preferred stocks - 1 - 2 |
|Equity securities 9 6 15 13 |
|Mortgage loans and real estate 1 15 2 17 |
|Policy loans 2 5 5 5 |
|Short-term investments 48 53 93 121 |
|Security lending activities-net 7 2 14 5 |
|Other 18 30 35 59 |
| ------- ------- ------- ------|
| 528 579 1,048 1,152 |
|Investment expense (9) (21) (17) (32)|
| ------- ------- --------- --------|
| NET INVESTMENT INCOME $ 519 $ 558 $1,031 $1,120 |
|==========================================================================|
Realized investment gains, net of tax, for the first six months of 1999
were $253 million, or $1.38 per share, compared with net realized investment
gains for the first six months of 1998 of $262 million, or $1.41 per share.
Realized investment gains, net of tax, for the second quarter of 1999 were $109
million, or $0.59 per share, compared with net realized investment gains for the
second quarter of 1998 of $146 million, or $0.79 per share. The components of
the net realized investment gains (losses) are as follows:
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
|-----------------------------------------------------------------------------|
|REALIZED INVESTMENT GAINS (LOSSES) |
| THREE MONTHS SIX MONTHS |
|PERIODS ENDED JUNE 30 1999 1998 1999 1998 |
|(In millions of dollars) |
|-----------------------------------------------------------------------------|
|Bonds: |
| U.S. Government $ (82) $ 46 $ (82) $ 96 |
| Tax-exempt (13) 16 13 32 |
| Asset-backed (2) 14 2 27 |
| Taxable (35) 40 (11) 69 |
| -------- ------- -------- ------- |
| Total bonds (132) 116 (78) 224 |
|Equity securities 288 17 310 13 |
|Derivative security investments 7 41 34 34 |
|Other, including Separate Accounts (1) 58 118 144 |
| -------- ------- -------- ------- |
| Realized investment gains 162 232 384 415 |
|Participating policyholders' interest 5 (2) 5 (7) |
|Income tax expense (58) (84) (136) (146) |
| -------- ------- -------- ------- |
| NET REALIZED INVESTMENT GAINS $ 109 $ 146 $ 253 $ 262 |
|=============================================================================|
(31)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
|----------------------------------------------------------|---------------|
|SUMMARY OF GENERAL ACCOUNT INVESTMENTS | SIX MONTHS |
|AT CARRYING VALUE | ENDED |
| | JUNE 30, 1999|
| | CHANGE IN |
| JUNE 30, DECEMBER 31,| UNREALIZED |
|(In millions of dollars) 1999 1998 | GAINS (LOSSES)|
|----------------------------------------------------------|---------------|
|FIXED MATURITY SECURITIES: | |
|U. S. Treasury securities and | |
|Obligations of government agencies $ 9,020 $ 7,734 | $ (215) |
|Asset-backed securities 7,578 8,214 | (171) |
|Tax-exempt securities 4,778 6,321 | (244) |
|Taxable 7,561 7,804 | (259) |
| -------- -------- | -------- |
| Total fixed maturity securities 28,937 30,073 | (889) |
|Equity securities 3,203 1,970 | 1,286 |
|Short-term investments 6,327 4,037 | - |
|Other investments 1,177 1,097 | 49 |
| -------- -------- | --------- |
| TOTAL INVESTMENTS $39,644 $37,177 | 446 |
| ======== ======== | |
|Other, principally Separate Accounts | (79) |
|Participating policyholders' interest | 9 |
|Income tax expense | (150) |
| | -------- |
| NET INVESTMENT GAINS | 226 |
|==========================================================|===============|
|---------------------------------------------------------------|
|SHORT-TERM INVESTMENTS: June 30, December 31, |
| 1999 1998 |
|---------------------------------------------------------------|
|Security lending collateral $ 2,411 $ 132 |
|Escrow 939 1,011 |
|U.S. Treasuries 85 506 |
|Commercial paper 1,980 1,398 |
|Money markets 293 401 |
|Other 619 589 |
|---------------------------------------------------------------|
| TOTAL SHORT-TERM INVESTMENTS $ 6,327 $ 4,037 |
|===============================================================|
The Company's general account investment portfolio consists primarily
of publicly traded government bonds, asset-backed securities, mortgage-backed
securities, municipal bonds, and corporate bonds and equity securities. The
Company's investment policies for both the general and separate accounts
emphasize high credit quality and diversification by industry, issuer and issue.
Assets supporting interest rate sensitive liabilities are segmented within the
general account to facilitate asset/liability duration management.
CNA believes it has the capacity to hold its fixed maturity portfolio
to maturity. However, fixed maturity securities may be sold as part of CNA's
asset/liability strategies or to take advantage of investment opportunities
generated by changing interest rates, tax and credit considerations, or other
similar factors. Accordingly, the fixed maturity securities are classified as
available-for-sale.
<PAGE>
CNA invests in certain derivative financial instruments primarily to reduce
its exposure to market risk (principally interest rate, equity price, and
foreign currency risk). CNA considers 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. CNA
also uses derivatives to mitigate the risk associated with its indexed group
annuity contracts by purchasing S&P 500 futures contracts in a notional amount
equal to the contract liability relating to the S&P 500 exposure.
(32)
<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 94.6% of which are rated as
investment grade. At June 30, 1999, tax-exempt securities and short-term
investments, excluding collateral for securities sold under repurchase
agreements, comprised approximately 12.0% and 9.9%, respectively, of the general
account's total investment portfolio compared to 17.0% and 10.5%, respectively,
at December 31, 1998. 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 June 30, 1999 and December 31, 1998 are substantially higher
than historical levels in anticipation of Fibreboard-related claim payments. At
June 30, 1999, the short-term investment portfolio consisted primarily of
security lending collateral.
As of June 30, 1999, the market value of CNA's general account
investments in fixed maturities was $28.9 billion with net unrealized investment
losses of approximately $327 million. This compares to a market value of $30.1
billion and approximately $562 million of net unrealized investment gains at
December 31, 1998. The gross unrealized investment gains and losses for the
fixed maturity securities portfolio at June 30, 1999 were $291 million and $618
million, respectively, compared to $818 million and $256 million, respectively,
at December 31, 1998.
Net unrealized investment losses on general account fixed maturities at
June 30, 1999 include net unrealized losses on high yield securities of $115
million, compared to net unrealized losses of $101 million on such securities at
December 31, 1998. 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 $428
million to approximately $1.6 billion at June 30, 1999 as compared to December
31, 1998.
In May, 1999, Global Crossing entered into a transaction to merge Frontier
Corporation (Frontier) into a subsidiary of Global Crossing. As part of the
Frontier merger agreement, certain shareholders of Global Crossing, including
the Company, entered into a voting agreement to limit their sales of Global
Crossing common stock to ensure that 51% of the outstanding shares of Global
Crossing would vote in favor of the merger. A large proportion of those
shareholders, including the Company, also agreed to suspend their rights under a
shareholders' agreement and a registration rights agreement until the closing of
the Frontier transaction. The Frontier merger is expected to close around
September 30, 1999. The Company has the right, after the closing (or termination
prior to closing) of the Frontier transaction and prior to the December 31,
1999, to require Global Crossing to register under the Act up to 25% of the
Company's holdings. The Company's holdings of Global Crossing were not acquired
in a public offering, and may not be sold to the public unless the sale is
registered or exempt from the registration requirements of the Act. Such
exemptions would include sales pursuant to Rule 144 under the Act if such sales
meet the requirements of the Rule.
(33)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
On March 25, 1999, Canary Wharf Group P.L.C. (CWG) shares were sold in
an initial public offering at a price of (pound)3.30 per share and listed on the
London Stock Exchange. CNA received approximately 100 million shares of CWG
stock and approximately $144 million in cash. At June 30, 1999, CNA had an
approximate 15% ownership interest in CWG accounted for as an available for sale
security, with a carrying value of approximately $630 million. The original
investors, including CNA, have entered into an agreement with the underwriters,
under which they may not sell their shares of CWG prior to September 30, 1999
without the underwriters' consent.
At June 30, 1999, total Separate Account cash and investments amounted
to $4.8 billion with taxable fixed maturity securities representing
approximately 76.0% of the Separate Accounts' portfolios. Approximately 59.4% of
Separate Account investments are used to fund guaranteed investment contracts
for which Continental Assurance Company guarantees principal and a specified
rate of return to the contractholders. The duration of fixed maturity securities
included in the guaranteed investment contract 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 contract portfolio was $2.7 billion at June 30, 1999 and
$3.2 billion at December 31, 1998.
At June 30, 1999, net unrealized losses were approximately $11 million
compared with a net unrealized gains of approximately $64 million at December
31, 1998. The gross unrealized investment gains and losses for the guaranteed
investment contract fixed maturity securities portfolio at June 30, 1999 were
$28 million and $39 million, respectively, as compared to unrealized gains of
$84 million and unrealized losses of $20 million at December 31, 1998.
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. Carrying values of high yield
securities in the guaranteed investment contract portfolio were $101 million at
June 30, 1999 and $269 million at December 31, 1998. Net unrealized investment
losses on high yield securities held in Separate Accounts were $3 million at
June 30, 1999 and $11 million at December 31, 1998. As of June 30, 1999, CNA's
concentration in high yield bonds, including Separate Accounts, was
approximately 2.9% of total assets as compared to 4.0% at December 31, 1998.
Included in CNA's fixed maturity securities at June 30, 1999 (general
and guaranteed investment portfolios) are $9.4 billion of asset-backed
securities, consisting of approximately 54.2% in collateralized mortgage
obligations (CMOs), 18.3% in corporate asset-backed obligations, 11.1% in
corporate mortgage backed security pass through obligations, and 16.4% 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 June 30, 1999, the net unrealized
loss related to asset-backed securities was approximately $68 million compared
with a net unrealized gain of approximately $163 million at December 31, 1998.
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.
(34)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
At June 30, 1999, 35.3% of the general account's fixed maturity
securities portfolio was invested in U.S. Government securities, 35.2% in other
AAA rated securities and 15.0% in AA and A rated securities. CNA's guaranteed
investment fixed maturity securities portfolio is comprised of 5.0% U.S.
Government securities, 64.0% in other AAA rated securities and 15.7% 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.
Market risk exposure may include changes in the level of prices due to
changes in interest rates, equity prices, foreign exchange rates or other
factors that relate to market volatility of the rate, index or price underlying
the financial instrument. The Company's primary market risk exposures are due to
changes in interest rates, although the Company has certain exposures to changes
in equity prices and foreign currency exchange rates.
Active management of market risk is integral to the Company's operations.
The Company may use the following tools to manage its exposure to market risk
within defined tolerance ranges: 1) change the character of future investments
purchased or sold, 2) use derivatives to offset the market behavior of existing
assets and liabilities or assets expected to be purchased and liabilities to be
incurred, or 3) rebalance its existing asset and liability portfolios.
For purposes of this disclosure, market risk sensitive instruments are
divided into two categories: instruments entered into for trading purposes and
instruments entered into for purposes other than trading. The Company's market
risk sensitive instruments presented in the tables on pages 38-39 are classified
as held for purposes other than trading. The Company does not generally hold or
issue derivatives for trading purposes.
The Company has exposure to economic losses due 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 that 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.
(35)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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 Deutsche Marks, Chilean Pesos, Argentinean Pesos and
Japanese Yen. This exposure is mitigated by the Company's asset/liability
matching strategy and through the use of forwards for those instruments of 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 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 sensitivity analysis estimates the change in the market value of
the Company's interest-sensitive assets and liabilities that were held on June
30, 1999 and December 31, 1998 due to instantaneous parallel changes in the
yield curve at the end of the period. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Accordingly, the analysis may not be indicative of, is not intended to
provide, and does not provide a precise forecast of the effect of changes of
market interest rates on the Company's income or stockholders' equity. Further,
the computations do not contemplate any actions CNA would undertake in response
to changes in interest rates.
The sensitivity analysis assumes an instantaneous shift in market
interest rates, with scenarios of interest rates increasing and decreasing 100
and 150 basis points from their levels at June 30, 1999 and December 31, 1998
with all other variables held constant. A 100 and 150 basis point increase in
market interest rates would result in a pre-tax decrease in the net financial
instrument position of $1.6 billion and $2.4 billion, respectively, at June 30,
1999, compared with $1.7 billion and $2.6 billion, respectively, at December 31,
1998. Similarly, a 100 and 150 basis point decrease in market interest rates
would result in a pre-tax increase in the net financial instrument position of
$1.7 billion and $2.5 billion, respectively, at June 30, 1999, compared with
$1.6 billion and $2.4 billion, respectively, at December 31, 1998.
(36)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The Company's debt, including certain related interest rate swap
agreements, as of June 30, 1999 is denominated in U.S. dollars. At June 30, 1999
and December 31, 1998 approximately 93% of the Company's long-term debt has been
issued at or effectively converted to fixed rates, and as such, interest expense
would not be impacted by interest rate shifts. The impact of a 100 and 150 basis
point increase in interest rates on the fixed rate debt would result in a
decrease in the market value of the debt by $149 million and $218 million,
respectively, at June 30, 1999, compared with $157 million and $229 million,
respectively, at December 31, 1998. 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 $165 million and $254 million, respectively, at
June 30, 1999, compared with $174 million and $268 million, respectively, at
December 31, 1998. 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 million and $3 million, respectively, at June 30, 1999 and June
30, 1998. A 100 and 150 basis point decrease in interest rates would result in
like decreases in interest expense 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 June 30, 1999
and December 31, 1998, with all other variables held constant. The Company's
equity holdings were assumed to be positively correlated with the Index. At June
30, 1999, a 10% and 25% decrease in the Index would result in a $461 million and
$1,142 million decrease, respectively, compared with $320 million and $795
million decrease, respectively, at December 31, 1998, in the market value of the
Company's equity investments. Of these amounts, $97 million and $242 million,
respectively, at June 30, 1999, and $92 million and $229 million, respectively,
at December 31, 1998, 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 market value of the Company's equity investments and
increases in liabilities to customers under variable annuity contracts.
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 June 30, 1999 and December 31, 1998, with all other variables held
constant. At June 30, 1999, a 10% and 20% strengthening of the U.S. dollar
versus other currencies would result in decreases of $210 million and $420
million, respectively, in the market value of certain financial instruments that
are denominated in foreign currencies, compared with $220 million and $441
million, respectively, at December 31, 1998. Weakening of the U.S. dollar versus
all other currencies would result in like increases in certain financial
instruments that are denominated in foreign currencies.
(37)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The following tables reflect the estimated effects on the market value
of the Company's financial instruments at June 30, 1999 and December 31, 1998
due to an increase in interest rates of 100 basis points, a decline of 10% in
the S&P 500 index and a 10% decline in foreign currency exchange rates.
|-----------------------------------------------------------------------------|
|PERIOD ENDED JUNE 30, 1999 MARKET INTEREST CURRENCY EQUITY |
|(In millions of dollars) VALUE RATE RISK RISK RISK |
|-----------------------------------------------------------------------------|
| General Account: |
| Fixed maturity securities $ 28,937 $ (1,484) $ (134) $ (14) |
| Equity securities 3,203 - (85) (320) |
| Short-term investments 6,327 (4) (41) - |
| Foreign currency forwards 28 4 69 - |
| Interest rate swaps (2) 6 - - |
| Interest rate caps 4 3 - - |
| Other derivative securities 8 (2) - 13 |
|-----------------------------------------------------------------------------|
| Total General Account 38,505 (1,477) (191) (321) |
|-----------------------------------------------------------------------------|
| Separate Account Business: |
| Fixed maturity securities 3,638 (148) (16) (6) |
| Equity securities 372 - (2) (37) |
| Short-term investments 481 (1) (1) - |
| Equity index futures 18 2 - (97) |
| Other derivative securities (1) 1 - - |
|-----------------------------------------------------------------------------|
| TOTAL SEPARATE ACCOUNT BUSINESS 4,508 (146) (19) (140) |
|-----------------------------------------------------------------------------|
| TOTAL ALL SECURITIES $ 43,013 $ (1,623) $ (210) $ (461) |
|=============================================================================|
|DEBT $ (3,164) $ 149 $ - $ - |
|=============================================================================|
|-----------------------------------------------------------------------------|
|Period Ended December 31, 1998 Market Interest Currency Equity |
|(In millions of dollars) Value Rate Risk Risk Risk |
|-----------------------------------------------------------------------------|
| General Account: |
| Fixed maturity securities $ 30,073 $(1,549) $ (156) $ - |
| Equity securities 1,970 - (21) (197) |
| Short-term investments 4,037 (21) (43) - |
| Interest rate swaps (20) 9 - - |
| Interest rate caps 1 1 - - |
| Other derivative securities 5 9 21 2 |
|-----------------------------------------------------------------------------|
| Total General Account 36,066 (1,551) (199) (195) |
|-----------------------------------------------------------------------------|
| Separate Account Business: |
| Fixed maturity securities 4,155 (176) (20) (3)|
| Equity securities 297 - - (30)|
| Short-term investments 473 - (1) - |
| Equity index futures 2 4 - (92)|
| Other derivative securities 2 (1) - - |
|-----------------------------------------------------------------------------|
| Total Separate Account Business 4,929 (173) (21) (125) |
|-----------------------------------------------------------------------------|
| Total all securities $ 40,995 $(1,724) $ (220) $ (320) |
|=============================================================================|
|Debt $ (3,179) $ 157 $ - $ - |
|=============================================================================|
(38)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The following tables reflect the estimated effects on the market value
of the Company's financial instruments at June 30, 1999 and December 31, 1998
due to an increase in interest rates of 150 basis points, a 25% decline in the
S&P 500 index and a decline of 20% in foreign currency exchange rates.
|-----------------------------------------------------------------------------|
|PERIOD ENDED JUNE 30, 1999 MARKET INTEREST CURRENCY EQUITY |
|(IN MILLIONS OF DOLLARS) VALUE RATE RISK RISK RISK |
|-----------------------------------------------------------------------------|
| General Account: |
| Fixed maturity securities $ 28,937 $ (2,204) $ (267) $ (36) |
| Equity securities 3,203 - (171) (799) |
| Short-term investments 6,327 (6) (82) - |
| Foreign currency forwards 28 6 139 - |
| Interest rate swaps (2) 9 - - |
| Interest rate caps 4 5 - - |
| Other derivative securities 8 (2) - 43 |
|-----------------------------------------------------------------------------|
| TOTAL GENERAL ACCOUNT 38,505 (2,192) (381) (792) |
|-----------------------------------------------------------------------------|
| Separate Account Business: |
| Fixed maturity securities 3,638 (222) (31) (15) |
| Equity securities 372 - (5) (93) |
| Short-term investments 481 (1) (3) - |
| Equity index futures 18 3 - (242) |
| Other derivative securities (1) 1 - - |
|-----------------------------------------------------------------------------|
| TOTAL SEPARATE ACCOUNT BUSINESS 4,508 (219) (39) (350) |
|-----------------------------------------------------------------------------|
| TOTAL ALL SECURITIES $ 43,013 $ (2,411) $ (420) $(1,142) |
|=============================================================================|
|DEBT $ (3,164) $ 218 $ - $ - |
|=============================================================================|
|-----------------------------------------------------------------------------|
|Period Ended December 31, 1998 Market Interest Currency Equity|
|(In millions of dollars) Value Rate Risk Risk Risk |
|-----------------------------------------------------------------------------|
| General Account: |
| Fixed maturity securities $ 30,073 $ (2,347) $ (313) $ - |
| Equity securities 1,970 - (42) (493) |
| Short-term investments 4,037 (31) (85) - |
| Interest rate swaps (20) 14 - - |
| Interest rate caps 1 1 - - |
| Other derivative securities 5 14 42 10 |
|-----------------------------------------------------------------------------|
| Total General Account 36,066 (2,349) (398) (483) |
|-----------------------------------------------------------------------------|
| Separate Account Business: |
| Fixed maturity securities 4,155 (272) (41) (9) |
| Equity securities 297 - - (74) |
| Short-term investments 473 (1) (2) - |
| Equity index futures 2 6 - (229) |
| Other derivative securities 2 (1) - - |
|-----------------------------------------------------------------------------|
| Total Separate Account Business 4,929 (268) (43) (312) |
|-----------------------------------------------------------------------------|
| Total all securities $ 40,995 $ (2,617) $ (441) $ (795) |
|=============================================================================|
|Debt $ (3,179) $ 229 $ - $ - |
==============================================================================|
(39)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
FINANCIAL CONDITION:
|------------------------------------------------------------------------|
|FINANCIAL POSITION June 30, December 31, |
|(In millions of dollars, except per share data) 1999 1998 |
|------------------------------------------------------------------------|
|Assets $ 64,474 $ 62,359 |
|Stockholders' Equity 9,343 9,157 |
|Accumulated Other Comprehensive Income 1,310 1,064 |
|Book Value per Common Share 49.91 47.89 |
|========================================================================|
CNA's assets increased approximately $2.1 billion from December 31,
1998 to $64.5 billion as of June 30, 1999. The major component of this increase
was an increase of approximately $2.5 billion in invested assets, primarily in
equity securities and short-term investments, including a $2.3 billion increase
in collateral on loaned securities. These increases were partially offset by a
decrease in fixed maturity securities.
During the first six months of 1999, CNA's stockholders' equity
increased by $187 million, or 2.0%, to $9.3 billion. The major components of
this change were a change in accumulated other comprehensive income of $246
million and net income of $149 million. These increases in stockholders' equity
were offset by the $200 million redemption of Series G preferred stock from its
majority shareholder, Loews Corporation.
The statutory surplus of the property/casualty subsidiaries was
approximately $8.8 billion at June 30, 1999 and $7.6 billion at December 31,
1998. Statutory surplus increased by net income of $345 million and a change in
net unrealized investment gains of $1.4 billion, principally attributable to
increases in the market values of Canary Wharf and Global Crossings Ltd., as
discussed in the investments section of the MD&A. These increases were partially
offset by $413 million of reductions in surplus, consisting primarily of
dividends to the parent company. The statutory surplus of the life insurance
subsidiaries was approximately $1.2 billion at June 30, 1999, compared to $1.1
billion at December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES:
The principal operating cash flow sources of CNA's property/casualty
and life insurance subsidiaries are premiums and investment income. The primary
operating cash flow uses are payments for claims, policy benefits and operating
expenses.
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 six months ended June 30, 1999, CNA's operating cash flows were a
negative $132 million, compared to a negative $579 million for the six months
ended June 30, 1998.
On December 24, 1998, CNAF filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission relating to $600 million in senior and
subordinated debt, junior debt, common stock, preferred stock and warrants. This
registration statement was amended on April 20, 1999 and became effective on May
10, 1999.
(40)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
IMPACT OF YEAR 2000:
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision-making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. The Company renovated or replaced
many of its legacy systems and upgraded its 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.
Based upon its current assessment, CNA estimates that the total cost to
replace and upgrade its systems to accommodate Year 2000 processing is expected
to be approximately $70 million. As of June 30, 1999, the Company has spent
approximately $60 million on Year 2000 readiness matters. 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
typically are included as part of ongoing technology updates and not
specifically as part of the Year 2000 project. All funds spent and to be spent
have been or 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. As of December 1, 1998, all internal application
systems had been certified by CNA as being ready for the year 2000. For an
internal system to be certified Year 2000 ready by CNA, it had to be tested and
accepted as capable of receiving, processing and providing dates and
date-related data from, into and between the years 1999 and 2000, and beyond,
including leap year calculations. By the end of summer 1999, the Company plans
to complete the replacement of minimal amounts of hardware and associated
operating system software providing Year 2000 readiness of all information
technology infrastructure components.
Due to the interdependent nature of computer systems, there may be an
adverse impact on the Company if banks, independent agents, vendors, insurance
agents, third party administrators, various governmental agencies and other
business partners fail to successfully address the Year 2000 issue. The Company
has 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 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. To
mitigate this impact, the Company is communicating with these various entities
to coordinate Year 2000 conversion. In addition, the Company has engaged in
interface and Y2K readiness testing with many of its banking relationships. To
date, no major problems have been identified. The Company continues to
communicate with its bank relationships to conduct appropriate testing.
As business conditions change, CNA may respond by revising previous
Year 2000 strategies or solutions affecting specific systems. In limited cases,
a system that was to have been replaced, may instead be renovated to become Year
2000 ready prior to January 1, 2000. The Company believes that these changes
will not have a material impact on the results of operations or equity of CNA.
(41)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
In addition, certain non-insurance affiliates are not yet Year 2000
ready, but they are expected to be ready on a timely basis. In the event that
they are not, the Company does not believe the impact on the Company would be
material on the results of operations or equity of CNA. To mitigate this impact,
the Company is communicating with these non-insurance affiliates to coordinate
Year 2000 conversion.
The Company also has 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 all the recovery plans for approximately 400
processes. These plans are being reviewed and updated quarterly.
In addition, property/casualty insurance companies may have an
underwriting exposure related to the Year 2000 issue. There can be no assurances
that policyholders will not suffer losses resulting from Year 2000 issues and
seek indemnification under insurance polices underwritten by the CNA
underwriting companies. 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 meaningful 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 on the results of operations or equity of CNA.
ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities". This statement 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, 2000. CNA is currently evaluating the effects of this Statement
on its accounting and reporting for derivative securities and hedging
activities.
In October 1998, the American Institute of Certified Public
Accountant's Accounting Standards Executive Committee issued SOP 98-7,
"Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk". This guidance excludes long-duration life and health insurance
contracts from its scope. This SOP is effective for financial statements in the
year 2000, with early adoption encouraged. CNA is currently evaluating the
effects of this SOP.
(42)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - concluded
FORWARD-LOOKING STATEMENTS:
The statements contained in this management discussion and analysis
which are not historical facts are forward-looking statements. When included in
this management 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, the impact of competitive products, policies and pricing; product and
policy demand and market responses; development of claims and the effect on loss
reserves; the performance of reinsurance companies under reinsurance contracts
with the Company; general economic and business conditions; changes in financial
markets (interest rate, credit, currency, commodities and stocks); changes in
foreign, political, social and economic conditions; regulatory initiatives and
compliance with governmental regulations; judicial decisions and rulings; the
effect on the Company with regards to third party corrective actions on Year
2000 compliance; changes in rating agency policies and practices; the results of
financing efforts; changes in the Company's composition of operating segments;
the actual closing of contemplated transactions and agreements and various other
matters and risks (many of which are beyond the Company's control) detailed in
the Company's Securities and Exchange Commission filings. These forward-looking
statements speak only as of the date of this press release. 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.
(43)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 16, 1999, CNA Financial Corporation issued a press release
announcing the appointment of Robert V. Deutsch as chief financial officer.
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 45
Computation of Ratio of Earnings to Fixed Charges 12.1 46
Computation of Ratio of Net Income,
As Adjusted, to Fixed Charges 12.2 46
Financial Data Schedule 27 47
(b) REPORTS ON FORM 8-K:
On June 10, 1999, CNA Financial Corporation filed a report on Form 8-K
related to the press release announcing that CNA is selling its personal lines
business to Allstate.
(44)
<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
-------------------------
S/W. JAMES MACGINNITIE
Date: August 16, 1999 By: _________________________
--------------- W. James MacGinnitie
Senior Vice President and
Chief Financial Officer
(45)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
|---------------------------------------------------------------------------------------|
|PERIOD ENDED JUNE 30 THREE MONTHS SIX MONTHS |
|(In millions of dollars, except per share data) 1999 1998 1999 1998 |
|---------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
|Earnings per share: |
| |
| Net income $ 154 $ 210 $ 149 $ 443 |
| Less preferred stock dividends 4 2 8 3 |
| ------ ------ ------ ------
| Net income available to common stockholders $ 150 $ 208 $ 141 $ 440 |
| ====== ====== ====== ====== |
| Weighted average shares outstanding 184.2 185.4 184.1 185.4 |
| ====== ====== ====== ====== |
| Net income per common share $0.82 $1.12 $0.77 $ 2.37 |
| ====== ====== ====== ======= |
|---------------------------------------------------------------------------------------|
</TABLE>
(46)
<PAGE>
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
|-------------------------------------------------------------------------|
|PERIOD ENDED JUNE 30 1999 1998 |
|(In millions of dollars, except ratio data) |
|-------------------------------------------------------------------------|
|Income before income tax and cumulative effect |
| of accounting changes $ 342 $ 615 |
|Adjustments: |
| Interest expense 108 115 |
| Interest element of operating lease rental 22 18 |
| ------- ------- |
| Income before income tax, as adjusted $ 472 $ 748 |
| ======= ======= |
| |
|Fixed charges: |
| Interest expense $ 108 $ 115 |
| Interest element of operating lease rental 22 18 |
| ------- ------- |
|Fixed charges $ 130 $ 133 |
| ======= ======= |
|Ratio of earnings to fixed charges (1) 3.6 5.6 |
|-------------------------------------------------------------------------|
(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 JUNE 30 1999 1998 |
|(In millions of dollars, except ratio data) |
|-------------------------------------------------------------------------|
|Net income $ 149 $ 443 |
|Adjustments: |
| Interest expense, after tax 70 75 |
| Interest element of operating lease rental, |
| after tax 14 12 |
| ------- -------- |
|Net income, as adjusted $ 233 $ 530 |
| ======= ======== |
| |
|Fixed charges: |
| Interest expense, after tax $ 70 $ 75 |
| Interest element of operating lease rental, |
| after tax 14 12 |
| ------- -------- |
|Fixed charges $ 84 $ 87 |
| ======= ======== |
|Ratio of net income, as adjusted, to fixed |
| charges (1) 2.8 6.1 |
|-------------------------------------------------------------------------|
(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.
(47)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 28,937
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,203
<MORTGAGE> 53
<REAL-ESTATE> 5
<TOTAL-INVEST> 39,644
<CASH> 235
<RECOVER-REINSURE> 5,935
<DEFERRED-ACQUISITION> 2,583
<TOTAL-ASSETS> 64,474
<POLICY-LOSSES> 34,214
<UNEARNED-PREMIUMS> 5,437
<POLICY-OTHER> 123
<POLICY-HOLDER-FUNDS> 736
<NOTES-PAYABLE> 3,050
0
150
<COMMON> 464
<OTHER-SE> 8,730
<TOTAL-LIABILITY-AND-EQUITY> 64,474
6,945
<INVESTMENT-INCOME> 1,031
<INVESTMENT-GAINS> 389
<OTHER-INCOME> 391
<BENEFITS> 5,923
<UNDERWRITING-AMORTIZATION> 1,108
<UNDERWRITING-OTHER> 1,217
<INCOME-PRETAX> 416
<INCOME-TAX> 90
<INCOME-CONTINUING> 326
<DISCONTINUED> 0
<EXTRAORDINARY> (177)
<CHANGES> 0
<NET-INCOME> 149
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.77
<RESERVE-OPEN> 22,931
<PROVISION-CURRENT> 3,740
<PROVISION-PRIOR> 458
<PAYMENTS-CURRENT> 1,046
<PAYMENTS-PRIOR> 3,325
<RESERVE-CLOSE> 22,758
<CUMULATIVE-DEFICIENCY> 458
</TABLE>
