===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 X No...
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 3, 1999
----------------------------- --------------------------
Common Stock, Par value $2.50 184,211,446
===============================================================================
Page (1) of (45)
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- ---------------------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 (Unaudited) and DECEMBER 31, 1998................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998............... 4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998... 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998............... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) MARCH 31, 1999............................ 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 20
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 41
SIGNATURES........................................... 42
EXHIBIT 11 COMPUTATION OF NET (LOSS) INCOME PER COMMON SHARE.... 43
EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES..................................... 44
EXHIBIT 12.2 COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED,
TO FIXED CHARGES..................................... 44
EXHIBIT 27 FINANCIAL DATA SCHEDULE.............................. 45
(2)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31,
1999 1998
(In millions of dollars, except share data) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturities available-for-sale (amortized cost: $ 30,168 and $29,511). $30,337 $30,073
Equity securities available-for-sale (cost: $ 1,037 and $1,055)............. 3,389 1,970
Mortgage loans and real estate (less accumulated depreciation: $1 and $1)... 59 62
Policy loans................................................................ 176 177
Other invested assets....................................................... 922 858
Short-term investments ..................................................... 4,832 4,037
--------- ---------
TOTAL INVESTMENTS......................................................... 39,715 37,177
Cash.......................................................................... 355 217
Receivables:
Reinsurance................................................................. 6,682 6,365
Insurance .................................................................. 6,852 6,504
Other ...................................................................... 249 300
Less allowance for doubtful accounts........................................ (330) (328)
Deferred acquisition costs.................................................... 2,490 2,422
Prepaid reinsurance premiums.................................................. 455 331
Accrued investment income..................................................... 380 392
Receivables for securities sold............................................... 551 255
Federal income taxes recoverable (includes $111 and $234 due from Loews)...... 131 251
Deferred income taxes......................................................... 725 995
Property and equipment at cost (less accumulated depreciation: $738 and $695). 841 824
Intangibles................................................................... 364 368
Other assets.................................................................. 776 1,083
Separate Account business..................................................... 5,050 5,203
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $65,286 $62,359
==========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31,
1999 1998
(In millions of dollars, except share data) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
<S> <C> <C>
Claim and claim adjustment expense ........................................ $29,420 $29,192
Unearned premiums.......................................................... 5,392 5,039
Future policy benefits..................................................... 5,541 5,418
Policyholders' funds....................................................... 756 789
Collateral on loaned securities............................................... 1,343 130
Payables for securities purchased............................................. 752 316
Participating policyholders' equity........................................... 136 140
Debt.......................................................................... 3,146 3,160
Other liabilities............................................................. 3,681 3,611
Separate Account business..................................................... 5,050 5,203
--------- --------
TOTAL LIABILITIES......................................................... 55,217 52,998
--------- --------
Commitments and contingent liabilities - Notes C and D
Minority Interest............................................................... 227 204
Stockholders' equity:
Common stock ($2.50 par value;
Authorized - 200,000,000 shares;
Issued - 185,525,907 shares;
Outstanding as of March 31, 1999 - 184,211,446 shares,
Outstanding as of December 31, 1998 - 183,889,569 shares)................... 464 464
Preferred stock............................................................... 350 350
Additional paid-in capital.................................................... 126 126
Retained earnings............................................................. 7,248 7,258
Accumulated other comprehensive income........................................ 1,758 1,064
Treasury stock, at cost....................................................... (49) (61)
-------- --------
9,897 9,201
Notes receivable from officer stockholders.................................... (55) (44)
--------- --------
TOTAL STOCKHOLDERS' EQUITY............................................... 9,842 9,157
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $65,286 $62,359
=========================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
(3)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1999 1998
(In millions of dollars, except per share data)
- ----------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C>
Premiums....................................................................... $3,439 $3,431
Net investment income.......................................................... 512 562
Realized investment gains, net of participating policyholders' interest........ 222 179
Other.......................................................................... 252 186
------- -------
Total revenues 4,425 4,358
------- -------
Claims, benefits and expenses:
Insurance claims and policyholders' benefits................................... 2,869 2,848
Amortization of deferred acquisition costs..................................... 577 490
Other operating expenses....................................................... 669 628
Restructuring-related charges ................................................. 35 -
Interest expense............................................................... 62 55
------- --------
Total claims, benefits and expenses 4,212 4,021
------- --------
Income before income tax, minority interest and cumulative effect of
a change in accounting principle........................................... 213 337
Income tax expense.............................................................. 35 98
Minority interest............................................................. 6 6
------- --------
Income before cumulative effect of a change in accounting principle........... 172 233
Cumulative effect of a change in accounting principle, net of tax............. 177 -
------- --------
Net (loss) income............................................................ $ (5) $ 233
=====================================================================================================
EARNINGS PER SHARE
Net (loss) income............................................................... $(0.05) $ 1.25
======= =======
Weighted average outstanding shares of
common stock (in millions of shares)............................................ 184.0 185.4
=====================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
(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 ComprehensiveTreasury 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................ - - - $233 233 - - - 233
Other comprehensive income
(loss).................... - - - (25) - (25) - - (25)
------
Total comprehensive income. $208
======
Preferred dividends....... - - - (1) - - - (1)
- ----------------------------------------------- -----------------------------------------------------
BALANCE, MARCH 31, 1998 $464 $150 $126 $7,215 $ 564 $ (3) $ - $8,516
=============================================== =====================================================
BALANCE, JANUARY 1, 1999 $464 $350 $126 $7,258 $1,064 $(61) $(44) $9,157
Comprehensive income:
Net loss.................. - - - $ (5) (5) - - - (5)
Other comprehensive income.- - - 694 - 694 - - 694
------
Total comprehensive income. $689
======
Sale of treasury stock and
issuance of notes receivable
from officer stockholders...- - - - - 12 (11) 1
Preferred dividends........- - - (5) - - - (5)
- ----------------------------------------------- -----------------------------------------------------
BALANCE, MARCH 31, 1999 $464 $350 $126 $7,248 $1,758 $(49) $(55) $9,842
=============================================== =====================================================
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
(5)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1999 1998
(In millions of dollars)
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income ....................................................$ (5) $ 233
--------- -----------
Adjustments to reconcile net income to net cash flows
from operating activities:
Minority Interest ............................................ 6 6
Deferred income tax provision................................. 22 10
Participating policyholders' interest......................... - 4
Net realized investment gains, pre-tax ....................... (222) (179)
Amortization of intangibles................................... 5 9
Amortization of bond discount................................. (34) (20)
Depreciation.................................................. 45 48
Changes in:
Receivables, net............................................. (612) (717)
Deferred acquisition costs................................... (68) (149)
Accrued investment income.................................... 12 (18)
Federal income taxes recoverable............................. 120 3
Prepaid reinsurance premiums................................. (124) (165)
Insurance reserves........................................... 675 916
Other liabilities............................................ 106 (401)
Other, net................................................... 106 180
--------- ----------
Total adjustments ....................................... 37 (473)
--------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES ................ 32 (240)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities................................... (11,744) (8,340)
Proceeds from fixed maturities:
Sales.......................................................... 10,971 7,809
Maturities, calls and redemptions............................... 889 676
Purchases of equity securities.................................. (144) (307)
Proceeds from sale of equity securities......................... 184 192
Change in short-term investments................................ (1,223) (182)
Purchases of property and equipment ............................ (75) (51)
Change in securities sold under repurchase agreements........... 1,213 393
Change in other investments..................................... 48 (117)
Other, net...................................................... 10 (5)
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES ................ 129 68
---------- ----------
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (cont.)
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1999 1998
(In millions of dollars)
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Dividends paid to preferred shareholders........................ (5) (1)
Receipts from investment contracts credited to policyholder
account balances................................................ - 1
Return of policyholder account balances on investment contracts. (4) (6)
Principal payments on long-term debt............................ (189) (301)
Proceeds from issuance of long-term debt........................ 175 297
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES................ (23) (10)
---------- ----------
Net cash flows....................................... 138 (182)
Cash at beginning of period...................................... 217 383
=======================================================================================
CASH AT END OF PERIOD $ 355 $ 201
=======================================================================================
Supplemental disclosures of cash flow information:
Cash (paid) received:
Interest expense................................................$ (42) $ (45)
Federal income taxes............................................ 127 (70)
Non-cash transactions:
Notes receivable from officer stockholders for sale of
treasury stock.................................................. (11) -
=======================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1999, Loews Corporation
(Loews) owns approximately 85% 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 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, which 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 March 31,
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 March 31, 1999, the Company
owned 40,075,170 shares (after a 2-for-1 split effective on March 10, 1999), or
9.7% of the outstanding common stock which was valued at $1,854 million. Net
unrealized gains associated with this security approximated $1,791 million at
March 31, 1999. Without registration or an exemption from registration, sales to
the public of the Company's holdings of Global Crossing are governed by Rule 144
of the Securities Act of 1933 (the Act) and may not commence until August 13,
1999. The Company has the right after August 13, 1999 to require Global Crossing
to register under the Act up to 25% of the Company's holdings prior to December
31, 1999.
On March 25, 1999, Canary Wharf Group P.L.C. (CWG) shares were sold in an
initial public offering at a price of 3.30 British pounds 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 March 31, 1999, CNA had an
approximate 15% ownership interest in CWG accounted for as an available for sale
security, with a carrying value of approximately $539 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.
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, Casualty, Fibreboard, another insurer (Pacific
Indemnity, a subsidiary of the Chubb Corporation), and a negotiating committee
of asbestos claimant attorneys (collectively referred to as "Settling Parties")
have reached an agreement (the "Global Settlement Agreement") to resolve all
future asbestos-related bodily injury claims involving Fibreboard. The Global
Settlement Agreement is subject to court approval.
Casualty, Fibreboard and Pacific Indemnity have also reached an
agreement (the "Trilateral Agreement") on a settlement to resolve the coverage
litigation in the event the Global Settlement Agreement does not obtain final
court approval.
On July 27, 1995, the United States District Court for the Eastern District
of Texas entered judgment approving the Global Settlement Agreement and the
Trilateral Agreement. As expected, appeals were filed as respects both of these
decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of
Appeals in New Orleans affirmed the judgment approving the Global Settlement
Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral
Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and suggestions
for rehearing by the entire Fifth Circuit Court of Appeals as respects the
decision on the Global Settlement Agreement were denied. Two petitions for
certiorari were filed in the Supreme Court as respects the Global Settlement
Agreement. On June 27, 1997, the Supreme Court granted these petitions, vacated
the Fifth Circuit's judgment as respects the Global Settlement
(8)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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. No opinion has yet
been released.
No further appeal was filed with respect to the Trilateral Agreement;
therefore, court approval of the Trilateral Agreement has become final.
SETTLEMENT AGREEMENTS
On April 9, 1993, Casualty and Fibreboard entered into an agreement
pursuant to which, among other things, the parties agreed to use their best
efforts to negotiate and finalize a global class action settlement with
asbestos-related bodily injury and death claimants.
On August 27, 1993, the Settling Parties reached an agreement in
principle for an omnibus settlement to resolve all future asbestos-related
bodily injury claims involving Fibreboard. The Global Settlement Agreement was
executed on December 23, 1993. The agreement calls for contribution by Casualty
and Pacific Indemnity of an aggregate of $1.53 billion to a trust fund for a
class of all future asbestos claimants, defined generally as those persons whose
claims against Fibreboard were neither filed nor settled before August 27, 1993.
(As used in this note, "present" claims generally refers to asbestos claims
filed against Fibreboard on or before August 27, 1993). An additional $10
million is to be contributed to the fund by Fibreboard. As indicated above, the
Global Settlement Agreement has been approved by the Fifth Circuit a second
time, but the Supreme Court granted a petition for certiorari and is currently
reviewing the Fifth Circuit decision.
On October 12, 1993, Casualty, Pacific Indemnity and Fibreboard entered
into the Trilateral Agreement to settle the coverage litigation to operate in
the event that the Global Settlement Agreement is disapproved. The Trilateral
Agreement calls for payment by Casualty and Pacific Indemnity of an aggregate
$2.0 billion, of which Casualty's portion is approximately $1.46 billion, to
Fibreboard to resolve all claims by Fibreboard and all future and certain
present asbestos claims arising under the policy issued to Fibreboard by
Casualty.
Under either the Global Settlement Agreement or the Trilateral
Agreement, Casualty is also obligated to pay prior settlements of present
asbestos claims. As a result of the final approval of the Trilateral Agreement,
such obligation has become final.
Through March 31, 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 March 31, 1999. Such payments have been partially
recovered from Pacific Indemnity. Casualty may negotiate other agreements for
unsettled claims.
<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 (the four other states had previously settled). The manufacturers have
agreed to make annual payments totaling approximately $206 billion through 2025.
In exchange, the states and other governmental entities 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. 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. 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 March 31, 1999 and December 31, 1998, CNA carried $740 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. There was no environmental pollution and other mass
tort reserve development for the three months ended March 31, 1999 and 1998,
respectively.
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 March
31, 1999 and December 31, 1998, CNA carried $1.4 billion and $1.5 billion,
respectively, 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 three months ended March 31, 1999 and 1998 totaled $34 million and $14
million, respectively.
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------------------|
|RESERVE SUMMARY |
| |
| MARCH 31, 1999 December 31, 1998 |
| ------------------------------- --------------------------------|
| ENVIRONMENTAL Environmental |
| POLLUTION AND Pollution and Other |
|(In millions of dollars) OTHER MASS TORT ASBESTOS Mass Tort Asbestos |
|------------------------------------------------------------------- --------------------------------|
<S> <C> <C> <C> <C>
| |
|Reported claims: |
| Gross reserves $ 291 $ 1,349 $ 291 $ 1,305 |
| Less reinsurance recoverable (38) (115) (41) (91) |
| -------------------------------------------------------------------|
| Net reported claims 253 1,234 250 1,214 |
|Net unreported claims 487 198 537 242 |
|------------------------------------------------------------------------------------------------------|
|NET RESERVES $ 740 $ 1,432 $ 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, securing a
large portion of the recoverables.
<TABLE>
<CAPTION>
|---------------------------------------------------------------------------------------|
|Three Months Ended March 31 Earned Premiums |
| --------------------------------------- |
| Assumed/ |
|(In millions of dollars) Direct Assumed Ceded Net Net % |
|---------------------------------------------------------------------------------------|
|1999 |
<S> <C> <C> <C> <C> <C>
| Property/casualty $2,275 $ 362 $ 268 $2,369 15.3 % |
| Accident and health 928 36 96 868 4.1 |
| Life 259 40 97 202 19.6 |
|---------------------------------------------------------------------------------------|
| TOTAL PREMIUMS $3,462 $ 438 $ 461 $3,439 12.7 % |
|=======================================================================================|
|1998 |
| Property/casualty $2,018 $ 433 $ 147 $2,304 18.8 % |
| Accident and health 905 75 91 889 8.4 |
| Life 251 36 49 238 15.1 |
|---------------------------------------------------------------------------------------|
| TOTAL PREMIUMS $3,174 $ 544 $ 287 $3,431 15.9 % |
|=======================================================================================|
</TABLE>
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' benefits are net of reinsurance
recoveries of $324 and $179 million for the three months ended March 31, 1999
and March 31, 1998, respectively.
(13)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE E. Debt:
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------|
|Debt MARCH 31, December 31,|
|(In millions of dollars) 1999 1998 |
|-------------------------------------------------------------------------------------------|
| Variable Rate Debt: |
<S> <C> <C>
| Commercial Paper $ 675 $ 500 |
| Credit Facility - CNAF 60 235 |
| Credit Facility - CNA Surety 100 113 |
| Senior Notes: |
| 8.25%, due April 15, 1999 100 100 |
| 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 98 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 45 46 |
| Other debt, due through 2019 (rates of 1.0% to 12.71%) 27 27 |
|-------------------------------------------------------------------------------------------|
| TOTAL DEBT $3,146 $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 March 31, 1999, there was $60 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 March 31, 1999 and 1998, respectively,
was 5.10% 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 March 31, 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 March 31, 1999 and March 31,
1998, in exchange for the receipt of interest at the three month LIBOR rate. The
effect of these interest rate swaps was to increase interest expense by
approximately $1.3 million and $0.3 million for the three-month periods ended
March 31, 1999 and 1998, respectively.
Outstanding commercial paper borrowings were $675 million and $500
million for the periods ending March 31, 1999 and December 31, 1998,
respectively. The weighted average interest rate on commercial paper at March
31, 1999 was 5.10% compared to 5.80% at March 31, 1998.
The weighted average interest rate (interest and facility fees) on the
combined revolving credit facility, commercial paper borrowings and interest
rate swaps was 6.08% and 6.12% at March 31, 1999 and 1998, respectively.
On April 15, 1999, CNAF paid at the due date $100 million of 8.25%
senior notes.
(14)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
CNA Surety, a 61% owned subsidiary of CNAF, has a $130 million
revolving credit facility that expires in September 2002. At March 31, 1999 and
December 31, 1998, the outstanding borrowings under this facility were $100
million and $113 million, respectively. The weighted average interest rate was
5.14% and 5.89% for the periods ending March 31, 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.
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:
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------|
|THREE MONTHS ENDED MARCH 31, 1999 Pre-tax amount Tax (expense) Net |
|(In millions of dollars) benefit amount |
|-------------------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investments: |
| |
<S> <C> <C> <C>
| Gains arising during the period $1,137 $(398) $739 |
| |
| Allocated to minority interest 2 (1) 1 |
| |
| Allocated to participating policyholders 1 - 1 |
| |
| Reclassification adjustment for (gains) losses |
| included in net income (121) 42 (79) |
| |
|Foreign currency translation adjustment 32 - 32 |
|-------------------------------------------------------------------------------------------|
| TOTAL OTHER COMPREHENSIVE INCOME $1,051 $(357) $694 |
|===========================================================================================|
</TABLE>
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------|
|THREE MONTHS ENDED MARCH 31, 1998 Pre-tax amount Tax (expense) Net |
|(In millions of dollars) benefit amount |
|-------------------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investments: |
| |
<S> <C> <C> <C>
| Gains arising during the period $ 123 $ (43) $ 80 |
| |
| Allocated to participating policyholders 3 - 3 |
| |
| Reclassification adjustment for (gains) losses |
| included in net income (149) 52 (97)|
| |
|Foreign currency translation adjustment (11) - (11)|
|-------------------------------------------------------------------------------------------|
| TOTAL OTHER COMPREHENSIVE INCOME (LOSS) $ (34) $ 9 $ (25)|
============================================================================================|
</TABLE>
(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 March 31, 1999 and 1998.
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------|
| Total |
| Foreign Net accumulated |
| currency unrealized other |
| translation gains/(losses) comprehensive|
|(In millions of dollars) adjustment on investments income |
|-------------------------------------------------------------------------------------|
<S> <C> <C> <C>
|Beginning balance January 1, 1999 $ 73 $ 991 $1,064 |
| |
|Current period change 32 662 694 |
|-------------------------------------------------------------------------------------|
| |
| ENDING BALANCE, MARCH 31, 1999 $105 $1,653 $1,758 |
|=====================================================================================|
| |
| |
|Beginning balance January 1, 1998 $ 66 $ 523 $ 589 |
| |
|Current period change (11) (14) (25) |
|-------------------------------------------------------------------------------------|
| |
| Ending balance, March 31, 1998 $ 55 $ 509 $ 564 |
|=====================================================================================|
</TABLE>
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, 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 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 |
|THREE MONTHS ENDED MARCH 31, 1999 Operations Operations CNA Re Operations Management |
|-----------------------------------------------------------------------------------------------------|
|(In millions of dollars)
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $1,359 $276 $252 $246 $209 |
| Net investment income 172 57 39 30 36 |
| Other 70 4 1 28 54 |
|-----------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 1,601 337 292 304 299 |
| investment gains |
|Total benefits and expenses 1,669 298 274 270 271 |
|-----------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (68) 39 18 34 28 |
|Income tax benefit (expense) 35 (10) (4) (10) (7) |
|-----------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding |
| realized investment gains/losses) |
| (33) 29 14 24 21 |
|Realized investment gains, net of tax 68 22 10 9 10 |
|Minority interest -- -- -- (7) - |
|-----------------------------------------------------------------------------------------------------|
| Income (loss) before cumulative effect of a
| change in accounting principle 35 51 24 26 31 |
|Cumulative effect of a change in accounting |
|principle, net of tax (93) (3) -- (3) (75) |
|-----------------------------------------------------------------------------------------------------|
| NET (LOSS) INCOME $ (58) $ 48 $ 24 $ 23 $(44) |
|=====================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------|
| Group Life |
|Three months ended March 31, 1999 Operations Operations Corporate Eliminations Total |
|-----------------------------------------------------------------------------------------------------|
(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $ 867 $203 $ 35 $ (8) $3,439 |
| Net investment income 33 145 -- -- 512 |
| Other 9 16 70 -- 252 |
|-----------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized |
| investment gains 909 364 105 (8) 4,203 |
|Total benefits and expenses 906 309 223 (8) 4,212 |
|-----------------------------------------------------------------------------------------------------|
| Operating income (loss) before income tax 3 55 (118) -- (9) |
|Income tax benefit (expense) -- (19) 58 -- 43 |
|-----------------------------------------------------------------------------------------------------|
| Net operating income (loss)(excluding |
| realized investment gains/losses) 3 36 (60) -- 34 |
|Realized investment gains, net of tax 7 12 6 -- 144 |
|Minority interest -- -- 1 -- (6) |
|-----------------------------------------------------------------------------------------------------|
| Income before cumulative effect of a |
| change in accounting principle 10 48 (53) -- 172 |
|Cumulative effect of a change in accounting |
|principle, net of tax (1) (2) -- -- (177) |
|-----------------------------------------------------------------------------------------------------|
| NET (LOSS) INCOME $ 9 $ 46 $(53) $ -- $ (5) |
|=====================================================================================================|
</TABLE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------|
| Agency |
| Market Specialty Global Risk |
|THREE MONTHS ENDED MARCH 31, 1998 Operations Operations CNA Re Operations Management |
|-----------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains:
| Premiums $1,335 $ 279 $259 $218 $ 226 |
| Net investment income 197 65 42 28 38 |
| Other 13 8 1 10 50 |
|-----------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized
| investment gains 1,545 352 302 256 314 |
|Total benefits and expenses 1,533 280 267 204 326 |
|-----------------------------------------------------------------------------------------------------|
| Operating income (loss) before income tax 12 72 35 52 (12) |
|Income tax benefit (expense) 8 (21) (10) (16) 6 |
|-----------------------------------------------------------------------------------------------------|
| Net operating income (loss) (excluding
| realized investment gains/losses) 20 51 25 36 (6) |
|Realized investment gains, net of tax 41 13 3 5 8 |
|Minority interest -- -- -- (6) -- |
|-----------------------------------------------------------------------------------------------------|
| Income before cumulative effect of a
| change in accounting principle 61 64 28 35 2 |
|Cumulative effect of a change in accounting
|principle, net of tax -- -- -- -- -- |
- ------------------------------------------------------------------------------------------------------|
| NET INCOME (LOSS) $ 61 $ 64 $ 28 $ 35 $ 2 |
|=====================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------------|
| Group Life |
|Three months ended March 31, 1998 Operations Operations Corporate Eliminations Total |
|-----------------------------------------------------------------------------------------------------|
(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $ 902 $225 $ (4) $ (9) $3,431 |
| Net investment income 35 131 26 -- 562 |
| Other 6 26 72 -- 186 |
|-----------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized |
| investment gains 943 382 94 (9) 4,179 |
|Total benefits and expenses 931 336 153 (9) 4,021 |
|-----------------------------------------------------------------------------------------------------|
| Operating income (loss) before income tax 12 46 (59) -- 158 |
|Income tax benefit (expense) (3) (17) 18 -- (35) |
|-----------------------------------------------------------------------------------------------------|
| Net operating income (loss)(excluding |
| (realized investment gains/losses) 9 29 (41) -- 123 |
|Realized investment gains, net of tax 7 36 3 -- 116 |
|Minority interest -- -- -- -- (6) |
|-----------------------------------------------------------------------------------------------------|
| Income before cumulative effect of a |
| change in accounting principle 16 65 (38) -- 233 |
|Cumulative effect of a change in accounting |
|principle, net of tax -- -- -- -- -- |
|-----------------------------------------------------------------------------------------------------|
| NET (LOSS) INCOME $ 16 $ 65 $(38) $ -- $ 233 |
|=====================================================================================================|
</TABLE>
(17)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE H. Restructuring-Related Charges:
As part of the Company's restructuring plan (Plan) that was initiated
in August of 1998, restructuring-related charges of $35 million were recorded in
the first quarter of 1999. These charges did not qualify for accrual under
generally accepted accounting principles at the end of the third quarter of 1998
when the initial restructuring and other related charges were taken, and
therefore, were expensed as incurred. The charges included the following:
In the first quarter of 1999, restructuring-related charges for Agency
Market Operations totaled approximately $21 million. The charges included
employee related costs of $10 million related to the planned net reduction in
the workforce. The Agency Market Operations charges also included consulting
costs of $1 million and parallel processing charges of $3 million. Other
charges, including relocation and facility charges, totaled approximately $7
million.
In the first quarter of 1999, restructuring-related charges for Risk
Management totaled approximately $5 million. The charges included consulting
costs of approximately $2 million and parallel processing and other charges
totaling approximately $3 million.
In the first quarter 1999, restructuring-related charges for Group
Operations totaled approximately $5 million. These charges relate to employee
related costs.
For the other segments of the Company, restructuring-related charges
totaled approximately $4 million for the first quarter of 1999. Charges related
primarily to employee 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 Writedown Termination Business |
|(In millions of dollars) Related Benefit of Assets Costs Exit Costs Total |
| Costs |
|-------------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C> <C>
|Accrued costs at December 31, 1998 $37 $ - $42 $32 $111 |
| |
|Less payments charged against |
|liability (4) - (1) - (5)|
|-------------------------------------------------------------------------------------------|
|ACCRUED COSTS AT MARCH 31, 1999 $33 $- $41 $32 $106 |
|===========================================================================================|
</TABLE>
(18)
<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 financials. The Company
does not expect the on-going effect of adopting SOP 97-3 to have a material
impact on the results of operations.
(19)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and notes thereto found on
pages 3 to 19, 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 premium, 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 for the first quarter of 1999 increased by
approximately $60 million as compared with the first quarter of 1998. The
increase was principally attributable to unfavorable loss reserve development in
run-off insurance lines as well as increased interest expense, an increase in
computer system related expenses and restructuring-related charges for the
quarter.
(20)
<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 months ended March 31, 1999 and 1998.
|-----------------------------------------------------------------------------|
|CONSOLIDATED OPERATIONS |
|THREE MONTHS ENDED MARCH 31 1999 1998 |
|(In millions of dollars) |
|-----------------------------------------------------------------------------|
|OPERATING REVENUES |
| (EXCLUDING REALIZED INVESTMENT GAINS/LOSSES): |
| Premiums $ 3,439 $ 3,431 |
| Net investment income 512 562 |
| Other 252 186 |
| ---------- ---------|
| Total operating revenues (excluding |
| realized investment gains/losses) 4,203 4,179 |
| |
|Restructuring-related charges 35 - |
|Benefits and expenses 4,183 4,027 |
| ---------- ---------|
| Operating (loss) income before income tax (15) 152 |
|Income tax benefit (expense) 43 (35)|
| ---------- ---------|
| Net operating income (excluding |
| realized investment gains/losses) 28 117 |
|Realized investment gains, net of tax 144 116 |
| ---------- ---------|
| Income before cumulative effect of change |
| in accounting principle 172 233 |
|Cumulative effect of change in accounting |
| principle, net of tax (177) - |
| ========== =========|
| NET (LOSS) INCOME $ (5) $ 233 |
| ========== =========|
| |
|=============================================================================|
Total operating revenues, which consist of premiums, net investment
income and other revenues, were approximately $4.2 billion for the first three
months of 1999 and 1998. For the first three months of 1999, operating revenues,
as compared with the same period in 1998, reflect an increase in earned premiums
of $8 million. Investment income was $512 million for the first three months of
1999 and $562 million for the same period in 1998. Other revenues were $252
million for the first three months of 1999 as compared with $186 million for the
same period in 1998. This increase was primarily due to an increase in
non-insurance revenues.
Net operating income, which excludes net realized investment gains, was
$28 million, or $0.13 per share, for the first three months of 1999, compared
with net operating income of $117 million, or $0.62 per share, for the same
period in 1998. Net operating income for the first three months of 1999 includes
after-tax restructuring-related charges of $23 million, or $0.12 per share.
Excluding these charges, net operating income for the period ended March 31,
1999 was $51 million, or $0.25 per share. Net operating income for the first
three months of 1999 includes after-tax catastrophe losses of $29 million as
compared with after-tax catastrophe losses of $16 million for the three months
ended March 31, 1998.
Net loss for the first three months of 1999 was $5 million, or $0.05
per share, compared with net income of $233 million, or $1.25 per share, for the
first three months of 1998. Included in the net loss for the first quarter of
1999 was a charge of $177 million, net of tax, or a $0.96 per share, for the
cumulative effect of a change in accounting for insurance-related assessments.
As part of the Company's restructuring plan (Plan) that was initiated
in August of 1998, restructuring-related charges of $35 million were recorded in
the first quarter 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, were expensed as incurred. The charges included the following:
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
In the first quarter of 1999, restructuring-related charges for Agency
Market Operations totaled approximately $21 million. The charges included
employee severance and outplacement costs of $10 million related to the planned
net reduction in the workforce. The Agency Market Operations charges also
included consulting costs of $1 million and parallel processing charges of $3
million. Other charges, including relocation and facility charges, totaled
approximately $7 million.
In the first quarter of 1999, restructuring related charges for Risk
Management totaled approximately $5 million. The charges included consulting
costs of approximately $2 million and parallel processing and other charges
totaling approximately $3 million.
In the first quarter 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 $4 million for the first quarter of 1999. Charges related
primarily to employee related costs.
Initial estimates of the Company's catastrophe losses from the May 1999
Midwest tornadoes are approximately $17 million. It is expected these losses
will be primarily in the Agency Market Operations segment. The initial estimates
are based upon preliminary information and are subject to the inherent
uncertainties of the loss reserve estimation process. The Company believes that
the ultimate losses should not have a significant impact on the equity of the
Company.
(22)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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.
|----------------------------------------------------------------------------|
| |
| THREE MONTHS ENDED MARCH 31 1999 1998 |
| (In millions of dollars, except ratio data) |
|----------------------------------------------------------------------------|
| |
| Net written premiums $ 1,327 $ 1,412 |
| Earned premiums 1,359 1,335 |
| Underwriting loss (233) (180) |
| Non-insurance loss (7) (4) |
| Net operating (loss) income (33) 20 |
|----------------------------------------------------------------------------|
| |
| Combined Ratio 117.9 % 113.9 %|
| Loss/LAE Ratio 83.9 81.7 |
| Expense Ratio 34.0 32.2 |
|----------------------------------------------------------------------------|
Agency Market Operations' net written premiums declined $85 million in the
first quarter of 1999 as compared with the same period in 1998. This decrease
was comprised of $114 million in Commercial Insurance (CI) due to continued
competitive market conditions and CI's unwillingness to write business if
appropriate rates are not obtained. This decrease was partially offset by an
increase in Personal Insurance of $29 million, due in part to gains in agency
premium volume driven by new agency appointments and the new auto tiering
program which allows for the acceptance of a broader range of customers for
which to write business.
Underwriting losses increased by $53 million in the first quarter of
1999 as compared with the same period in 1998. The combined ratio increased 4
points to 117.9 for the quarter ended March 31, 1999 from 113.9 for the quarter
ended March 31, 1998. This increase was driven by an increase of 2.2 points in
the loss ratio due primarily to higher catastrophe losses of $42 million, an
increase of $23 million over the same period in 1998. The increase of 1.8 points
in the expense ratio was due primarily to restructuring-related charges of $21
million.
(23)
<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.
|----------------------------------------------------------------------------|
| |
| THREE MONTHS ENDED MARCH 31 1999 1998 |
| (In millions of dollars, except ratio data) |
|----------------------------------------------------------------------------|
| |
| Net written premiums $ 267 $ 298 |
| Earned premiums 276 279 |
| Underwriting (loss) income (17) 7 |
| Net operating income 29 51 |
|----------------------------------------------------------------------------|
| |
| Combined Ratio 107.0 % 99.4 %|
| Loss/LAE Ratio 81.4 66.9 |
| Expense Ratio 25.6 32.5 |
|----------------------------------------------------------------------------|
Specialty Operations' net written premiums declined $31 million, or
approximately 10%, in the first quarter of 1999, as compared with the same
period in 1998. This decrease was attributable to Specialty's continued
determination to underwriting discipline and the previously announced exit from
the agriculture and entertainment insurance lines of business.
Underwriting results decreased by $24 million in the first quarter of
1999 as compared with the same period in 1998. The combined ratio increased 7.6
points to 107.0 for the quarter ended March 31, 1999 from 99.4 for the quarter
ended March 31, 1998. This increase was principally driven by an increase of
14.5 points in the loss ratio which was primarily due to an unfavorable change
in net reserve development of approximately $39 million in the first quarter of
1999 as compared with the same period in 1998. The change in development
occurred primarily in the HealthPro and professional liability businesses. The
decrease of 6.9 points in the expense ratio was due primarily to Specialty's
continued focus on expense reduction initiatives.
(24)
<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.
|-----------------------------------------------------------------------------|
| |
| THREE MONTHS ENDED MARCH 31 1999 1998 |
| (In millions of dollars, except ratio data) |
|-----------------------------------------------------------------------------|
| |
| Net written premiums $ 415 $ 385 |
| Earned premiums 252 259 |
| Underwriting loss (22) (8) |
| Net operating income 14 25 |
|-----------------------------------------------------------------------------|
| |
| Combined Ratio 108.5 % 102.6 %|
| Loss/LAE Ratio 77.6 74.2 |
| Expense Ratio 30.9 28.4 |
|-----------------------------------------------------------------------------|
CNA Re's net written premiums increased $30 million, or approximately
8%, in the first quarter of 1999, as compared with the same period in 1998. This
growth was primarily in the U.S. professional lines and Canadian operations and
resulted from a combination of new business and the growth of existing treaty
relationships.
Underwriting losses increased by $13 million in the first quarter of
1999 as compared with the same period in 1998. The combined ratio increased 5.9
points to 108.5 for the quarter ended March 31, 1999 from 102.6 for the quarter
ended March 31, 1998. This increase was driven by an increase of 3.4 points in
the loss ratio due primarily to an unfavorable change in net reserve
development. The increase of 2.5 points in the expense ratio was due primarily
to higher policy acquisition costs.
GLOBAL OPERATIONS
Global Operations provides marine, property/casualty, surety, warranty
and specialty products to both domestic and international customers.
|-----------------------------------------------------------------------------|
| |
| THREE MONTHS ENDED MARCH 31 1999 1998 |
| (In millions of dollars, except ratio data) |
|-----------------------------------------------------------------------------|
| |
| Net written premiums $ 267 $ 222 |
| Earned premiums 246 218 |
| Underwriting income - 18 |
| Net operating income* 17 30 |
|-----------------------------------------------------------------------------|
| |
| Combined Ratio 100.0 % 91.8 % |
| Loss/LAE Ratio 56.1 56.0 |
| Expense Ratio 43.9 35.8 |
|-----------------------------------------------------------------------------|
* includes minority interest expense
(25)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Global Operations' net written premiums increased $45 million, or
approximately 20%, in the first quarter of 1999, as compared with the same
period in 1998. The increase in premiums is due to, in part, an increase of $23
million stemming from the acquisition of Maritime Insurance Co., Ltd., an $8
million increase primarily in its European operations and an increase in CNA
Surety of $8 million.
Underwriting results decreased by $18 million in the first quarter of
1999 as compared with the same period in 1998. The combined ratio increased 8.2
points to 100.0 for the quarter ended March 31, 1999 from 91.8 for the quarter
ended March 31, 1998. The increase was driven principally by an increase in the
expense ratio while the loss ratio remained consistent from period to period.
The increase of 8.1 points in the expense ratio was primarily due to higher
acquisition expenses in the first quarter of 1999 as compared with the first
quarter of 1998.
RISK MANAGEMENT
Risk Management serves the property/casualty needs of large domestic
commercial businesses, offering customized, solution based strategies to address
risk management.
|--------------------------------------------------------------------------|
| |
| THREE MONTHS ENDED MARCH 31 1999 1998 |
| (In millions of dollars, except ratio data) |
|--------------------------------------------------------------------------|
| |
| Net written premiums $ 255 $ 356 |
| Earned premiums 209 226 |
| Underwriting loss (13) (40) |
| Non-insurance income (loss) 5 (10) |
| Net operating income (loss) 21 (6) |
|--------------------------------------------------------------------------|
| |
| Combined Ratio 95.2% 118.5 %|
| Loss/LAE Ratio 68.5 95.5 |
| Expense Ratio 26.7 23.0 |
|--------------------------------------------------------------------------|
Net written premiums for Risk Management (RM) declined $101 million, or
approximately 28%, in the first quarter 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.
Underwriting loss decreased by $27 million in the first quarter of 1999
as compared with the same period in 1998. The combined ratio decreased 23.3
points to 95.2 for the quarter ended March 31, 1999 from 118.5 for the quarter
ended March 31, 1998. This decrease was driven by a decrease of 27.0 points in
the loss ratio due primarily to RM's aforementioned decision to change their
retention of risks, capitalizing on favorable reinsurance rates and coverages
related to certain long-tail lines of insurance that historically involved
relatively high combined ratios but offered higher investment income
opportunities. Additionally, a net favorable change in reserve development
period over period contributed to the improvement. The increase of 3.7 points in
the expense ratio was primarily due to an increase in policy acquisition costs
of approximately $18 million.
(26)
<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 ENDED MARCH 31 1999 1998 |
| (In millions of dollars) |
|-------------------------------------------------------------------|
| |
| Premiums $ 867 $ 902 |
| Net investment income 33 35 |
| Net operating income 3 9 |
| Net realized investment gains 7 7 |
| |
|-------------------------------------------------------------------|
Group Operations' premiums decreased $35 million for the first quarter
of 1999 as compared with the same period in 1998. This decline is due to the
decision to exit the Employer Health and Affinity lines of businesses that
resulted in a decrease in premiums of $85 million, partially offset by growth in
other lines of business, primarily in Provider Markets and Special Benefits
businesses. Growth in Provider Markets was primarily driven by employer stop
loss business while the growth in Special Benefits was mainly attributable to
disability and accident special risk lines of business.
Net operating income declined by $6 million in the first quarter of
1999, as compared with the same period in 1998. Partially offsetting the
decrease in premiums was an overall improvement in benefits and expenses of
approximately $25 million, attributable primarily to a decrease in current year
losses as a result of Group Operations' decision to exit certain lines of
business, as mentioned above.
(27)
<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 ENDED MARCH 31 1999 1998 |
| (In millions of dollars) |
|----------------------------------------------------------------|
| |
| Premiums $ 203 $ 225 |
| Net investment income 145 131 |
| Net operating income 36 29 |
| Net realized investment gains 12 36 |
| |
|----------------------------------------------------------------|
Life Operations' premiums decreased $22 million for the first quarter
of 1999 as compared with the same period in 1998. This decline is due to the
increased use of reinsurance for term insurance in the first quarter of 1999, as
well as lower sales within the Retirement Services business.
Net operating income for the first quarter of 1999 was higher than net
operating income for the same period in 1998 due to a combination of reduced
overall operating expenses and better than expected investment results in one of
the plans sold to institutional markets. This improvement was partially offset
by higher mortality experience for the first quarter of 1999 as compared with
the same period in 1998.
(28)
<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
$512 million and $562 million for the quarters ended March 31, 1999 and 1998,
respectively. Lower net investment income was the result of a decline in market
rates for the first quarter 1999 as compared to the same period in 1998. The
overall investment portfolio yielded 5.8% and 6.4% for the quarters ended March
31, 1999 and 1998, respectively.
|---------------------------------------------------------------------------|
|NET INVESTMENT INCOME |
|THREE MONTHS ENDED MARCH 31 1999 1998 |
|(In millions of dollars) |
|---------------------------------------------------------------------------|
|Fixed maturities: |
| Bonds: |
| Taxable $ 361 $ 391 |
| Tax-exempt 80 72 |
|Redeemable preferred stocks - 1 |
|Equity securities 6 7 |
|Mortgage loans and real estate 1 2 |
|Policy loans 3 - |
|Short-term investments 45 68 |
|Security lending activities-net 7 3 |
|Other 17 29 |
| ------------ ------------ |
| 520 573 |
|Investment expense (8) (11) |
| ------------ ------------ |
| NET INVESTMENT INCOME $ 512 $ 562 |
|===========================================================================|
Realized investment gains, net of tax, for the first quarter of 1999 were
$144 million, or $0.78 per share, compared with net realized investment gains
for the first quarter of 1998 of $116 million, or $0.63 per share. The
components of the net realized investment gains (losses) are as follows:
|---------------------------------------------------------------------------|
|REALIZED INVESTMENT GAINS (LOSSES) |
|THREE MONTHS ENDED MARCH 31 1999 1998 |
|(In millions of dollars) |
|---------------------------------------------------------------------------|
|Bonds: |
| U.S. Government $ - $ 50 |
| Tax-exempt 26 16 |
| Asset-backed 4 13 |
| Taxable 24 29 |
| ------------ ------------|
| Total bonds 54 108 |
|Equity securities 22 (4)|
|Derivative security investments 27 (7)|
|Other, including Separate Accounts 119 86 |
| ------------ ------------|
| Realized investment gains 222 183 |
|Participating policyholders' interest - (4)|
|Income tax expense (78) (63)|
| ------------ ------------|
| NET REALIZED INVESTMENT GAINS $ 144 $ 116 |
|===========================================================================|
(29)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------|------------------|
|Summary of General Account Investments | THREE MONTHS |
|at Carrying Value | ENDED |
| | MARCH 31, 1999|
| | ---------------|
| | CHANGE IN |
| MARCH 31, December 31, | UNREALIZED |
|(In millions of dollars) 1999 1998 | GAINS (LOSSES)|
|-------------------------------------------------------------------------|------------------|
|FIXED MATURITY SECURITIES: | |
|U. S. Treasury securities and | |
<S> <C> <C> <C>
| Obligations of government agencies $ 8,777 $ 7,734 | $ (139) |
|Asset-backed securities 8,003 8,214 | (48) |
|Tax-exempt securities 5,899 6,321 | (84) |
|Taxable 7,658 7,804 | (121) |
| ------------- --------------| -------- |
| Total fixed maturity securities 30,337 30,073 | (392) |
|Equity securities 3,389 1,970 | 1,437 |
|Short-term investments 4,832 4,037 | - |
|Other investments 1,157 1,097 | 22 |
| ------------- --------------| ---------------|
| TOTAL INVESTMENTS $ 39,715 $ 37,177 | 1,067 |
| =========== ============= | |
|Other, principally Separate Accounts | (42) |
|Participating policyholders' interest | 1 |
|Income tax expense | (364) |
| | ---------------|
| NET INVESTMENT GAINS | $ 662 |
|=========================================================================|==================|
|-------------------------------------------------------------------------|
|SHORT-TERM INVESTMENTS: |
|-------------------------------------------------------------------------|
|Security lending collateral $ 1,349 $ 132 |
|Escrow 1,009 1,011 |
|U.S. Treasuries 113 506 |
|Commercial paper 1,536 1,398 |
|Money markets 331 401 |
|Other 494 589 |
|-------------------------------------------------------------------------|
| TOTAL SHORT-TERM INVESTMENTS $ 4,832 $ 4,037 |
|=========================================================================|
</TABLE>
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. 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.
(30)
<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 94.4% of which are rated as
investment grade. At March 31, 1999, tax-exempt securities and short-term
investments, excluding collateral for securities sold under repurchase
agreements, comprised approximately 14.9% and 8.8%, 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 March 31, 1999 and December 31, 1998 are substantially
higher than historical levels in anticipation of Fibreboard-related claim
payments. At March 31, 1999, the short-term investment portfolio consisted
primarily of high-grade commercial paper.
As of March 31, 1999, the market value of CNA's general account
investments in fixed maturities was $30.3 billion with net unrealized investment
gains of approximately $169 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 March 31, 1999 were $520 million and $350
million, respectively, compared to $818 million and $256 million, respectively,
at December 31, 1998.
Net unrealized investment gains on general account fixed maturities at
March 31, 1999 include net unrealized losses on high yield securities of $104
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 $295
million to approximately $1.7 billion at March 31, 1999 as compared to December
31, 1998.
The Company's largest equity holding in a single issuer is Global
Crossing, Ltd. (Global Crossing) common stock. As of March 31, 1999, the Company
owned 40,075,170 shares (after a 2-for-1 split effective on March 10, 1999), or
9.7% of the outstanding common stock, which was valued at $1,854 million. Net
unrealized gains associated with this security approximated $1,791 million at
March 31, 1999. Without registration or an exemption from registration, sales to
the public of the Company's holdings of Global Crossing are governed by Rule 144
of the Securities Act of 1933 (the Act) and may not commence until August 13,
1999. The Company has the right after August 13, 1999 to require Global Crossing
to register under the Act up to 25% of the Company's holdings prior to December
31, 1999.
On March 25, 1999, Canary Wharf Group P.L.C. (CWG) shares were sold in an
initial public offering at a price of 3.30 British pound 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 March 31, 1999, CNA had an
approximate 15% ownership interest in CWG accounted for as an available for sale
security, with a carrying value of approximately $539 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.
(31)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
At March 31, 1999, total Separate Account cash and investments amounted
to $4.9 billion with taxable fixed maturity securities representing
approximately 77.5% of the Separate Accounts' portfolios. Approximately 61.1% 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 $2.9 billion at March 31, 1999 and
$3.2 billion at December 31, 1998. At March 31, 1999, net unrealized gains were
approximately $20 million compared with a net unrealized gain 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 March 31, 1999 were $49 million and $29 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 $159 million at
March 31, 1999 and $269 million at December 31, 1998. Net unrealized investment
losses on high yield securities held in Separate Accounts were $28 million at
March 31, 1999 and $11 million at December 31, 1998. As of March 31, 1999, CNA's
concentration in high yield bonds, including Separate Accounts, was
approximately 3.2% of total assets as compared to 4.0% at December 31, 1998.
Included in CNA's fixed maturity securities at March 31, 1999 (general
and guaranteed investment portfolios) are $9.9 billion of asset-backed
securities, consisting of approximately 53.6% in collateralized mortgage
obligations (CMOs), 15.2% in corporate asset-backed obligations, 13.3% in
corporate mortgage backed security pass through obligations, and 17.9% in U.S.
Government agency issued pass-through certificates. The majority of CMOs held
are corporate mortgage-backed securities, which are actively traded in liquid
markets and are priced by broker-dealers. At March 31, 1999, the net unrealized
gain related to asset-backed securities was approximately $96 million compared
with $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.
At March 31, 1999, 35.2% of the general account's fixed maturity
securities portfolio was invested in U.S. Government securities, 35.1% in other
AAA rated securities and 15.9% in AA and A rated securities. CNA's guaranteed
investment fixed maturity securities portfolio is comprised of 3.9% U.S.
Government securities, 63.1% in other AAA rated securities and 15.9% in AA and A
rated securities. These ratings are primarily from Standard & Poor's.
MARKET RISK:
Market risk is a broad term related to economic losses due to adverse
changes in the fair value of a financial instrument. Market risk is inherent to
all financial instruments, and accordingly, the Company's risk management
policies and procedures include all market risk sensitive financial instruments.
<PAGE>
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.
(32)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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 35-36 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.
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 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.
(33)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The sensitivity analysis estimates the change in the market value of
the Company's interest-sensitive assets and liabilities that were held on March
31, 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 March 31, 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 $1.7 billion and $2.6 billion, respectively, at March 31,
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 March 31, 1999, compared with
$1.6 billion and $2.4 billion, respectively, at December 31, 1998.
The Company's debt, including certain related interest rate swap
agreements, as of March 31, 1999 is denominated in U.S. dollars. At March 31,
1999 and December 31, 1998 approximately 94% and 93%, respectively, 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 $163 million and $238 million, respectively, at March 31, 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 $181 million and $279
million, respectively, at March 31, 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
March 31, 1999, compared with $3 million and $4 million, respectively, at March
31, 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 March 31, 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
March 31, 1999, a 10% and 25% decrease in the Index would result in a $478
million and $1,192 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, $96 million and
$239 million, respectively, at March 31, 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.
(34)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The sensitivity analysis also assumes an instantaneous 10% and 20%
change in the foreign currency exchange rates versus the U.S. dollar from their
levels at March 31, 1999 and December 31, 1998, with all other variables held
constant. At March 31, 1999, a 10% and 20% strengthening of the U.S. dollar
versus other currencies would result in decreases of $127 million and $255
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.
The following tables reflect the estimated effects on the market value
of the Company's financial instruments at March 31, 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.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------------------------|
|March 31, 1999 MARKET INTEREST CURRENCY EQUITY |
|(In millions of dollars) VALUE RATE RISK RISK RISK |
|------------------------------------------------------------------------------------------------------------|
| General Account: |
<S> <C> <C> <C> <C>
| Fixed maturity securities $ 30,337 $ (1,547) $ (124) $ (11) |
| Equity securities 3,389 - (23) (339) |
| Short-term investments 4,832 (5) (42) - |
| Foreign currency forwards 13 5 82 - |
| Interest rate swaps (2) 8 - - |
| Interest rate caps 2 1 - - |
| Other derivative securities 6 - - 1 |
|------------------------------------------------------------------------------------------------------------|
| TOTAL GENERAL ACCOUNT 38,577 (1,538) (107) (349) |
|------------------------------------------------------------------------------------------------------------|
| Separate Account Business: |
| Fixed maturity securities 3,829 (158) (17) (8) |
| Equity securities 254 - (2) (25) |
| Short-term investments 508 - (1) - |
| Equity index futures (17) 2 - (96) |
| Other derivative securities 3 8 - - |
|------------------------------------------------------------------------------------------------------------|
| TOTAL SEPARATE ACCOUNT BUSINESS 4,577 (148) (20) (129) |
|===============================================================================================-------------|
| TOTAL ALL SECURITIES $ 43,154 $ (1,686) $ (127) $ (478) |
|============================================================================================================|
|DEBT $ (3,307) $ 163 $ - $ - |
|============================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------------------------|
|March 31, 1998 Market Interest Currency Equity |
|(In millions of dollars) Value Rate Risk Risk Risk |
|------------------------------------------------------------------------------------------------------------|
| General Account: |
<S> <C> <C> <C> <C>
| 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 $ - $ - |
|============================================================================================================|
</TABLE>
(35)
<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 March 31, 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.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------------------------|
|March 31, 1999 Market Interest Currency Equity |
|(In millions of dollars) Value Rate Risk Risk Risk |
|------------------------------------------------------------------------------------------------------------|
| General Account: |
<S> <C> <C> <C> <C>
| Fixed maturity securities $ 30,337 $ (2,338) $ (248) $ (28) |
| Equity securities 3,389 - (46) (848) |
| Short-term investments 4,832 (6) (85) - |
| Foreign currency forwards 13 8 163 - |
| Interest rate swaps (2) 11 - - |
| Interest rate caps 2 2 - - |
| Other derivative securities 6 - - 6 |
|------------------------------------------------------------------------------------------------------------|
| TOTAL GENERAL ACCOUNT 38,577 (2,323) (216) (870) |
|------------------------------------------------------------------------------------------------------------|
| Separate Account Business: |
| Fixed maturity securities 3,829 (240) (34) (21) |
| Equity securities 254 - (3) (63) |
| Short-term investments 508 - (2) - |
| Equity index futures (17) 3 - (239) |
| Other derivative securities 3 17 - 1 |
|------------------------------------------------------------------------------------------------------------|
| TOTAL SEPARATE ACCOUNT BUSINESS 4,577 (220) (39) (322) |
|============================================================================================================|
| TOTAL ALL SECURITIES $ 43,154 $ (2,543) $ (255) $ (1,192) |
|============================================================================================================|
|DEBT $ (3,307) $ 238 $ - $ - |
|============================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------------------------|
|March 31, 1998 Market Interest Currency Equity |
|(In millions of dollars) Value Rate Risk Risk Risk |
|------------------------------------------------------------------------------------------------------------|
| General Account: |
<S> <C> <C> <C> <C>
| 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 $ - $ - |
|============================================================================================================|
</TABLE>
(36)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
FINANCIAL CONDITION:
|---------------------------------------------------------------------------|
|Financial Position March 31, December 31, |
|(In millions of dollars, except per share data) 1999 1998 |
|---------------------------------------------------------------------------|
| |
|Assets $ 65,286 $ 62,359|
|Stockholders' Equity 9,842 9,157|
|Accumulated Other Comprehensive Income 1,758 1,064|
|Book Value per Common Share 51.53 47.89|
|===========================================================================|
CNA's assets increased approximately $2.9 billion from December 31,
1998 to $65.3 billion as of March 31, 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.
During the first three months of 1999, CNA's stockholders' equity
increased by $685 million, or 7.5%, to $9.84 billion. The major components of
this change were a change in accumulated other comprehensive income of $694
million offset by a net loss for the quarter of $5 million.
The statutory surplus of the property/casualty subsidiaries was
approximately $9.1 billion at March 31, 1999 and $7.6 billion at December 31,
1998. Statutory surplus increased by net income of $118 million and a change in
net unrealized investment gains of $1.6 billion, principally attributable to
increases in the market values of Canary Wharf and Global Crossings Ltd., as
discussed in Note B of the condensed consolidated financial statements. These
increases were partially offset by $112 million reductions in surplus, primarily
dividends. The statutory surplus of the life insurance subsidiaries was
approximately $1.1 billion at March 31, 1999 and 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 three months ended March 31, 1999, CNA's operating cash flows were
a positive $32 million, compared to a negative $240 million for the three months
ended March 31, 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 April 20, 1999 and became effective on
May 10, 1999.
(37)
<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 March 31, 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.
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.
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.
<PAGE>
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, it is unclear at this time whether the impact on the Company would
be material. To mitigate this impact, the Company is communicating with these
non-insurance affiliates to coordinate Year 2000 conversion.
(38)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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 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 to the Company.
(39)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - concluded
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, 1999. 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.
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.
(40)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Description of Exhibit
Exhibit Page
Number Number
-------- --------
Computation of Net (Loss) Income per Common Share 11 43
Computation of Ratio of Earnings to Fixed Charges 12.1 44
Computation of Ratio of Net Income,
As Adjusted, to Fixed Charges 12.2 44
Financial Data Schedule 27 45
(b) REPORTS ON FORM 8-K:
None
(41)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - Concluded
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA FINANCIAL CORPORATION
Date: May 17, 1999 By: S/W. JAMES MACGINNITIE
------------ ------------------------------
W. James MacGinnitie
Senior Vice President and
Chief Financial Officer
(42)
<PAGE>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET (LOSS) INCOME PER COMMON SHARE
|------------------------------------------------------------------------------|
|THREE MONTHS ENDED MARCH 31 |
|(In millions of dollars, except per share data) 1999 1998|
|------------------------------------------------------------------------------|
|Earnings per share: |
| |
| |
| |
| Net (loss) income $ (5) $ 233 |
| |
| |
| Less preferred stock dividends 5 1 |
| --------- ------- |
| Net (loss) income available to common stockholders $ (10) $ 232 |
| ========= ======= |
| Weighted average shares outstanding 184.0 185.4 |
| ========= ======= |
| Net (loss) income per common share $ (0.05) $ 1.25 |
| ======== ======= |
| |
|------------------------------------------------------------------------------|
(43)
<PAGE>
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
|-------------------------------------------------------------------------|
|THREE MONTHS ENDED MARCH 31 1999 1998 |
|(In millions of dollars, except ratio data) |
|-------------------------------------------------------------------------|
|Income before income tax and cumulative |
| effect of accounting changes $ 207 $ 331 |
|Adjustments: |
| Interest expense 62 55 |
| Interest element of operating lease rental 11 10 |
| ===== =====|
| Income before income tax, as adjusted $ 280 $ 396 |
| ===== =====|
| |
|Fixed charges: |
| Interest expense $ 62 $ 55 |
| Interest element of operating lease rental 11 10 |
| ===== =====|
|Fixed charges $ 73 $ 65 |
| ===== =====|
|Ratio of earnings to fixed charges (1) 3.8 6.1 |
|-------------------------------------------------------------------------|
(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
|---------------------------------------------------------------------------|
|THREE MONTHS ENDED MARCH 31 1999 1998 |
|(In millions of dollars, except ratio data) |
|---------------------------------------------------------------------------|
|Net income $ (5) $ 233|
|Adjustments: |
| Interest expense, after tax 40 35|
| Interest element of operating lease rental, after tax 7 7|
| ==== ====|
|Net income, as adjusted $ 42 $ 275|
| ==== ====|
| |
|Fixed charges: |
| Interest expense, after tax $ 40 $ 35|
| Interest element of operating lease rental, after tax 7 7|
| ==== ====|
|Fixed charges $ 47 $ 42|
| ==== ====|
|Ratio of net income, as adjusted, to fixed charges (1) 0.9 6.5|
|---------------------------------------------------------------------------|
(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.
(44)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 30,337
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,389
<MORTGAGE> 55
<REAL-ESTATE> 4
<TOTAL-INVEST> 39,715
<CASH> 355
<RECOVER-REINSURE> 6,682
<DEFERRED-ACQUISITION> 2,490
<TOTAL-ASSETS> 65,286
<POLICY-LOSSES> 34,961
<UNEARNED-PREMIUMS> 5,392
<POLICY-OTHER> 136
<POLICY-HOLDER-FUNDS> 756
<NOTES-PAYABLE> 3,146
0
350
<COMMON> 464
<OTHER-SE> 9,028
<TOTAL-LIABILITY-AND-EQUITY> 65,286
3,439
<INVESTMENT-INCOME> 512
<INVESTMENT-GAINS> 222
<OTHER-INCOME> 252
<BENEFITS> 2,869
<UNDERWRITING-AMORTIZATION> 577
<UNDERWRITING-OTHER> 704
<INCOME-PRETAX> 207
<INCOME-TAX> 35
<INCOME-CONTINUING> 172
<DISCONTINUED> 0
<EXTRAORDINARY> (177)
<CHANGES> 0
<NET-INCOME> (5)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
<RESERVE-OPEN> 22,931
<PROVISION-CURRENT> 2,117
<PROVISION-PRIOR> 237
<PAYMENTS-CURRENT> 490
<PAYMENTS-PRIOR> 1,761
<RESERVE-CLOSE> 23,033
<CUMULATIVE-DEFICIENCY> 237
</TABLE>
