<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999 Commission File Number 1-5823
--------------------------
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-6169860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA Plaza
Chicago, Illinois 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No...
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 10, 1999
--------------------------------- ------------------------------
Common Stock, Par value $2.50 184,396,931
- ------------------------------------------------------------------------------
Page (1) of (51)
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 (Unaudited) and DECEMBER 31, 1998............... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998........................................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.............. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) SEPTEMBER 30, 1999.......................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................... 33
SIGNATURES............................................... 34
EXHIBIT 10 MATERIAL CONTRACT........................................ 35
EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE............... 49
EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES......................................... 50
EXHIBIT 12.2 COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED,
TO FIXED CHARGES......................................... 50
EXHIBIT 27 FINANCIAL DATA SCHEDULE.................................. 51
(2)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
(In millions of dollars, except share data) (Unaudited)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale (amortized cost: $27,843 and $29,511)...$27,348 $30,073
Equity securities available-for-sale (cost: $1,216 and $1,055).............. 2,597 1,970
Mortgage loans and real estate (less accumulated depreciation: $1 and $1)... 49 62
Policy loans................................................................ 190 177
Other invested assets....................................................... 1,076 858
Short-term investments ..................................................... 7,571 4,037
-------- --------
TOTAL INVESTMENTS......................................................... 38,831 37,177
Cash.......................................................................... 305 217
Receivables:
Reinsurance................................................................. 6,239 6,416
Insurance .................................................................. 5,725 5,543
Less allowance for doubtful accounts........................................ (321) (328)
Deferred acquisition costs.................................................... 2,650 2,422
Prepaid reinsurance premiums.................................................. 513 331
Accrued investment income..................................................... 394 392
Receivables for securities sold............................................... 729 255
Federal income taxes recoverable (includes $101 and $234 due from Loews)...... 150 251
Deferred income taxes......................................................... 1,178 995
Property and equipment at cost (less accumulated depreciation: $810 and $695). 881 824
Intangibles................................................................... 360 368
Other assets.................................................................. 1,692 2,293
Separate account business..................................................... 4,573 5,203
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $63,899 $62,359
=======================================================================================================
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
September, December 31,
1999 1998
(In millions of dollars, except share data) (Unaudited)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Claim and claim adjustment expense ........................................$28,424 $29,192
Unearned premiums.......................................................... 5,525 5,039
Future policy benefits..................................................... 5,841 5,418
Policyholders' funds....................................................... 743 789
Collateral on loaned securities............................................... 2,668 130
Payables for securities purchased............................................. 769 316
Participating policyholders' equity........................................... 124 140
Debt.......................................................................... 2,894 3,160
Other liabilities............................................................. 3,400 3,611
Separate account business..................................................... 4,573 5,203
-------- ----------
TOTAL LIABILITIES......................................................... 54,961 52,998
-------- ----------
Commitments and contingent liabilities
Minority Interest............................................................... 227 204
Stockholders' equity:
Common stock ($2.50 par value;
Authorized - 500,000,000 shares;
Issued - 185,525,907 shares;
Outstanding as of September 30, 1999 - 184,396,931 shares,
Outstanding as of December 31, 1998 -183,889,569 shares).................... 464 464
Preferred stock............................................................... 150 350
Additional paid-in capital.................................................... 126 126
Retained earnings............................................................. 7,425 7,258
Accumulated other comprehensive income........................................ 652 1,064
Treasury stock, at cost....................................................... (45) (61)
--------- ----------
8,772 9,201
Notes receivable from officer stockholders.................................... (61) (44)
--------- ----------
TOTAL STOCKHOLDERS' EQUITY................................................ 8,711 9,157
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $63,899 $62,359
========================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
(3)
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars, except per share data) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums....................................................................$ 3,329 $ 3,363 $10,274 $10,285
Net investment income....................................................... 531 521 1,562 1,641
Realized investment gains (losses), net of participating
policyholders' interest..................................................... (81) 95 308 503
Other ..................................................................... 138 191 551 560
--------- -------- -------- --------
Total revenues 3,917 4,170 12,695 12,989
--------- -------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits............................... 2,753 2,807 8,610 8,681
Amortization of deferred acquisition costs................................. 483 466 1,591 1,561
Other operating expenses................................................... 585 650 1,819 1,770
Restructuring and other related charges ................................... 16 220 70 220
Interest expense........................................................... 55 53 163 168
--------- -------- -------- --------
Total benefits and expenses 3,892 4,196 12,253 12,400
--------- -------- -------- --------
Income before income tax and cumulative
effect of a change in accounting principle............................... 25 (26) 442 589
Income tax expense (benefit)................................................. (4) (12) 87 160
--------- -------- -------- --------
Income before cumulative effect of a change in accounting principle........ 29 (14) 355 429
Cumulative effect of a change in accounting principle, net of tax.......... - - (177) -
--------- -------- -------- --------
Net income (loss)..........................................................$ 29 $ (14) $ 178 $ 429
=====================================================================================================================
BASIC AND DILUTED EARNINGS PER SHARE
Income (loss) before cumulative effect of a change in accounting principle...$ 0.15 $ (0.09) $ 1.87 $ 2.29
Cumulative effect of a change in accounting principle, net of tax............ - - (0.96) -
-------- -------- -------- --------
Net income (loss)............................................................$ 0.15 $ (0.09) $ 0.91 $ 2.29
======== ======== ======== ========
Weighted average outstanding shares of
common stock (in millions of shares)...................................... 184.3 185.2 184.2 185.2
===================================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(Unaudited)
(4)
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 1999 1998
(In millions of dollars)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................$ 178 $ 429
Adjustments to reconcile net income to net cash flows
from operating activities:
Minority Interest ............................................................. 23 20
Deferred income tax provision.................................................. 46 (2)
Participating policyholders' interest.......................................... 7 15
Net realized investment gains, pre-tax ........................................ (308) (503)
Amortization of intangibles.................................................... 18 85
Amortization of bond discount.................................................. (166) (165)
Depreciation................................................................... 141 124
Changes in:
Receivables, net.............................................................. (12) (838)
Deferred acquisition costs.................................................... (228) (217)
Accrued investment income..................................................... (2) (29)
Federal income taxes recoverable.............................................. 101 (64)
Prepaid reinsurance premiums.................................................. (182) (90)
Insurance reserves............................................................ 98 666
Other liabilities............................................................. (194) (44)
Other, net.................................................................... 331 (117)
------- ---------
Total adjustments ......................................................... (327) (1,159)
------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES .................................. (149) (730)
------- ---------
Cash flows from investing activities:
Purchase of fixed maturity securities.............................................(36,307) (28,438)
Proceeds from fixed maturities:
Sales........................................................................... 35,509 26,686
Maturities, calls and redemptions............................................... 2,305 2,655
Purchases of equity securities................................................... (735) (792)
Proceeds from sale of equity securities.......................................... 880 509
Change in short-term investments................................................. (3,382) 419
Purchases of property and equipment ............................................. (149) (175)
Change in securities sold under repurchase agreements............................ 2,538 (95)
Change in other investments...................................................... 100 (229)
Other, net....................................................................... (45) (47)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES ........................................ 714 493
-------- --------
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 1999 1998
(In millions of dollars)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to preferred shareholders......................................... (11) (5)
Acquisition of treasury stock.................................................... - (65)
Principal payments on long-term debt............................................. (447) (942)
Proceeds from issuance of long-term debt......................................... 177 1,012
Redemption of preferred stock ................................................... (200) -
Other, Net....................................................................... 4 (11)
--------- -------
NET CASH FLOWS FROM FINANCING ACTIVITIES................................... (477) (11)
--------- -------
Net cash flows......................................................... 88 (248)
Cash at beginning of period....................................................... 217 383
- -----------------------------------------------------------------------------------------------------
Cash at end of period $ 305 $ 135
=====================================================================================================
Supplemental disclosures of cash flow information:
Cash (paid) received:
Interest expense.................................................................$ (128) $(147)
Federal income taxes............................................................. 142 (187)
Non-cash transactions:
Notes receivable from directors/officer stockholders for sale of treasury stock.. 17 -
Exchange of Canary Wharf Limited Partnership interest into common stock.......... 539 -
======================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
(5)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements (unaudited) include CNA
Financial Corporation (CNAF) and its subsidiaries, which include
property/casualty insurance companies (principally Continental Casualty Company
and The Continental Insurance Company) and life insurance companies (principally
Continental Assurance Company and Valley Forge Life Insurance Company),
collectively CNA, or the Company. As of September 30, 1999, Loews Corporation
(Loews) owned approximately 86% of the outstanding common stock of CNAF.
The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Certain amounts applicable to prior periods have been
reclassified to conform to classifications followed in 1999. All significant
intercompany amounts have been eliminated.
In the opinion of management, these statements include all adjustments
(consisting of normal recurring accruals) that are necessary for the fair
presentation of the consolidated financial position, results of operations and
cash flows. 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 for the year
ended December 31, 1998 (incorporated by reference in Form 10-K filed with the
Securities and Exchange Commission on March 31, 1999).
In the first quarter of 1999, the Company adopted the American
Institute of Certified Public Accountants' Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." This SOP requires that insurance companies recognize liabilities
for insurance-related assessments when an assessment is probable and will be
imposed, when it can be reasonably estimated, and when the event obligating an
entity to pay an imposed or probable assessment has occurred on or before the
date of the financial statements. Adoption of the SOP resulted in an after-tax
charge of $177 million.
2. 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 3
below. The balance in the escrow account was approximately $1.10 billion at
September 30, 1999 and $1.13 billion at December 31, 1998. The majority of the
funds are included in short-term investments in the balance sheets and are
invested in commercial paper.
The Company's investment in the equity securities of Global Crossing, Ltd.
which is carried at $966 million as of September 30, 1999, are subject to legal
restrictions that limit the Company's ability to sell those securities. The
Company has the right beginning on March 28, 2000 to require Global Crossing to
register under the Securities Act of 1933 (the Act) up to 25% of the Company's
holdings and beginning on August 13, 2000 to require Global Crossing to register
up to an additional 25% of the Company's holdings.
3. LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES
Fibreboard Litigation
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
CNAF's primary property/casualty subsidiary, Continental Casualty
Company (Casualty), has been party to litigation with Fibreboard Corporation
(Fibreboard) involving coverage for certain asbestos-related claims and defense
costs (San Francisco Superior Court, Judicial Council Coordination Proceeding
1072). As described below, in 1993, Casualty, Fibreboard, another insurer
(Pacific Indemnity, a subsidiary of the Chubb Corporation), and a negotiating
committee of asbestos claimant attorneys (collectively referred to as "Settling
Parties") reached an agreement (the "Global Settlement Agreement") to resolve
all future asbestos-related bodily injury claims involving Fibreboard. The
Global Settlement Agreement by its terms required court approval.
Casualty, Fibreboard and Pacific Indemnity also reached an agreement
(the "Trilateral Agreement") on a settlement to resolve the coverage litigation
in the event the Global Settlement Agreement did not obtain final court
approval.
On July 27, 1995, the United States District Court for the Eastern
District of Texas entered judgment approving the Global Settlement Agreement and
the Trilateral Agreement. As expected, appeals were filed as respects both of
these decisions. On July 25, 1996, a panel of the United States Fifth Circuit
Court of Appeals in New Orleans affirmed the judgment approving the Global
Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the
Trilateral Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and
suggestions for rehearing by the entire Fifth Circuit Court of Appeals as
respects the decision on the Global Settlement Agreement were denied. No further
appeal was filed with respect to the Trilateral Agreement; therefore, court
approval of the Trilateral Agreement has become final.
On June 23, 1999, the Supreme Court reversed the Fifth Circuit decision
approving the Global Settlement Agreement by a 7 to 2 vote. On September 22,
1999, the District Court entered judgment disapproving the Global Settlement
Agreement. If no appeals are filed from that judgment, it is expected to become
final as of November 22, 1999.
Upon final disapproval of the Global Settlement Agreement, the
Trilateral Agreement becomes fully effective.
SETTLEMENT AGREEMENTS
On April 9, 1993, Casualty and Fibreboard entered into an agreement
pursuant to which, among other things, the parties agreed to use their best
efforts to negotiate and finalize a global class action settlement with
asbestos-related bodily injury and death claimants.
On October 12, 1993, Casualty, Pacific Indemnity and Fibreboard entered
into the Trilateral Agreement to settle the coverage litigation to operate in
the event that the Global Settlement Agreement was disapproved. The Trilateral
Agreement calls for payment by Casualty and Pacific Indemnity of an aggregate $2
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 policies issued to Fibreboard by
Casualty.
Under the Trilateral Agreement, Casualty is also obligated to pay prior
settlements of present asbestos claims. As a result of the final approval of the
Trilateral Agreement, such obligation has become final.
Through September 30, 1999, Casualty, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 133,000 claims, for an
estimated settlement amount of approximately $1.63 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligated Casualty to
pay under these settlements. Of these settlements, Casualty has paid
approximately
(7)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
$1.72 billion (including interest of approximately $185 million) through
September 30, 1999. Casualty has recovered approximately $700 million of these
payments from Pacific Indemnity. In addition, approximately $300 million of
these settlements will be deducted from the aggregate $2 billion payable to
Fibreboard.
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.
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
CNA's 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.
The Comprehensive Environmental Response Compensation and Liability Act
of 1980 (Superfund) and comparable state statutes (mini-Superfunds) 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.
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 have been enacted by Congress in 1999 and it is
unclear as to what positions the Congress or the Administration will take and
what legislation, if any, will result in the future. If there is legislation,
and in
(8)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
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 September 30, 1999 and December 31, 1998, CNA carried $585
million and $787 million, respectively, of claim and claim expense reserves, net
of reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims.
CNA's property/casualty insurance subsidiaries have exposure to asbestos
claims, including those attributable to CNA's litigation with Fibreboard
Corporation. Estimation of asbestos claim reserves involves many of the same
limitations discussed above for environmental pollution claims, such as
inconsistency of court decisions, specific policy provisions, allocation of
liability among insurers, missing policies and proof of coverage. As of
September 30, 1999 and December 31, 1998, CNA carried approximately $1.5 billion
of claim and claim expense reserves, net of reinsurance recoverables, for
reported and unreported asbestos-related claims, including those related to
Fibreboard.
Unfavorable asbestos claim reserve development for the nine months ended
September 30, 1999 and 1998 totaled $215 million and $205 million, respectively.
Environmental pollution and other mass tort reserves experienced favorable
development of $49 million during the nine months ended September 30, 1999 and
unfavorable development of $58 million during the nine months ended September
30, 1998.
|---------------------------------------------------------------------------|
| SEPTEMBER 30, 1999 DECEMBER 31, 1998 |
| ------------------------ -------------------------|
| ENVIRONMENTAL ENVIRONMENTAL |
| POLLUTION AND POLLUTION AND |
| OTHER MASS OTHER MASS |
|(In millions of dollars) TORT ASBESTOS TORT ASBESTOS |
|----------------------------------------------- -------------------------|
|Reported claims: |
| Gross reserves $306 $1,564 $291 $1,305 |
| Reinsurance recoverable (61) (316) (41) (91) |
|---------------------------------------------------------------------------|
|Net reported claims 245 1,248 250 1,214 |
|Net unreported claims 340 255 537 242 |
|---------------------------------------------------------------------------|
|NET RESERVES $585 $1,503 $787 $1,456 |
|===========================================================================|
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.
(9)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
4. REINSURANCE
The effects of reinsurance on earned premiums are shown in the
following table.
|------------------------------------------------------------------|
|NINE MONTHS ENDED SEPTEMBER 30 Earned Premiums |
| ------------------------------------|
| |
|(In millions of dollars) Direct Assumed Ceded Net |
|------------------------------------------------------------------|
| |
|1999 |
| Property/casualty $ 6,731 $1,237 $ 999 $ 6,969 |
| Accident and health 2,805 117 253 2,669 |
| Life 799 139 302 636 |
|------------------------------------------------------------------|
| TOTAL PREMIUMS $10,335 $1,493 $1,554 $10,274 |
|==================================================================|
| |
|1998 |
| Property/casualty $ 6,295 $1,114 $ 481 $ 6,928 |
| Accident and health 2,746 147 202 2,691 |
| Life 742 112 188 666 |
|------------------------------------------------------------------|
| TOTAL PREMIUMS $ 9,783 $1,373 $ 871 $10,285 |
|==================================================================|
In the table above, life premiums are principally from long duration
contracts, property/casualty premiums are from short duration contracts, and
approximately 75% of accident and health premiums are from short duration
contracts.
(10)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. DEBT
- -------
Debt is comprised of the following obligations at September 30, 1999
and December 31, 1998.
<TABLE>
<CAPTION>
|--------------------------------------------------------------------------------------------------|
| September 30, December 31, |
|(In millions of dollars) 1999 1998 |
|--------------------------------------------------------------------------------------------------|
<S> <C> <C>
| Variable rate debt: |
| Commercial paper $ 675 $ 500 |
| Credit facility--CNAF 77 235 |
| Credit facility--CNA Surety 100 113 |
| Senior notes: |
| 8.25%, due April 15, 1999 - 100 |
| 7.25%, due March 1, 2003 147 147 |
| 6.25%, due November 15, 2003 249 249 |
| 6.50%, due April 15, 2005 debenture 497 497 |
| 6.75%, due November 15, 2006 249 248 |
| 6.45%, due January 15, 2008 149 149 |
| 6.60%, due December 15, 2008 199 199 |
| 8.375%, due August 15, 2012 83 98 |
| 6.95%, due January 15, 2018 148 148 |
|7.25%, debenture, due November 15, 2023 247 247 |
|11.0% secured mortgage notes, due June 30, 2013 - 157 |
|6.9% - 16.29% secured capital leases, due through December 31, 2001 44 46 |
|Other debt, due through 2019 (rates of 1.0% to 12.71%) 30 27 |
|--------------------------------------------------------------------------------------------------|
| TOTAL DEBT $2,894 $3,160 |
|==================================================================================================|
</TABLE>
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
6. 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 changes in the components of accumulated other
comprehensive income are shown below:
<TABLE>
<CAPTION>
|--------------------------------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
(In millions of dollars) 1999 1998 1999 1998 |
- ---------------------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
|Net income (loss) $ 29 $ (14) $ 178 $ 429 |
|Other comprehensive income: |
| Change in unrealized gains/losses during the period: |
| Holding gains (losses) arising during the period (902) 414 (287) 752 |
| Unrealized losses (gains) at beginning of period |
| included in realized gains/losses during the |
| period (34) (4) (287) (281)|
| Net change in unrealized gains/losses (936) 410 (574) 471 |
| Foreign currency translation adjustment (5) 10 15 6 |
| Minority interest and other 3 7 17 8 |
|--------------------------------------------------------------------------------------------------|
|Other comprehensive income (loss), before tax (938) 427 (542) 485 |
|Income tax benefit (expense) related to other
| comprehensive income (loss) 280 162 130 182 |
|--------------------------------------------------------------------------------------------------|
|Other comprehensive income (loss), net of tax (658) 265 (412) 303 |
|--------------------------------------------------------------------------------------------------|
|Total comprehensive income (loss) $ (629) $ 251 $ (234) $ 732 |
|==================================================================================================|
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
7. BUSINESS SEGMENTS
The Company's reportable segments are strategic businesses that offer
different types of products and services. The Company has seven segments: Agency
Market Operations, Specialty Operations, CNA Re, Global Operations, Risk
Management, Group Operations and Life Operations.
All significant intercompany income and expenses, as well as intercompany
dividends, have been eliminated. Certain intrasegment revenues and expenses in
the Risk Management segment are eliminated at the Company level. Intrasegment
other revenue and benefits and expenses eliminated at the Company level were
$51 and $151 for the three and nine months ended September 30, 1999,
respectively.
(12)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--continued
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------------------|
| Agency |
| Market Specialty Global Risk |
| THREE MONTHS ENDED SEPTEMBER 30, 1999 Operations Operations CNA Re Operations Management|
|-------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $1,278 $ 229 $ 335 $ 258 $ 171 |
| Net investment income 170 57 42 31 38 |
| Other 16 4 (2) 33 80 |
|-------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 1,464 290 375 322 289 |
|Total benefits and expenses 1,495 248 327 296 267 |
|-------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (31) 42 48 26 22 |
|Income tax benefit (expense) 16 (13) (15) (7) (7) |
|Minority interest - - - (6) - |
|-------------------------------------------------------------------------------------------------------|
|Net operating (loss) income (excluding realized
investment gains/losses and minority interest) (15) 29 33 13 15 |
|Realized investment gains(losses), net of tax |
| and minority interest (22) (7) (3) (3) (4) |
|-------------------------------------------------------------------------------------------------------|
|NET INCOME (LOSS) $ (37) $ 22 $ 30 $ 10 $ 11 |
|=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------------------|
| Group Life |
| THREE MONTHS ENDED SEPTEMBER 30, 1999 Operations Operations Corporate Eliminations Total |
|-------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $ 871 $ 209 $ (3) $ (19) $3,329 |
| Net investment income 30 136 27 531 |
| Other 11 63 57 (124) 138 |
|-------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 912 408 81 (143) 3,998 |
|Total benefits and expenses 876 353 165 (143) 3,884 |
|-------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax 36 55 (84) - 114 |
|Income tax benefit (expense) (12) (19) 33 - (24) |
|Minority interest - - (2) - (8) |
|-------------------------------------------------------------------------------------------------------|
|Net operating (loss) income (excluding realized
| investment gains/losses and minority interest) 24 36 (53) - 82 |
|Realized investment gains(losses), net of tax |
|and minority interest (2) (12) - - (53) |
|-------------------------------------------------------------------------------------------------------|
|NET INCOME (LOSS) $ 22 $ 24 $ (53) $ - $ 29 |
|=======================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------------------|
| Agency |
| Market Specialty Global Risk |
| THREE MONTHS ENDED SEPTEMBER 30, 1999 Operations Operations CNA Re Operations Management|
|-------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $1,254 $ 267 $ 244 $ 238 $ 237 |
| Net investment income 178 58 39 27 34 |
| Other 9 4 (1) 20 58 |
|-------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 1,441 329 282 285 329 |
|Total benefits and expenses 1,516 250 261 285 381 |
|-------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (75) 79 21 - (52) |
|Income tax benefit (expense) 40 (23) (6) 3 12 |
|Minority interest - - - (11) - |
|-------------------------------------------------------------------------------------------------------|
|Net operating income (loss) (excluding realized
investment gains/losses and minority interest) (35) 56 15 (8) (40) |
|Realized investment gains(losses), net of tax |
|and minority interest 21 4 6 3 4 |
|-------------------------------------------------------------------------------------------------------|
|NET INCOME (LOSS) $ (14) $ 60 $ 21 $ (5) $ (36) |
|=======================================================================================================|
</TABLE>
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------------------|
| Group Life |
| THREE MONTHS ENDED SEPTEMBER 30, 1999 Operations Operations Corporate Eliminations Total |
|-------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $ 931 $ 190 $ 15 $ (13) $3,363 |
| Net investment income 31 130 24 - 521 |
| Other 7 26 66 2 191 |
|-------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 969 346 105 (11) 4,075 |
|Total benefits and expenses 1,030 318 153 (11) 4,183 |
|-------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (61) 28 (48) - (108) |
|Income tax benefit (expense) 23 (10) 14 - 53 |
|Minority interest - - (2) - (13) |
|-------------------------------------------------------------------------------------------------------|
|Net operating income (loss) (excluding realized
investment gains/losses and minority interest (38) 18 (36) - (68) |
|Realized investment gains(losses), net of tax |
|and minority interest 3 3 10 - 54 |
|-------------------------------------------------------------------------------------------------------|
|NET INCOME (LOSS) $ (35) $ 21 $ (26) $ - $ (14) |
|=======================================================================================================|
</TABLE>
(13)
<PAGE>
<TABLE>
<CAPTION>
| Agency |
| Market Specialty Global Risk |
|NINE MONTHS ENDED SEPTEMBER 30, 1998 Operations Operations CNA Re Operations Management|
|-------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $3,974 $ 773 $ 866 $ 767 $ 591 |
| Net investment income 517 174 117 100 111 |
| Other 50 12 - 93 237 |
|-------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 4,541 959 983 960 939 |
| investment gains |
|Total benefits and expenses 4,678 842 895 852 875 |
|-------------------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (137) 117 88 108 64 |
|Income tax benefit (expense) 75 (32) (26) (31) (17) |
|Minority interest - - - (20) - |
|-------------------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding |
| realized investment gains/losses and (62) 85 62 57 47 |
| minority interest) |
|Realized investment gains (losses), net of tax |
|and minority interest 108 35 21 8 17 |
|-------------------------------------------------------------------------------------------------------|
|Income (loss) before cumulative effect of a |
| change in accounting principle 46 120 83 65 64 |
|Cumulative effect of a change in accounting |
|principle, net of tax (93) (3) - (3) (74) |
|-------------------------------------------------------------------------------------------------------|
|NET INCOME (LOSS) $ (47) $ 117 $ 83 $ 62 $ (10) |
|=======================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
| Group Life |
|NINE MONTHS ENDED SEPTEMBER 30, 1998 Operations Operations Corporate Eliminations Total |
|-------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $2,680 $ 626 $ 33 $ (36) $10,274 |
| Net investment income 95 414 34 - 1,562 |
| Other 20 99 173 (143) 551 |
|-------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 2,805 1,139 240 (179) 12,387 |
| investment gains |
|Total benefits and expenses 2,743 980 546 (179) 12,232 |
|---------- --------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax 62 159 (306) - 155 |
|Income tax benefit (expense) (19) (55) - 126 - 21 |
|Minority interest - - (1) - (21) |
|----------- -------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding |
| realized investment gains/losses and 43 104 (181) - 155 |
| minority interest) |
|Realized investment gains (losses), net of tax |
|and minority interest 6 (31) 36 - 200 |
|-------------------------------------------------------------------------------------------------------|
|Income (loss) before cumulative effect of a |
| change in accounting principle 49 73 (145) - 355 |
|Cumulative effect of a change in accounting |
|principle, net of tax (2) (2) - - (177) |
|-------------------------------------------------------------------------------------------------------|
|NET INCOME (LOSS) $ 47 $ 71 $ (145) $ - $ 178 |
|=======================================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
| Agency |
| Market Specialty Global Risk |
|NINE MONTHS ENDED SEPTEMBER 30, 1998 Operations Operations CNA Re Operations Management |
|-------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $3,905 $ 855 $ 800 $ 697 $ 666 |
| Net investment income 572 189 123 83 110 |
| Other 26 14 4 56 157 |
|-------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 4,503 1,058 927 836 933 |
| investment gains |
|Total benefits and expenses 4,541 886 835 774 1,013 |
|---------- --------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (38) 172 92 62 (80) |
|Income tax benefit (expense) 50 (48) (22) (20) 26 |
|Minority interest - - - (22) - |
|----------- -------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding |
| realized investment gains/losses and 12 124 70 20 (54) |
| minority interest) |
|Realized investment gains (losses), net of tax |
|and minority interest 121 37 19 12 22 |
|-------------------------------------------------------------------------------------------------------|
|NET INCOME (LOSS) $ 133 $ 161 $ 89 $ 32 $ (32) |
|=======================================================================================================|
</TABLE>
<TABLE>
<CAPTION>
| Group Life |
|NINE MONTHS ENDED SEPTEMBER 30, 1998 Operations Operations Corporate Eliminations Total |
|-------------------------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C> <C>
|Revenues, excluding realized investment gains: |
| Premiums $2,731 $ 660 $ 5 $ (34) $10,285 |
| Net investment income 102 391 71 - 1,641 |
| Other 19 73 215 (4) 560 |
|-------------------------------------------------------------------------------------------------------|
| Total revenues, excluding realized 2,852 1,124 291 (38) 12,486 |
| investment gains |
|Total benefits and expenses 2,915 1,005 446 (38) 12,377 |
|---------- --------------------------------------------------------------------------------------------|
| Operating (loss) income before income tax (63) 119 (155) - 109 |
|Income tax benefit (expense) 26 (39) - 53 - 26 |
|Minority interest - - (1) - (23) |
|----------- -------------------------------------------------------------------------------------------|
| Net operating (loss) income (excluding |
| realized investment gains/losses and (37) 80 (103) - 112 |
| minority interest) |
|Realized investment gains (losses), net of tax |
|and minority interest 19 70 17 - 317 |
- --------------------------------------------------------------------------------------------------------|
|NET INCOME (LOSS) $ (18) $ 150 $ (86) $ - $ 429 |
|=======================================================================================================|
</TABLE>
(14)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
(Unaudited)
8. RESTRUCTURING AND OTHER RELATED CHARGES
As part of the Company's restructuring plan (the Plan) that was
initiated in August 1998, restructuring-related charges of $70 million were
recorded in the nine months ended September 30, 1999. These charges did not
qualify for accrual under generally accepted accounting principles at the end of
the third quarter of 1998 and therefore, have been expensed as incurred. The
charges included the following:
In the first nine months of 1999, restructuring-related charges for
Agency Market Operations totaled approximately $48 million. The charges included
employee severance and outplacement costs of $17 million related to the planned
net reduction in the workforce. The Agency Market Operations charges also
included consulting costs of $9 million and parallel processing charges of $10
million. Other charges, including relocation and facility charges, totaled
approximately $12 million.
In the first nine months of 1999, restructuring-related charges for
Risk Management totaled approximately $8 million. The charges included parallel
processing costs of approximately $3 million, employee severance and
outplacement costs of approximately $2 million and other charges, including
consulting and facility charges, totaling approximately $5 million.
Additionally, Risk Management reduced its estimate for lease termination costs
by $2 million during the nine months ended September 30, 1999.
In the first nine months of 1999, restructuring-related charges for
Group Operations totaled approximately $5 million. These charges related to
employee severance and other charges.
For the other segments of the Company, restructuring-related charges
totaled approximately $9 million for the first nine months of 1999. These
charges were primarily for employee termination related costs.
The following table sets forth the major categories of restructuring
accrual and changes therein during 1999.
|-----------------------------------------------------------------------------|
| Employee |
| Termination and Lease Business |
| Related Benefit Termination Exit |
|(In millions of dollars) Costs Costs Costs Total|
|-----------------------------------------------------------------------------|
|Accrued costs at December 31, 1998 $37 $42 $32 $111 |
|Payments charged against liability (27) (7) 12) (46)|
|Reduction in estimated costs - (2) - (2)|
|-----------------------------------------------------------------------------|
|Accrued costs at September 30, 1999 $10 $33 $20 $ 63 |
|=============================================================================|
9. BENEFIT PLANS
During the third quarter of 1999 the Board of Directors approved the CNA
Long-Tem Incentive Plan (the Plan) which authorizes the grant of options to
management personnel for up to 2,000,000 shares of CNAF's common stock. All
options granted have 10-year terms and vest ratably over the four-year period
following the date of grant. As of September 30, 1999, options on approximately
299,000 shares had been granted contingent on the approval of the Plan by the
shareholders.
(15)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
CNAF follows Accounting Principles Board Opinion 25, "Accounting for Stock
Issued to Employees," to account for its stock option plan. No compensation cost
is recognized because the option exercise price is equal to the market price of
the underlying stock on the date of grant.
10. SUBSEQUENT EVENT
On October 1, 1999, certain subsidiaries of CNAF completed a previously
announced transaction with The Allstate Corporation (Allstate) involving CNA's
personal lines insurance business. Approximately $1.2 billion was transferred to
Allstate for the policy liabilities assumed. Additionally, CNA received $140
million in cash which consisted of (i) $120 million in commissions for the
reinsurance of the CNA personal insurance business by Allstate and (ii) $20
million for an option exercisable during 2002 to purchase common stock of five
CNAF subsidiaries.
CNA will continue to have an ongoing interest in the profitability of CNA's
personal lines insurance business and the related successor business through a
$75 million equity linked note. In addition, the Company has licensed the "CNA
Personal Insurance" trademark and personal insurance distribution system to
Allstate for use in Allstate's personal insurance agency business for a period
of five years. CNA will receive a royalty fee based on the business volume of
personal insurance policies sold through the CNA agents for a period of six
years.
(16)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and notes thereto found on
pages 3 to 15, 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 1998 net written premiums, is the fifth largest property/casualty
company and the thirty-fifth 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 segment results consist of interest expense on corporate
borrowings, certain run-off insurance operations, asbestos claims related to
Fibreboard Corporation, financial guarantee insurance contracts, and certain
non-insurance operations, principally the operations of Agency Management
Systems, Inc. (AMS), an information technology and agency software development
subsidiary.
Pre-tax operating losses, excluding realized investment gains, for the
Corporate segment for the first nine months of 1999 increased by $151 million as
compared with the same period in 1998. The increase was principally attributable
to unfavorable loss reserve development in run-off insurance lines (including
Fibreboard), and a settlement of a computer services contract. Pre-tax operating
losses, excluding realized investment gains, for the quarter ended September 30,
1999 increased approximately $36 million as compared with the same period in
1998 for the same reason.
(17)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
OPERATING RESULTS
The following chart summarizes key components of operating results for
the three and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998 |
|-----------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C>
|OPERATING REVENUES |
| (excluding realized investment gains/losses): |
| Premiums $3,329 $ 3,363 $10,274 $10,285 |
| Net investment income 531 521 1,562 1,641 |
| Other 138 191 551 560|
| --------------------------------|
| Total operating revenues (excluding realized |
| investment gains/losses) 3,998 4,075 12,387 12,486 |
| Restructuring and related charges 16 220 70 220 |
| Benefits and expenses 3,876 3,976 12,183 12,180 |
| ---------------------------------|
| Operating income (loss) before income tax 106 (121) 134 86 |
| Income tax expense (benefit) 24 (53) (21) (26)|
| ---------------------------------|
| Net operating income (excluding realized investment |
| gains/losses) 82 (68) 155 112 |
| Realized investment gains (losses), net of tax and |
| minority interest (53) 54 200 317 |
| ---------------------------------|
| Income (loss) before cumulative effect of a change in |
| accounting principle |
| 29 (14) 355 429 |
| Cumulative effect of a change in accounting |
| principle, net of tax - - (177) - |
| ---------------------------------|
| NET INCOME (LOSS) $ 29 $ (14) $ 178 $ 429 |
|=========================================================================================|
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
<TABLE>
<CAPTION>
==================================================================================================================
<S> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE
Net operating income (loss)..................................................$ 0.43 $ (0.39) $ 0.78 $ 0.57
Realized gains (losses), net of tax.......................................... (0.28) 0.30 1.09 1.72 -
Cumulative effect of a change in accounting priniple, net of tax............ - - (0.96) -
-------- -------- -------- --------
Net income (loss)............................................................$ 0.15 $ (0.09) $ 0.91 $ 2.29
======== ======== ======== ========
Weighted average outstanding shares of
common stock (in millions of shares)...................................... 184.3 185.2 184.2 185.2
===================================================================================================================
</TABLE>
Net operating income, which excludes net realized investment gains and
a cumulative effect of a change in accounting principle, was $155 million, or
$0.78 per share, for the first nine months of 1999, compared with net operating
income of $112 million, or $0.57 per share, for the same period in 1998. This
increase was due primarily to a reduction in restructuring and related charges
from $220 million, or $1.18 per share, during the nine months ended September
30, 1998 to $70 million, or $0.38 per share, during the same period in 1999. Net
operating income for the first nine months of 1999 includes after-tax
catastrophe losses of $173 million as compared with after-tax catastrophe losses
of $134 million for the nine months ended September 30, 1998, an increase mainly
attributable to damage caused by Hurricane Floyd. Net operating income was $82
million, or $0.43, for the third quarter of 1999, compared to a net operating
loss of $68 million, or $0.39 per share, for the same quarter in 1998. Excluding
after-tax restructuring-related charges of $10 million, net operating income for
the third quarter of 1999 was $92 million, or $0.49 per share. Net operating
income for the third quarter of 1999 includes after-tax
(18)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
catastrophe losses of $78 million as compared with after-tax losses of $39
million for the same period in 1998.
Net income for the first nine months of 1999 was $178 million, or $0.91 per
share, compared with net income of $429 million, or $2.29 per share, for the
first nine months of 1998. Included in the net income for the nine months ended
September 30, 1999 was a charge of $177 million, net of tax, or $0.96 per share,
for the cumulative effect of a change in accounting principle for
insurance-related assessments. Net income for the quarter ended September 30,
1999 was $29 million, or $0.15 per share, compared with net loss of $14 million,
or $0.09 per share for the same period in 1998.
<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
(Commercial Insurance), as well as individuals (Personal Insurance), a wide
range of property/casualty products distributed through one of the broadest
independent agency networks in the U.S.
|-----------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998|
|-----------------------------------------------------------------------------|
| |
| Net written premiums $1,234 $1,191 $4,000 $4,068 |
| Net earned premiums 1,278 1,254 3,974 3,905 |
| Underwriting gain (loss) (197) (244) (656) (604)|
| Net operating (loss) income (15) (35) (62) 12 |
|-----------------------------------------------------------------------------|
| Combined Ratio 115.4% 119.5% 116.5% 115.5%|
| Loss/LAE Ratio 81.7 81.9 83.3 81.8 |
| Expense Ratio 33.1 36.1 32.8 32.3 |
| Dividend Ratio 0.6 1.5 0.4 1.4 |
|-----------------------------------------------------------------------------|
Agency Market Operations' net written premiums declined $68 million in the
first nine months of 1999 as compared with the same period in 1998. This was due
to a $316 million decrease in Commercial Insurance resulting from aggressive
re-underwriting and expansion of reinsurance to take advantage of a favorable
reinsurance market. This decrease was partially offset by an increase in
Personal Insurance of $216 million, due in part to gains in agency premium
volume driven by new agency appointments and a new auto tiering program, which
allows for the acceptance of a broader range of customers for which to write
business.
Net written premiums for the third quarter of 1999 increased $43 million
from the same quarter in 1998, due primarily to growth in net written premium in
Personal Insurance of $107 million, offset by a $73 million decline in
Commercial Insurance for the reasons noted above.
Underwriting losses for the quarter ended September 30, 1999 were $197
million as compared with $244 million for the same period in 1998. The combined
ratio for the quarter decreased 4.1 points to 115.4%. The decrease is
principally attributable to an improved expense ratio due to reduced
restructuring charges recognized in the third quarter of 1999 partially offset
by costs incurred to centralize processing in Maitland, Florida. The loss ratio
improved slightly as increases caused by greater catastrophe losses, mainly
attributable to Hurricane Floyd, and increased losses in other lines were offset
by the benefits of reinsurance treaties. For the nine months ending September
30, 1999, the combined ratio increased from 115.5% to 116.5% which is
attributable to an increase in the loss ratio
(19)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
mainly resulting from unfavorable development in prior year loss reserves and
higher current year losses partially offset by reinsurance. In addition,
expenses were slightly higher for the reasons noted above.
On October 1, 1999, certain subsidiaries of CNAF completed a previously
announced transaction with The Allstate Corporation (Allstate) involving CNA's
personal lines insurance business. Approximately $1.2 billion was transferred to
Allstate for the policy liabilities assumed. Additionally, CNA received $140
million in cash which consisted of (i) $120 million in commissions for the
reinsurance of the CNA personal insurance business by Allstate and (ii) $20
million for an option exercisable during 2002 to purchase common stock of five
CNAF subsidiaries.
CNA will continue to have an ongoing interest in the profitability of
CNA's personal lines insurance business and the related successor business
through a $75 million equity linked note. In addition, the Company has licensed
the "CNA Personal Insurance" trademark and personal insurance distribution
system to Allstate for use in Allstate's personal insurance agency business for
a period of five years. CNA will receive a royalty fee based on the business
volume of personal insurance policies sold through the CNA agents and on some
related business for a period of six years. The Company believes there will be
no material effect on its operating income in 1999 and 2000 as a result of this
transaction.
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
|----------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998 |
|----------------------------------------------------------------------------|
| Net written premiums $225 $237 $733 $799 |
| Net earned premiums 229 267 773 855 |
| Underwriting gain (loss) (12) 31 (47) 1 |
| Net operating income 29 56 85 124 |
|----------------------------------------------------------------------------|
| Combined Ratio 105.6% 88.3% 106.1% 99.9%|
| Loss/LAE Ratio 75.8 68.5 80.3 72.9 |
| Expense Ratio 29.8 19.8 25.7 27.0 |
| Dividend Ratio - - 0.1 - |
|----------------------------------------------------------------------------|
Specialty Operations' net written premiums declined $66 million, or
approximately 8%, in the first nine months of 1999, as compared with the same
period in 1998. Net written premiums for the quarter ended September 30, 1999
decreased $12 million as compared with the same period in 1998. These decreases
were attributable to Specialty's continued resolve to maintain underwriting
discipline and a decrease in premiums due to the previously announced exit from
the agriculture and entertainment insurance lines of business.
Underwriting losses increased by $48 million in the first nine months of
1999 as compared with the same period in 1998. The combined ratio increased 6.2
points to 106.1%. The increases in the combined ratios were primarily due to
higher losses in the 1999 accident year than in the 1998 accident year partially
offset in the nine month period by reduced expenses due primarily to lower
acquisition
(20)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
costs. For the three months ended September 30, 1999, the increase in the
combined ratio was due to higher expenses in 1999 due to certain reinsurance
transactions and related adjustments and related commission in 1998. The Company
expects that the expense ratio for the three months ended September 30, 1999
will be more representative of the segment's on-going business.
CNA Re
CNA Re serves as a property/casualty reinsurer, offering primarily
traditional treaty reinsurance, with increasing positions in facultative and
financial reinsurance.
|----------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998 |
|----------------------------------------------------------------------|
| Net written premiums $388 $141 $1,061 $809 |
| Earned premiums 335 244 866 800 |
| Underwriting gain (loss) 8 (15) (34) (30)|
| Net operating income 33 15 62 70 |
|----------------------------------------------------------------------|
| Combined Ratio 97.7% 105.9% 104.0% 103.8%|
| Loss/LAE Ratio 68.7 68.8 73.3 71.5 |
| Expense Ratio 29.0 37.1 30.7 32.3 |
|----------------------------------------------------------------------|
For the third quarter of 1999 and for the nine months ended September
30, 1999, net written premiums increased $247 million and $252 million,
respectively, as compared with the same periods in 1998. These increases are
primarily attributable to expansion of business with existing clients and the
continued development of new product lines, and growth in global facultative
operations and the Canadian branch.
Underwriting losses increased by $4 million in the first nine months of
1999 as compared with the same period in 1998. When compared to nine months
ended September 30, 1998, the September 30, 1999 combined ratio increased 0.2
points from 103.8% to 104.0%. Catastrophe losses are $34 million greater in the
quarter and $14 million greater through nine months. After adjusting for the
higher premium volume, through nine months, the increase in catastrophe losses
caused a 1.1 point deterioration in the combined ratio. However, because of the
late timing of significant catastrophes in the third quarter of 1999, occurring
both domestically and internationally, further evaluation is required to
ascertain the full impact of such catastrophe losses. The increase in
catastrophe losses during the quarter ended September 30, 1999 was offset by a
reduction in commission expenses.
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
GLOBAL OPERATIONS
Global Operations provides marine, commercial property/casualty,
surety, warranty and specialty products to both domestic and international
customers.
|--------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998 |
|--------------------------------------------------------------------------|
| Net written premiums $311 $245 $837 $737 |
| Earned premiums 258 238 767 697 |
| Underwriting gain (loss) (12) (26) (10) (25) |
| Net operating income (loss) 13 (8) 57 20 |
|--------------------------------------------------------------------------|
| Combined Ratio 104.7% 111.0% 101.3% 103.7% |
| Loss/LAE Ratio 58.9 60.6 56.1 59.5 |
| Dividend Ratio 0.4 0.4 0.3 0.3 |
| Expense Ratio 45.4 50.0 44.9 43.9 |
|--------------------------------------------------------------------------|
Global Operations' net written premiums increased $100 million in the
first nine months of 1999, as compared with the same period in 1998. The
increase in premiums was due to (i) an increase in international premiums of $74
million, of which $45 million related to the June 30, 1998, acquisition of
Maritime Insurance Co., Ltd, and $17 million of which resulted from business
growth in the United Kingdom and continental Europe (ii) an increase in surety
premiums of $21 million, primarily due to generally favorable economic
conditions for public construction nationwide, and (iii) an increase in premiums
in the warranty unit of $19 million, mainly attributable to robust sales of new
automobiles. These increases were partially offset by adverse premium
development in voluntary pools and associations.
Net written premiums for the third quarter of 1999 increased $66
million as compared with the same quarter in 1998. The increase is due primarily
to (i) an increase in surety premiums due to continued strength in the standard
contract segment (ii) an increase in the warranty premiums for the reasons cited
above, and (iii) an increase in European operations premium due to expansion in
this region.
Underwriting losses decreased by $14 million and $15 million in the
three and nine months ended September 30, 1999 as compared with the same periods
in 1998, respectively. When compared to September 30, 1998, the September 30,
1999 combined ratio for the nine month period decreased 2.4 percentage points to
101.3%. Net operating income benefited from a changing mix of business, which
reduced exposure to catastrophes and large property losses. Other contributing
factors included strong performances by First Insurance Company of Hawaii and
CNA Surety Corporation.
(22)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
RISK MANAGEMENT
Risk Management serves the property/casualty needs of large domestic
commercial businesses, offering customized strategies to address risk
management.
|------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998 |
|------------------------------------------------------------------------|
|Net written premiums $159 $198 $646 $ 783 |
|Earned premiums 171 237 591 666 |
|Underwriting gain (loss) (14) (18) (49) (105) |
|Risk management services revenues 77 58 228 155 |
|Risk management services operating |
| income (loss) 1 (51) 6 (62) |
|Net operating income (loss) 15 (40) 47 (54) |
|------------------------------------------------------------------------|
|Combined Ratio 108.4% 108.1% 108.2% 115.7%|
| Loss/LAE Ratio 75.1 77.9 79.0 87.6 |
| Dividend Ratio (0.1) 3.4 - 3.8 |
| Expense Ratio 33.4 26.8 29.2 24.3 |
|------------------------------------------------------------------------|
Net written premiums for Risk Management declined $137 million, or
approximately 18%, in the first nine months of 1999, as compared with the same
period in 1998. This decrease resulted from the Company'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.
These operational changes also caused a decrease in net written premiums in the
third quarter of 1999 as compared to the same period in 1998.
Underwriting results improved by $56 million in the first nine months of
1999 as compared with the same period in 1998. The combined ratio decreased 7.5
points to 108.2% for the nine months ended September 30, 1999. The decrease in
the three months and nine months loss ratio is attributable to changes in
pricing and new reinsurance treaties. The decrease in the dividend ratio for
both the three-month and nine-month periods is due to a shift in the business
mix away from guaranteed cost and programs that returned dividends to loss
sensitive and deductible programs. The increase in the expense ratios is
primarily driven by the impact of decreased deferrable acquisition expenses due
to larger portions of ceded direct premiums and a minor increase in residual
market expenses.
Risk management services operations consist principally of RSKCo, the new
total risk management services organization. The increases in risk management
services operating income for the three and nine month periods ended September
30, 1999 compared to the same periods in the prior year are primarily
attributable to significant restructuring charges incurred in 1998. Risk
management services revenues and expenses include intrasegment revenues that are
eliminated at the corporate level. Intrasegment other revenue and benefits and
expenses eliminated at the Company level were $51 million and $151 million for
the three and nine months ended September 30, 1999, respectively.
(23)
<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.
|-----------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998 |
|-----------------------------------------------------------------------------|
| |
|Premiums $871 $931 $2,680 $2,731 |
|Net operating income (loss) 24 (38) 43 (37)|
|-----------------------------------------------------------------------------|
Group Operations' premiums for the three-month and nine-month periods
ended September 30, 1999 decreased $60 million and $51 million, respectively, as
compared with the same periods in 1998. These decreases are due primarily to the
Company's exit from the Employer Health and Affinity lines of business resulting
in the loss of $87 million and $264 million in premiums in the three month and
nine month periods ended September 30, 1999, respectively, as compared with the
same periods in 1998. The loss of this business has been substantially offset by
growth in all other units within this segment.
Net operating income increased by $80 million in the first nine months
of 1999, as compared with the same period in 1998. This improvement is
attributable partially to a $48 million decrease in current year losses as a
result of Group Operations' decision to exit certain lines of business, as
mentioned above. In addition, results improved by $30 million due to improved
loss experience on life and disability business.
Net operating income for the third quarter of 1999 was $24 million as
compared with a net operating loss of $38 million for the same period in 1998.
This change was again driven by a $47 million decrease in current year losses as
a result of Group Operations' decision to exit certain lines of business, as
well as improvement in life and disability business results of $14 million.
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.
|-----------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998 |
|-----------------------------------------------------------------------------|
| |
|Premiums $209 $190 $ 626 $ 660 |
|Sales Volume 800 531 2,195 1,660 |
|Net operating income 36 18 104 80 |
|-----------------------------------------------------------------------------|
Life Operations' continued to have strong sales, particularly in
retirement-related products as well as an increasing base of direct premiums for
life and long term care. Sales volume is a cash-based measure of business sales,
which includes premium and annuity considerations, investment deposits, and
other sales activity not reported as premiums. Sales volume increased from $1.7
billion for the first nine months of 1998 to $2.2 billion for the first nine
(24)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
months of 1999. Third quarter 1999 sales volume was $800 million compared to
$531 million in 1998.
Life Operations' premiums decreased $34 million for the first nine months
of 1999 as compared with the same period in 1998. The decline was primarily the
result of ceding business under a reinsurance treaty that was completed in late
1998. Premiums for the third quarter of 1999 increased $19 million as compared
with the same period in 1998.
Net operating income for the first nine months of 1999 was higher than
net operating income for the same period in 1998 due to a combination of lower
operating expenses, improved investment results in institutional pension
products. Net operating income for the third quarter of 1999 decreased $18
million as compared with the same period in 1998.
INVESTMENTS
Net investment income, as shown in the table below, was approximately
$1.56 billion and $1.64 billion for the nine months ended September 30, 1999 and
1998, respectively. Net investment income, for the third quarter of 1999 and
1998 was approximately $531 million and $521 million, respectively. Lower net
investment income for the first nine months of 1999 as compared to the same
period in 1998 was the result of declining market interest rates on fixed
maturity securities. The fixed maturity securities portfolio yielded 6.0% and
6.6% for the nine months ended September 30, 1999 and 1998, respectively. The
following table presents the components of net investment income for the three
and nine month periods ended September 30, 1999 and 1998.
|----------------------------------------------------------------------------|
|PERIODS ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998 |
|----------------------------------------------------------------------------|
|Fixed maturity securities: |
| Taxable $388 $369 $1,123 $1,135 |
| Tax-exempt 58 97 207 263 |
|Equity securities 14 10 29 23 |
|Mortgage loans and real estate 1 (13) 3 4 |
|Policy loans 3 3 8 8 |
|Short-term investments 54 61 147 182 |
|Security lending activities-net 7 2 21 7 |
|Other 19 1 54 60 |
| --------------------------------------------|
| 544 530 1,592 1,682 |
|Investment expense (13) (9) (30) (41)|
|----------------------------------------------------------------------------|
| NET INVESTMENT INCOME $531 $521 $1,562 $1,641|
|============================================================================|
Realized investment gains, net of tax, for the first nine months of 1999
were $200 million, or $1.09 per share, compared with net realized investment
gains for the first nine months of 1998 of $317 million, or $1.72 per share.
Realized investment losses, net of tax, for the third quarter of 1999 were $53
million, or $0.28 per share, compared with net realized investment gains for the
third quarter of 1998 of $54 million, or $0.30 per share. The following table
presents the components of the net realized investment gains (losses) for the
three and nine month periods ended September 30, 1999 and 1998.
(25)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
|----------------------------------------------------------------------------|
|PERIODS ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS |
|(In millions of dollars) 1999 1998 1999 1998|
|----------------------------------------------------------------------------|
|Bonds: |
| U.S. Government $ (22) $ 69 $(104) $ 165 |
| Tax-exempt (36) 26 (23) 58 |
| Asset-backed (15) 3 (13) 30 |
| Taxable (43) 14 (54) 83 |
| -------------------------------------|
|Total bonds (116) 112 (194) 336 |
|Equity securities 6 (1) 316 12 |
|Derivative security investments (11) (6) 23 28 |
|Other, including separate accounts 38 (8) 156 136 |
| -------------------------------------|
|Realized investment gains (losses) (83) 97 301 512 |
|Participating policyholders' interest 2 (2) 7 (9)|
|Income tax benefit (expense) 28 (41) (108) (186)|
| -------------------------------------|
|Net realized investment gains (losses), |
|net of tax and minority interest $ (53) $ 54 $ 200 $ 317 |
|============================================================================|
Substantially all invested assets are marketable securities classified as
available-for-sale in the accompanying financial statements. Accordingly,
changes in fair value for these securities are reported in other comprehensive
income. The following table presents the carrying values of the Company's
investments as of September 30, 1999 and December 31, 1998, and the change in
unrealized gains (loss) of those securities included in other comprehensive
income for the nine months ended September 30, 1999.
|-----------------------------------------------------------|-----------------|
| | NINE MONTHS |
| | ENDED |
| | SEPTEMBER 30, |
| | 1999 CHANGE IN |
| SEPTEMBER 30, DECEMBER 31,| UNREALIZED |
|(In millions of dollars) 1999 1998 | GAINS/LOSSES |
|-----------------------------------------------------------|-----------------|
|FIXED MATURITY SECURITIES: | |
|U. S. Treasury securities and | |
|obligations of government agencies $ 8,768 $ 7,734| $ (233) |
|Asset-backed securities 7,216 8,214| (218) |
|Tax-exempt securities 4,445 6,321| (333) |
|Taxable securities 6,919 7,804| (273) |
| ------------------------|-----------------|
| Total fixed maturity securities 27,348 30,073| (1,057) |
|Equity securities 2,597 1,970| 466 |
|Short-term investments 7,571 4,037| - |
|Other investments 1,315 1,097| 119 |
| ------------------------|-----------------|
| TOTAL INVESTMENTS $ 38,831 $37,177| (472) |
| ========================| |
|Separate account business and other | (102) |
| |-----------------|
|Change in unrealized gains/losses | |
|reported in other comprehensive | |
|income | $ (574) |
| |=================|
|===========================================================|=================|
<PAGE>
(26)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
|--------------------------------------------------------------|
|SHORT-TERM INVESTMENTS September 30, December 31,|
|(In millions of dollars) 1999 1998 |
|--------------------------------------------------------------|
|U.S. Treasury securities $ 58 $ 506 |
|Commercial paper 5,193 2,406 |
|Money market funds 1,643 536 |
|Other 677 589 |
|--------------------------------------------------------------|
| TOTAL SHORT-TERM INVESTMENTS $ 7,571 $4,037 |
|==============================================================|
The Company's general account investment portfolio consists primarily of
publicly traded government bonds, asset-backed securities, mortgage-backed
securities, municipal bonds, corporate bonds and equity securities. The
Company's investment policies for both the general and separate accounts
emphasize high credit quality and diversification by industry, issuer and issue.
Assets supporting interest rate sensitive liabilities are segmented within the
general account to facilitate asset/liability duration management.
The general account portfolio consists primarily of high quality marketable
fixed maturity securities, approximately 94.3% of which are rated as investment
grade. At September 30, 1999, tax-exempt securities and short-term investments,
excluding collateral for securities sold under repurchase agreements, comprised
approximately 11.4% and 12.6%, 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
September 30, 1999 are substantially higher than historical levels in
anticipation of the cash transfer related to the Allstate transaction and
Fibreboard-related claim payments.
As of September 30, 1999, the market value of CNA's general account
investments in fixed maturity securities was $27.35 billion with net unrealized
investment losses of approximately $495 million. This compares to a market value
of $30.07 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 September 30, 1999 were $195 million
and $690 million, respectively, compared to $818 million and $256 million,
respectively, at December 31, 1998.
Net unrealized investment losses on general account fixed maturity
securities at September 30, 1999 include net unrealized losses on high yield
securities of $126 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. CNA's investment in high yield
securities in the general account decreased $455 million to $1.54 billion at
September 30, 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 September 30, 1999, the Company owned
36.4 million shares, or 8.4% of the outstanding common stock, which was carried
at $966 million. Unrealized gains associated with this security approximated
$908 million at September 30, 1999.
In May, 1999, Global Crossing entered into a transaction to merge Frontier
Corporation (Frontier) into a subsidiary of Global Crossing. As part of the
Frontier merger agreement, certain
(27)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
shareholders of Global Crossing, including the Company, entered into a
voting agreement to limit their sales of Global Crossing common stock to ensure
that 51% of the outstanding shares of Global Crossing would vote in favor of the
merger. A large proportion of those shareholders, including the Company, also
agreed to suspend their rights under a shareholders' agreement and a
registration rights agreement until the closing of the Frontier transaction. The
voting rights agreement was amended on September 2, 1999 to delay the exercise
of those rights described in the previous sentence until the earlier of the
termination of the Frontier transaction or six months after the closing of the
Frontier transaction. The Frontier transaction closed on September 28, 1999. The
Company has the right beginning on March 28, 2000 to require Global Crossing to
register under the Securities Act of 1933 (the Act) up to 25% of the Company's
holdings and beginning on August 13, 2000 to require Global Crossing to register
up to an additional 25% of the Company's holdings. The Company's holdings of
Global Crossing were not acquired in a public offering, and may not be sold to
the public unless the sale is registered or exempt from the registration
requirements of the Act. Such exemptions would include sales pursuant to Rule
144 under the Act if such sales meet the requirements of the Rule.
At September 30, 1999, total separate account cash, investments and
other assets amounted to $4.57 billion with taxable fixed maturity securities
representing approximately 77.3% of the separate accounts' portfolios.
Approximately 57.0% 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 $2.48
billion at September 30, 1999 and $3.20 billion at December 31, 1998.
At September 30, 1999, net unrealized losses on the guaranteed investment
contract fixed maturity securities portfolio were approximately $32 million
compared with a net unrealized gains of approximately $64 million at December
31, 1998. The gross unrealized investment gains and losses for the guaranteed
investment contract fixed maturity securities portfolio at September 30, 1999
were $20 million and $52 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 $100 million at
September 30, 1999 and $269 million at December 31, 1998. Net unrealized
investment losses on high yield securities held in separate accounts were $12
million at September 30, 1999 and $11 million at December 31, 1998. As of
September 30, 1999, CNA's concentration in high yield bonds, including Separate
Accounts, was approximately 2.9% of total assets as compared to 4.0% at December
31, 1998.
Included in CNA's fixed maturity securities at September 30, 1999 (general
and guaranteed investment contract portfolios) are $8.96 billion of asset-backed
securities, consisting of approximately 57.3% in collateralized mortgage
obligations (CMOs), 19.4% in corporate asset-backed obligations, 9.5% in
corporate mortgage-backed security pass through obligations, and 13.8% in U.S.
Government agency issued pass-through certificates. The majority of CMOs held
are corporate mortgage-backed
(28)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
securities, which are actively traded in liquid markets and are priced by
broker-dealers. At September 30, 1999, the net unrealized loss related to
asset-backed securities was approximately $134 million compared with a net
unrealized gain of approximately $163 million at December 31, 1998. CNA limits
the risks associated with interest rate fluctuations and prepayments by
concentrating its CMO investments in early planned amortization classes with
relatively short principal repayment windows.
At September 30, 1999, 36.1% of the general account's fixed maturity
securities portfolio was invested in U.S. Government securities, 35.0% in other
AAA rated securities and 14.7% in AA and A rated securities. CNA's guaranteed
investment fixed maturity securities portfolio is comprised of 2.8% U.S.
Government securities, 67.3% in other AAA rated securities and 14.6% in AA and A
rated securities. These ratings are primarily from Standard & Poor's
Corporation.
FINANCIAL CONDITION
|-------------------------------------------------------------------------|
|BALANCE SHEET DATA September 30, December 31, |
|(In millions of dollars) 1999 1998 |
|-------------------------------------------------------------------------|
|Assets $63,899 $62,359 |
|Stockholders' Equity 8,711 9,157 |
|Accumulated Other Comprehensive Income 652 1,064 |
|=========================================================================|
CNA's assets increased $1.54 billion from $62.36 billion at December
31, 1998 to $63.90 billion as of September 30, 1999. The major component of this
increase was an increase of approximately $1.65 billion in invested assets,
primarily in equity securities and short-term investments, including a $2.55
billion increase in collateral on loaned securities to $2.68 billion. These
increases were partially offset by a decrease in fixed maturity securities.
During the first nine months of 1999, CNA's stockholders' equity
decreased by $446 million, or 4.8%, to $8.71 billion. The major components of
this change were a decrease in accumulated other comprehensive income of $412
million and net income of $178 million. Additionally, stockholders' equity was
decreased by the $200 million redemption of Series G Preferred Stock from its
majority shareholder, Loews Corporation.
The statutory surplus of the domestic property/casualty subsidiaries was
approximately $7.93 billion at September 30, 1999 and $7.42 billion at December
31, 1998. Statutory surplus increased by net income for the nine months ended
September 30, 1999 of $284 million and an increase in net unrealized investment
gains for that period of $676 million, principally attributable to increases in
the market value of Global Crossings Ltd., as discussed on page 26. These
increases were partially offset by $470 million in dividends to the parent
company. The statutory surplus of the life insurance subsidiaries was
approximately $1.30 billion at September 30, 1999, compared to $1.11 billion at
December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The principal operating cash flow sources of CNA's property/casualty
and life insurance subsidiaries are premiums and investment income. The primary
operating cash flow uses are payments for claims, policy benefits and operating
expenses.
(29)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Net cash flows from operations are primarily invested in marketable
securities. Investment strategies employed by CNA's insurance subsidiaries
consider the cash flow requirements of the insurance products sold and the tax
attributes of the various types of marketable investments.
For the nine months ended September 30, 1999, CNA's operating cash flows
were a negative $149 million, compared to a negative $730 million for the nine
months ended September 30, 1998.
On December 24, 1998, CNAF filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission relating to $600 million in senior debt,
subordinated debt, junior debt, common stock, preferred stock and warrants. This
registration statement was amended on April 20, 1999 and became effective on May
10, 1999.
Stockholders' equity was decreased in the second quarter of 1999 by the
$200 million redemption of Series G Preferred Stock from its majority
shareholder, Loews Corporation.
On August 2, 1999, the Company repaid its 11% Secured Mortgage Notes, due
June 30, 2013. The gain realized on the transaction was not significant.
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 September 30, 1999, the Company has spent
approximately $60 million on Year 2000 readiness matters. However, prior to
1997, the Company did not specifically separate technology charges for Year 2000
from other information technology charges. In addition, while some hardware
charges are included in the budget figures, the Company's hardware costs
typically are included as part of ongoing technology updates and not
specifically as part of the Year 2000 project. All funds spent and to be spent
have been or will be financed from current operating funds.
The Company believes that it will be able to resolve the Year 2000
issue in a timely manner. As of December 1, 1998, all internal application
systems had been certified by CNA as being ready for the year 2000. For an
internal system to be certified Year 2000 ready by CNA, it had to be tested and
accepted as capable of receiving, processing and providing dates and
date-related data from, into and between the years 1999 and 2000, and beyond,
including leap year calculations. Replacement of hardware and associated systems
software is now in all material respects complete, providing Year 2000 readiness
for CNA's infrastructure components.
Due to the interdependent nature of computer systems, there may be an
adverse impact on the Company if banks, independent agents, vendors, insurance
agents, third party administrators, various
(30)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
governmental agencies and other business partners fail to successfully address
the Year 2000 issue. The Company has sent Year 2000 information packages to more
than 12,000 independent agents to encourage them to become Year 2000 ready on a
timely basis. The Company also sent Year 2000 information to almost 300,000
business policyholders to increase their awareness of the Year 2000 issue.
Similar information packages have been sent to healthcare providers, lawyers and
others with whom the Company has business relationships. Because of the
interdependent nature of the issue, the Company cannot be sure that there will
not be a disruption in its business. To mitigate this impact, the Company is
communicating with these various entities to coordinate Year 2000 conversion. In
addition, the Company has engaged in interface and Year 2000 readiness testing
with many of its banking relationships. No major problems have been identified.
The Company continues to communicate with its bank relationships to conduct
appropriate testing.
As business conditions change, CNA may respond by revising previous
Year 2000 strategies or solutions affecting specific systems. In limited cases,
a system that was to have been replaced, may instead be renovated to become Year
2000 ready prior to January 1, 2000. The Company believes that these changes
will not have a material impact on the results of operations or equity of CNA.
In addition, non-insurance affiliates are expected to be ready on a
timely basis. In the event that they are not, the Company does not believe the
impact on the Company would be material on the results of operations or equity
of CNA. To mitigate this impact, the Company is communicating with these
non-insurance affiliates to coordinate Year 2000 conversion.
The Company also has developed business resumption plans to ensure that
the Company is able to continue critical processes through other means in the
event that it becomes necessary to do so. Formal strategies have been developed
within each business unit and support organization to include appropriate
recovery processes and use of alternative vendors. More than 200 strategies have
been developed to address all the recovery plans for approximately 400
processes. These plans are being reviewed and updated quarterly. The Company is
also developing a year-end rollover plan to ensure its ability to continue
critical processes.
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 losses or
claims. Although the Company has received notices of Year 2000-related claims,
it is unable to forecast the nature and range of the losses, the availability of
coverage for the losses, or the likely frequency or severity of future claims.
As a result, the Company is unable to determine whether the adverse impact, if
any, in connection with the foregoing circumstances would be material on the
results of operations or equity of CNA.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities". This
(31)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. CNA is currently
evaluating the effects of this Statement on its accounting and reporting for
derivative securities and hedging activities.
In October 1998, the American Institute of Certified Public
Accountant's Accounting Standards Executive Committee issued SOP 98-7,
"Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk". This guidance excludes long-duration life and health insurance
contracts from its scope. This SOP is effective for financial statements in the
year 2000, with early adoption encouraged. CNA is currently evaluating the
effects of this SOP.
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 the costs
and other burdens associated with 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 this and other of the Company's
Securities and Exchange Commission filings. Such filings are available from the
Commission, either at the Commission's public reading rooms, or through its
website at www.sec.gov. Additionally, copies of some of these filings are
available from the Company directly through the office of the Corporate
Secretary.
These forward-looking statements speak only as of the date of this
management discussion and analysis. 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.
(32)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Description of Exhibit
Exhibit Page
Number Number
------- ------
Material Contract 10 35
Computation of Net Income per Common Share 11 49
Computation of Ratio of Earnings to Fixed Charges 12.1 50
Computation of Ratio of Net Income,
As Adjusted, to Fixed Charges 12.2 50
Financial Data Schedule 27 51
(b) REPORTS ON FORM 8-K:
On October 19, 1999, CNA Financial Corporation filed a report on Form 8-K
related to its announcement of CNA's completion of the transfer of its personal
lines insurance business to Allstate.
(33)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - Concluded
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA FINANCIAL CORPORATION
--------------------------
S/Robert V. Deutsch
Date: November 15, 1999 By: __________________________
----------------- Robert V. Deutsch
Senior Vice President and
Chief Financial Officer
(34)
<PAGE>
EMPLOYMENT AGREEMENT EXHIBIT 10
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 16th day
of August, 1999, by and between CNA Financial Corporation, a Delaware
corporation (the "Company"), and Robert V. Deutsch ("Executive"). For purposes
of Sections 8 through 16, the "Company" shall include its subsidiaries,
affiliates and related entities.
WITNESSETH:
WHEREAS, the parties desire to enter into this Agreement pertaining to the
employment of Executive by the Company;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is hereby covenanted and agreed by Executive and the Company as
follows:
1. Employment Term. The Company and Executive agree that the Company
shall employ Executive on the terms and conditions set forth herein beginning on
the Effective Date and continuing through and until December 31, 2002 or such
earlier date as of which Executive's employment is terminated in accordance with
Section 6 hereof. The "Effective Date" of this Agreement shall be August 16,
1999.
2. Duties of Executive.
(a) Executive shall report to the Chairman and Chief Executive Officer
referred to hereinafter as the "Chairman" of the Company's subsidiaries,
collectively known as the "CNA Companies".
(b) Executive shall diligently and to the best of his abilities assume,
perform, and discharge the duties and responsibilities of Senior Vice President
and Chief Financial Officer of the Company and certain of the CNA Companies, as
determined by the Chairman consistent with such title. Executive shall devote
substantially all of his working time to the performance of his duties as set
forth herein and shall not, without the prior written consent of the Chairman,
accept other employment or render or perform other services, nor shall he have
any direct or indirect ownership interest in any other business which is in
competition with the principal business of the Company or its subsidiaries and
its affiliates, other than in the form of publicly traded securities
constituting less than five percent (5%) of the outstanding securities of a
corporation (determined by vote or value) or limited partnership interests
constituting less than five percent (5%) of the value of any such partnership.
The foregoing shall not preclude Executive from engaging in charitable,
professional, and personal investment activities, provided that, in the
reasonable judgment of the Chairman, such activities do not materially interfere
with his performance of his duties and responsibilities hereunder.
3. Compensation.
(a) Salary. The Company shall pay or cause to be paid to Executive,
commencing on the Effective Date (and excluding any periods of unpaid vacation
prior to September 8, 1999) and continuing for the period he is employed by the
Company hereunder, an annual base salary of FIVE HUNDRED FIFTY THOUSAND AND NO
ONE HUNDREDTHS DOLLARS ($550,000.00), payable not less frequently than monthly
(the "Base Compensation"). In no event shall Executive's base salary rate be
reduced to an amount that is less than the amount specified in this paragraph
(a), or to an amount that is less than the amount that he was previously
receiving, without Executive's written consent.
(35)
<PAGE>
(b) Incentive Compensation Award. Executive shall be entitled to an
Incentive Compensation Award, in accordance with the CNA Financial Corporation
Incentive Compensation Plan for Certain Executive Officers (the "Incentive
Compensation Plan") according to the performance criteria and amounts
established by the Incentive Compensation Committee (the "Committee") in its
August 4, 1999 meeting subject to the annual review and certification by the
Committee of the awards. To the extent that any award is performance-based, the
award shall be determined based on net income as defined in the Incentive
Compensation Plan.
(c) Long-Term Incentive Awards. During the term of this Agreement,
Executive shall be entitled to awards under the CNA Financial Corporation 2000
Long Term Incentive Plan ("LTIP") according to the performance criteria and
amounts established by the Committee in its August 4, 1999 meeting and subject
to the annual review and certification by the Committee of the awards; provided,
however, that any award made in accordance with the terms of the LTIP shall be
contingent on approval of the LTIP by the Company's shareholders at the
Company's 2000 annual shareholders meeting.
(d) Restricted Stock. On the Effective Date and subject to Executive
becoming a paid employee, Executive shall be granted 10,000 shares of common
stock of the Company (the "Stock") which shall bear a restricted transfer legend
(the "Restricted Stock"). The Company shall include the Restricted Stock in its
next Form S-8 filed under the Securities Act of 1933, as amended (the "Act").
The Company shall not have an obligation to include the Restricted Stock in its
next Form S-8 if at such time all of the Restricted Stock may be transferred
pursuant to Rule 144 of the Act. Executive shall be entitled to receive any
dividends payable on shares of Restricted Stock for which the record date of
such dividends is on or after the Vesting Date for such shares; and no dividends
shall be payable to or for the benefit of Executive for shares of Restricted
Stock the record date for which is prior to the Vesting Date for such shares, or
the record date for which is on or after the date, if any, on which Executive
has forfeited those shares of Restricted Stock. If the termination of
Executive's employment does not occur prior to the Vesting Date with respect to
any Installment of shares of Restricted Stock, then, at the Vesting Date for
such shares, Executive shall become vested in those shares of Restricted Stock,
and shall own the shares free of all restrictions otherwise imposed by this
Agreement (other than transfer restrictions imposed by the Securities Act of
1933, as amended or the rules thereto) as follows:
|------------------------------|----------------------------------------|
|INSTALLMENT | VESTING DATE APPLICABLE TO
| | INSTALLMENT |
|------------------------------|----------------------------------------|
| 2,500 Shares | December 31, 2000 |
|------------------------------|----------------------------------------|
| 2,500 Shares | December 31, 2001 |
|------------------------------|----------------------------------------|
| 2,500 Shares | December 31, 2002 |
|------------------------------|----------------------------------------|
| 2,500 Shares | December 31, 2003 |
|------------------------------|----------------------------------------|
Notwithstanding the foregoing provisions of this paragraph (d),
Executive shall become vested in the shares of Restricted Stock, and become
owner of the shares free of all restrictions otherwise imposed by this Agreement
(other than transfer restrictions imposed by the Securities Act of 1933, as
amended or the rules thereto), upon the termination of Executive's employment
under circumstances described in paragraph 6.1 (relating to Executive's death or
Disability), paragraph 6.3 (relating to termination for convenience of the
Company), paragraph 6.4 (relating to termination for Good Reason by Executive),
or paragraph 6.6 (relating to non-renewal).
(36)
<PAGE>
(e) Retirement Plan Service. In lieu of the benefit otherwise payable
under the CNA Financial Corporation Supplemental Executive Retirement Plan (the
"SERP") and as illustrated in Attachment I hereto, Executive shall be entitled
to a benefit under the SERP (or, in the discretion of the Company, under another
non-qualified plan or arrangement maintained by the Company), in an amount
determined as follows:
A pension enhancement in the form of ten additional credited years of service
will be provided through the SERP. The additional credited years of service will
be earned pro-rata over four years of service. In the event of a termination
pursuant to Section 6.1, 6.3, 6.4 or 6.6 , the unvested additional credited
years of service will vest immediately. If Executive has less than 60 months of
service at time of termination, "compensation" as defined in the SERP will be
based on actual average monthly earnings from September 8, 1999 through the date
of termination. At the option of either the Company or the Executive, this
obligation may be liquidated in the event of a termination pursuant to Section
6.1, 6.3, 6.4 or 6.6. The liquidated present value shall be calculated using
annuity factors and interest rates assumed by the SERP at the time of
calculation. The basis for the calculation shall be reviewed by the Company's
outside pension actuary, if one, and such basis and the details of such
calculation shall be made available to the Executive.
This paragraph shall not be construed to increase the deemed age of Executive
for purposes of determining his benefits.
(f) Relocation Allowance. Executive shall be based principally in
Chicago, Illinois as reasonably determined by the Chairman. During the initial
period of Executive's employment during which he is partially based in a
location other than Chicago, the following arrangements shall apply. In
connection with his relocation to Chicago, the Company shall make available to
him Executive Relocation Package Option 3 with the exception of the "Temporary
Living" benefits stated therein. Subject to the first sentence of this
subsection, the Company shall reimburse him for weekly transportation to and
from such non-Chicago locations at which the Executive may be based from time to
time and the Chicago home office and temporary living accommodations while in
Chicago, both for a period of no longer than one year after the Effective Date.
In addition, in lieu of the benefits of said Relocation Package with respect to
loss on sale of a residence, the Company shall reimburse Executive for any
losses which he may incur on the sale of either or both of his two existing
homes, to the extent that the aggregate losses do not exceed $300,000. Executive
shall receive a tax gross-up payment in an amount equal to the aggregate amount
of additional Federal, state and local income taxes payable by Executive from
time to time by reason of the receipt of such reimbursement under this paragraph
(e), and by reason of his receipt of the gross-up payment.
(g) Loan to Purchase Stock. On or after the Effective Date, the Company
shall extend to the Executive under the CNA Financial Corporation Officer Stock
Ownership Plan, a non-recourse loan in an amount sufficient to purchase 100,000
shares of the Stock (the "Stock Loan") on terms agreed upon by the Executive and
the Company. The terms offered by the Plan Administration Committee for the
purchase of the Stock shall provide the Executive with a window purchase period
of at least three weeks. By December 31, 1999 the Company shall also make
available to the Executive a non-recourse personal loan in an amount equal to
the difference between the Stock Loan and $5 million on terms agreed upon by the
Executive and the Company.
(37)
<PAGE>
4. Other Benefits. Commencing on the Effective Date, Executive shall be
entitled to participate in the various benefit plans, programs or arrangements
established and maintained by the Company from time to time applicable to grade
96 executives of the Company and its subsidiaries. Executive's entitlement to
participate in any such plan, program or arrangement shall, in each case, be
subject to the terms and conditions thereof. To the extent that the health
insurance plan available for grade 96 executives of the Company or its
subsidiaries provides for any waiting periods for insurance coverage for
Executive, his spouse or his dependents, the Company shall arrange to have such
waiting periods waived. The Company confirms that as a grade 96 executive,
Executive shall be entitled to twenty (20) vacation days per calendar year.
5. Expense Reimbursement. Executive shall be entitled to reimbursement
by the Company for all reasonable and customary travel and other business
expenses incurred by Executive in carrying out his duties under this Agreement,
in accordance with the general reimbursement policies adopted by the Company
from time to time and applicable generally to other grade 96 executives of the
Company or its subsidiaries. The Company will pay the reasonable fees and
expenses of legal counsel to Executive in connection with negotiating this
Agreement, but if the Executive terminates this Agreement under Section 6.5 on
or before December 31, 1999, Executive shall reimburse the Company promptly for
such fees and expenses or, at the election of the Company, it shall withhold the
amount of such fees and expenses from amounts otherwise due to the Executive.
6. Termination of Employment. Executive's employment with the Company
hereunder shall continue until the date on which his employment is terminated
pursuant to this Section 6. Either party may terminate Executive's employment
with the Company by written notice to the other party effective as of the date
specified in such notice. Upon termination of Executive's employment under this
Agreement, the rights of the parties under this Agreement shall be determined
pursuant to this Section 6.
6.1. Death and Disability. In the event of the death of Executive or,
at the Company's election, in the event of his Permanent Disability (as defined
below) during the term of this Agreement and while Executive is in the employ of
the Company, Executive's employment shall terminate. In such event:
(a) Executive (or his personal representatives, heirs or beneficiaries as
the case may be) shall be paid:
(i) Any unpaid Base Compensation, including credited but unused
vacation pay accrued up to the date of such termination.
(ii) Any unpaid Incentive Compensation Award described in paragraph
3(b) with respect to the performance period prior to Executive's death
or Permanent Disability.
(iii) A pro-rata portion of the amount of the Incentive Compensation
Award earned for the performance period in which the termination occurs
determined by multiplying the Incentive Compensation Award earned
through the end of the performance period in which termination occurs
(as determined by actual performance through the end of that period) by
the number of days in the performance period prior to the date of
termination and dividing such product by the number of days in the
performance period.
(38)
<PAGE>
(iv) If Executive's termination of employment occurs before the last
day of the Performance Period with respect to a Long-Term Incentive
Award, Executive (or Executive's estate) shall be entitled to a payment
with respect to the Long-Term Incentive Award in accordance with the
terms of the award, with the amount determined as though Executive
remained employed by the Company through the end of the Performance
Period, and the performance through Executive's date of termination of
employment was extrapolated to the end of the period, but subject to a
pro rata reduction for the portion of the Performance Period after
Executive's termination of employment. Distribution under this
paragraph (iv) shall be made as soon as practicable after Executive's
date of termination.
(v) Any unexercised option held by Executive upon termination of
employment may be exercised on or after the date of termination only as
to that portion of the covered shares for which it was exercisable
immediately prior to the date of termination, and may be exercised
through the one-year anniversary of such date of termination, but in no
event later than the date on which such option would expire if
Executive had remained employed by the Company.
(b) Except as otherwise provided in this Section 6, the rights of
Executive or his personal representatives, heirs or beneficiaries under any
benefit plan, program or arrangement in which he was participating at the time
of his termination, including any benefits which shall have accrued and vested
under the terms of any plan, program or arrangement described in Section 4, and
his right under any long-term incentive compensation plan, shall remain
unaffected and shall be determined by the applicable terms of such plans,
programs or arrangements.
For purposes of this Agreement, the term "Permanent Disability" means a physical
or mental condition of Executive which, as determined by the Board of Directors
of the Company (the "Company Board"), in its sole discretion based on all
available medical information, is expected to continue indefinitely and which
renders Executive incapable of performing any substantial portion of the
services contemplated hereunder.
6.2. Termination For Cause by the Company. In the event that Executive
shall engage in any conduct which the Company's Board, in good faith, shall
determine to be fraudulent, a substantial breach of any material provision of
this Agreement, willful malfeasance or gross negligence, or inconsistent with
the dignity and character of a senior executive of the Company, and only if such
conduct is determined by the Board, acting in good faith, to have a material
adverse effect on the business of the Company (defined herein as "Cause"), the
Company shall have the right to terminate Executive's employment with the
Company by written notice to Executive effective as of the date of such notice.
Following such termination, the Company shall pay any unpaid Base Compensation
accrued through the date of termination, any unpaid Incentive Compensation Award
described in paragraph 3(b) with respect to the performance period prior to the
date of such termination, and unused vacation time accrued prior to the date of
such termination. However, upon such termination, Executive's right to payments
or otherwise with respect to any other annual Incentive Award, any Long-Term
Incentive Award that is unpaid as of the date of termination, and any option
that is unexercised on the date of termination, shall be forfeited, and the
Company shall have no further obligations under this Agreement.
6.3. Termination for Convenience by the Company. In the event that
Executive's employment is terminated by the Company for any reason not described
in subsections 6.1 or 6.2 above, the obligations of the parties hereto shall be
deemed discharged, provided, however, that:
(39)
<PAGE>
(a) The Company shall pay to Executive or his personal representatives,
heirs, or beneficiaries, as the case may be, (i) any unpaid Base Compensation,
including credited but unused vacation pay accrued up to the date of such
termination, (ii) any unpaid Incentive Compensation Award described in paragraph
3(b) with respect to the performance period prior to the date of such
termination, and (iii) termination payments at the annual rate equal to:
(w) Executive's annual rate of Base Compensation as in effect
immediately prior to his date of termination; plus
(x) Executive's target annual incentive compensation as previously
determined by the Committee; plus
(y) Executive's target long term cash incentive compensation as
previously determined by the Committee; plus
(z) The cash equivalent of a stock option grant of 25,000 shares of
Stock utilizing a methodology to value said option at 48% of the fair
market value of 25,000 shares of Stock on the date of termination. Fair
market value of the Stock shall be determined by taking the average of
the highest and lowest sales prices of the Stock on the date of
termination, as reported as the New York Stock Exchange-Composite
Transactions for such day, or if the Stock was not traded on the New
York Stock Exchange on such day then on the next preceding day on which
the Stock was traded, all as reported by The Wall Street Journal,
mid-west edition under the heading New York Stock Exchange-Composite
Transactions, or, if the Stock ceases to be listed on such exchange, as
reported on the principal national securities exchange or national
automated stock quotation system on which the Stock is traded or
quoted, but in no event shall the price be less than the par value of
the Stock.
with such termination payment to be made in substantially equal installments,
not less frequently than monthly, for a period of thirty-six (36) months
following such termination.
(b) A pro-rata portion of the amount of the Incentive Compensation Award
earned for the performance period in which the termination occurs determined by
multiplying the Incentive Compensation Award earned through the end of the
performance period in which termination occurs (as determined by actual
performance through the end of that period) by the number of days in the
performance period prior to the date of termination and dividing such product by
the number of days in the performance period.
(c) If Executive's termination of employment occurs before the last day
of the Performance Period with respect to a Long-Term Incentive Award, Executive
(or Executive's estate) shall be entitled to a payment with respect to the
Long-Term Incentive Award in accordance with the terms of the award, with the
amount determined as though Executive remained employed by the Company through
the end of the Performance Period, and based on actual performance for the
period, but subject to a pro rata reduction for the portion of the Performance
Period after Executive's date of termination. Distribution under this paragraph
(c) for the Performance Period shall be made at the normally scheduled time for
such distribution (determined without regard to the occurrence of Executive's
date of termination).
(40)
<PAGE>
(d) Any unexercised option held by Executive upon termination of
employment shall expire on the date of termination (which shall be no earlier
than ten business days after notice of such date of termination is sent to the
Executive by facsimile transmission) with respect to all covered shares;
provided, however, that the Committee, in its discretion, may provide for
extension of the exercise date, except that such extended date may not be later
than the earlier of the one-year anniversary of Executive's date of termination
or the date on which such option would expire if Executive had remained employed
by the Company; and further provided that the Committee may, in its discretion,
permit continued vesting of the options during such extension period.
(e) Except as otherwise provided in this Section 6, the rights of
Executive or his personal representatives, heirs, or beneficiaries under any
benefit plan, program or arrangement in which he participated at the time of
such termination, including any benefits which shall have accrued and vested
under the terms of any plan described in Section 4, and his rights under any
long-term incentive compensation plan, shall remain unaffected and be determined
by the applicable terms of such plans, programs or arrangements.
6.4. Termination For Good Reason by Executive.
(a) In the event that Executive's employment is terminated by Executive
for "good reason," the Company's obligations shall be the same as they would
have been, and Executive shall receive the same payments and other benefits that
he would have received, had the Company terminated his employment pursuant to
subsection 6.3.
(b) For purposes of this Agreement, the term "good reason" means any of
the following without Executive's written consent: (i) a change in Executive's
reporting relationship such that Executive no longer reports directly to the
Chairman; (ii) a reduction in the rate of Executive's Base Compensation; or,
with respect to Incentive Compensation payable under Section 3(b), an increase
in the performance targets or a reduction in the maximum Incentive Compensation
Award (as a percentage of Base Compensation); or with respect to LTIP awards
payable under Section 3(c), a reduction in the cash or other benefits the
Executive is entitled to receive if the applicable target performance levels are
met; or a material reduction in Executive's benefits that is not generally
applicable to all senior executives of the Company and the CNA Companies ; or
(iii) a material diminution in Executive's duties and responsibilities as Senior
Vice President and Chief Financial Officer or a diminution in his title.
6.5. Voluntary Resignation by Executive. In the event that Executive's
employment is terminated by Executive other than pursuant to subsection 6.4 or
as a direct result of his death or Permanent Disability (as described in
subsection 6.1), the Company shall pay any unpaid Base Compensation accrued
through the date of termination, any unpaid Incentive Compensation Award
described in paragraph 3(b) with respect to the performance period prior to the
date of such termination, and unused vacation time accrued prior to the date of
such termination. However, upon such termination, Executive's right to payments
or otherwise with respect to any other annual Incentive Award, any Long-Term
Incentive Award that is unpaid as of the date of termination, and any option
that is unexercised on the date of termination, shall be forfeited, and the
Company have no further obligations under this Agreement. The rights of
Executive under any benefit plan, program or arrangement in which he
participated at the time of such termination, including any benefits which shall
have accrued and vested under the terms of any plan described in Section 4 shall
be determined by the applicable terms of such plans, programs or arrangements.
(41)
<PAGE>
6.6. Failure to Extend Agreement. In the event that this Agreement has
not been extended or renewed by mutual agreement at the end of its term on
December 31, 2002 and the employment of Executive continues, then the following
shall apply:
(a) Such employment shall constitute an employment at will from month
to month. During Executive's employment following December 31, 2002, (i) he
shall receive salary at the annual rate of 300% of his annual Base Compensation
as of December 31, 2002; (ii) the terms of this Agreement that governed
Executive's benefits and perquisites prior to January 1, 2003 will continue to
apply, and will be in addition to Executive's salary specified in clause (i)
above; (iii) Executive shall be entitled to payment with respect to the
Incentive Compensation Award for calendar year 2002 and LTIP awards for the
performance period ending December 31, 2002 to the extent provided by this
Agreement, but Executive will not be entitled to an Incentive Compensation
Award, or LTIP awards or any other incentive compensation award for performance
periods beginning after December 31, 2002.
(b) If the Company terminates Executive's employment following December
31, 2002, or if the Company and Executive shall not have mutually agreed to the
terms of, and entered into, a new employment prior to March 31, 2003, then
Executive's employment shall terminate on April 1, 2003, and the Company's
obligations shall be the same as they would have been, and Executive shall
receive the same payments and other benefits that he would have received, had
the Company terminated his employment pursuant to subsection 6.3.
7. Parachute Payment Gross-Up. In the event any payments made to
Executive under this Agreement shall be found to constitute an "excess parachute
payment" within the meaning of section 280(G) of the Internal Revenue Code or
other payment subject to a federal excise tax, the Company shall pay to
Executive an amount equal to the amount of such excise tax, plus a tax gross-up
payment in the amount of the aggregate additional federal, state, and local
income, excise or other taxes payable by Executive with respect to the receipt
of such excise tax payment.
8. Confidentiality. Executive agrees that, while he is employed by the
Company, and at all times thereafter, he shall continue to hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company and any other business or entity in
which at any relevant time it holds greater than a 10% equity (voting or
non-voting) interest that shall have been obtained by Executive during and by
reason of his employment by or affiliation with the Company and that shall not
be public knowledge other than by acts of Executive or his representative
("Confidential Material"). Executive shall not, without the prior written
consent of the Chairman, communicate or divulge any Confidential Material to
anyone other than the Company and those individuals or entities designated by
the Company.
9. Competition. Executive hereby agrees that, while he is employed by
the Company, and for a period of 24 months following the date of his termination
of employment with the Company for any reason, he will not, directly or
indirectly, without the prior written approval of the Chairman, enter into any
business relationship (either as principal, agent, board member, officer,
consultant, stockholder, employee or in any other capacity) with any business or
other entity that at any relevant time competes in any respect with any of the
principal businesses of the Company (a "Competitor"); provided, however, that
such prohibited activity shall not include the ownership of less than 5% of the
voting securities of any publicly traded corporation (determined by vote or
value) or limited partnership interests constituting less than five percent (5%)
of the value of any such partnership regardless of the business of such
corporation. Upon the written request of Executive, the Chairman will determine
whether a business or other entity constitutes a "Competitor" for purposes of
this Section 9; provided that the Chairman may require Executive to provide such
information as the Chairman reasonably determines to be necessary to make such
determination; and further provided that the current and continuing
effectiveness of such
(42)
<PAGE>
determination may be conditioned on the accuracy of such information, and on
such other factors as the Chairman may reasonably determine. The foregoing
restrictions shall not be applicable in the event of his termination pursuant to
Section 6.5 unless the Company gives the Executive written notice that it
desires such restrictions to apply and makes the payments described in the last
sentence of this section. Said notice shall be given in writing within ten days
of the Executive's termination and shall designate the number of months of the
restriction period not to exceed twenty-four (24) months subsequent to the date
of termination. For each such month designated, the Company shall pay the
Executive 1.5 times the monthly proration of the amount of compensation he would
have received pursuant to subsection 6.3(a)(iii) had the Company terminated his
employment for convenience. Each month's compensation shall be payable on the
last day of each month during the period designated.
10. Solicitation. Executive agrees that while he is employed by the
Company, and for a period of thirty-six (36) months following his termination of
employment with the Company for any reason, he will not employ, offer to employ,
engage as a consultant, or form an association with any person who is then, or
who during the preceding one year was, an employee of the Company, nor will he
assist any other person in soliciting for employment or consultation any person
who is then, or who during the preceding one year was, an employee of the
Company. The foregoing restrictions in this section shall not be applicable in
the event of his termination pursuant to Section 6.5, unless the Company gives
the Executive written notice that Section 9 above shall apply and makes the
payments described in the last sentence of Section 9. For each month designated
in Section 9, the Executive shall be bound by the restrictions in this section
for 1.5 times the number of months designated in Section 9, rounded down to the
nearest whole day. By way of illustration, payments pursuant to Section 9 for a
period of twenty-four (24) months shall cause this restriction to be applicable
for thirty-six (36) months.
11. Non-Interference. Executive agrees that while he is employed by the
Company, and for a period of thirty-six (36) months following his termination of
employment with the Company for any reason, he will not disturb or attempt to
disturb any business relationship or agreement between the Company and any other
person or entity. The foregoing restrictions shall not be applicable in the
event of his termination pursuant to Section 6.5, unless the Company gives the
Executive written notice that Section 9 above shall apply and makes the payments
described in the last sentence of Section 9. For each month designated in
Section 9, the Executive shall be bound by the restrictions in this section for
1.5 times the number of months designated in Section 9, rounded down to the
nearest whole day. By way of illustration, payments pursuant to Section 9 for a
period of twenty-four (24) months shall cause this restriction to be applicable
for thirty-six (36) months.
12. Assistance with Claims. Executive agrees that, while he is employed
by the Company, and for a reasonable period (not less than 60 months)
thereafter, he will be available, on a reasonable basis, to assist the Company
in the prosecution or defense of any claims, suits, litigation, arbitrations,
investigations, or other proceedings, whether pending or threatened ("Claims")
that may be made or threatened by or against the Company. Executive agrees,
unless precluded by law, to promptly inform the Company if he is requested (i)
to testify or otherwise become involved in connection with any Claim against the
Company or (ii) to assist or participate in any investigation (whether
governmental or private) of the Company or any of their actions, whether or not
a lawsuit has been filed against the Company relating thereto. For periods
following the 36-month anniversary of the date of Executive's termination of
employment with the Company, the Company agrees to provide reasonable
compensation to Executive for such assistance. The Company also shall reimburse
the Executive or cause the Executive to be reimbursed for any out-of-pocket
expenses reasonably incurred by the Executive in complying with this section.
(43)
<PAGE>
13. Return of Materials. Executive shall, at any time upon the request
of the Company, and in any event upon the termination of his employment with the
Company, for whatever reason, immediately return and surrender to the Company
all originals and all copies, regardless of medium, of property belonging to the
Company, created or obtained by Executive as a result of or in the course of or
in connection with his employment with the Company regardless of whether such
items constitute proprietary information, provided that Executive shall be under
no obligation to return written materials acquired from third parties which are
generally available to the public. Executive acknowledges that all such
materials are, and will remain, the exclusive property of the Company.
14. Effect of Breach. Executive acknowledges that his violation of the
covenants set forth in Sections 8, 9, 10, 11 and 13 could cause the Company
irreparable harm and he agrees that the Company shall be entitled to injunctive
relief restraining Executive from actual or threatened breach of the covenants
and that if bond is required to be posted in order for the Company to secure
such relief said bond need only be in a nominal amount. The right of the Company
to seek injunctive relief shall be in addition to any other remedies available
to the Company with respect to an alleged or threatened breach.
15. Limitation on Remedies. The Company shall not be entitled to
suspend payments otherwise due to Executive by reason of Executive's violation
of Sections 8, 9, 10, 11 and 13 (whether before or after a judgment is obtained
by the Company against Executive). The Company shall not be entitled to set off
against the amounts payable to Executive under this Agreement any amounts owed
to the Company by Executive. Nothing in this Section 15 shall limit the
Company's remedies in the case of Executive's violation of this Agreement,
except as otherwise specifically provided in this Section 15.
16. Effect of Covenants. Nothing in Sections 8 through 15 shall be
construed to adversely affect the rights that the Company would possess in the
absence of the provisions of such Sections and related entities.
17. Revision. The parties hereto expressly agree that in the event that
any of the provisions, covenants, warranties or agreements in this Agreement are
held to be in any respect an unreasonable restriction upon Executive or are
otherwise invalid, for whatsoever cause, then the court or arbitrator so holding
is hereby authorized to (a) reduce the territory to which said covenant,
warranty or agreement pertains, the period of time in which said covenant,
warranty or agreement operates or the scope of activity to which said covenant,
warranty or agreement pertains or (b) effect any other change to the extent
necessary to render any of the restrictions contained in this Agreement
enforceable.
18. Severability. Each of the terms and provisions of this Agreement is
to be deemed severable in whole or in part and, if any term or provision of the
application thereof in any circumstances should be invalid, illegal or
unenforceable, the remaining terms and provisions or the application thereof to
circumstances other than those as to which it is held invalid, illegal or
unenforceable, shall not be affected thereby and shall remain in full force and
effect.
19. Binding Agreement; Assignment. This Agreement shall be binding upon
the parties hereto and their respective heirs, successors, personal
representatives and assigns. The Company shall have the right to assign this
Agreement to any successor in interest to the business, or any majority part
thereof, of the Company or any joint venture or partnership to which the Company
is a joint venturer or general partner which conducts substantially all of the
Company's business. Executive shall not assign any of his obligations or duties
hereunder and any such attempted assignment shall be null and void.
(44)
<PAGE>
20. Controlling Law; Jurisdiction. This Agreement shall be governed by,
interpreted and construed according to the laws of the State of Illinois
(without regard to conflict of laws principles).
21. Arbitration of All Disputes. Any controversy or claim arising out
of or relating to this Agreement (or the breach thereof) shall be settled by
final, binding and non-appealable arbitration in Chicago, Illinois by three
arbitrators. Except as otherwise expressly provided in this Section 21, the
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association (the "Association") then in effect. One of the
arbitrators shall be appointed by the Company, one shall be appointed by
Executive, and the third shall be appointed by the first two arbitrators. If the
first two arbitrators cannot agree on the third arbitrator within 30 days of the
appointment of the second arbitrator, then the third arbitrator shall be
appointed by the Association. This Section 21 shall not be construed to limit
the Company's right to obtain relief under Section 14 with respect to any matter
or controversy subject to Section 14 and, pending a final determination by the
arbitrator with respect to any such matter or controversy, the Company shall be
entitled to obtain any such relief by direct application to state, federal or
other applicable court, without being required to first arbitrate such matter or
controversy.
22. Entire Agreement. Except as otherwise expressly set forth herein,
this Agreement contains the entire agreement of the parties with regard to the
subject matter hereof, supersedes all prior agreements and understandings,
written or oral, and may only be amended by an agreement in writing signed by
the parties thereto.
23. Additional Documents. Each party hereto shall, from time to time,
upon request of the other party, execute any additional documents which shall
reasonably be required to effectuate the purposes hereof.
24. Incorporation. The introductory recitals hereof are incorporated in
this Agreement and are binding upon the parties hereto.
25. Failure to Enforce. The failure to enforce any of the provisions of
this Agreement shall not be construed as a waiver of such provisions. Further,
any express waiver by any party with respect to any breach of any provision
hereunder by any other party shall not constitute a waiver of such party's right
to thereafter fully enforce each and every provision of this Agreement.
26. Survival. Except as otherwise set forth herein, the obligations
contained in this Agreement shall survive the termination, for any reason
whatsoever, of Executive's employment with the Company.
27. Headings. All numbers and headings contained herein are for
reference only and are not intended to qualify, limit or otherwise affect the
meaning or interpretation of any provision contained herein.
28. Notices. Notices and all other communications provided for in this
Agreement shall be in writing and shall be delivered personally or sent by
registered or certified mail, return receipt requested, postage prepaid
(provided that international mail shall be sent via overnight or two-day
delivery), or sent by facsimile or prepaid overnight courier to the parties at
the addresses or facsimile numbers set forth below (or such other addresses or
facsimile numbers as shall be specified by the parties by like notice). Such
notices, demands, claims and other communications shall be deemed given:
(a) in the case of delivery by overnight service with guaranteed
next day delivery, the next day or the day designated for delivery;
(45)
<PAGE>
(b) in the case of certified or registered U.S. mail, five days
after deposit in the U.S. mail; or
(c) in the case of facsimile, the date upon which the transmitting
party received confirmation of receipt by facsimile, telephone or
otherwise;
provided, however, that in no event shall any such communications be deemed to
be given later than the date they are actually received. Communications that are
to be delivered by the U.S. mail or by overnight service or two-day delivery
service are to be delivered to the addresses or facsimile numbers set forth
below:
If to the Company:
CNA Financial Corporation
CNA Plaza
Chicago, IL 60685
Attn: Corporate Secretary
Facsimile Number: (312)817-0511
If to Executive:
Robert V. Deutsch
7 Pheasant Hill
Farmington, CT 06032
Facsimile Number: (860)676-1398
or to such other address as either party shall furnished to the other party in
writing in accordance with the provisions of this Section 28.
29. Gender. The masculine, feminine or neuter pronouns used herein
shall be interpreted without regard to gender, and the use of the singular or
plural shall be deemed to include the other whenever the context so requires.
30. Acknowledgment by Executive. Executive represents and warrants that
(i) he is not, and will not become a party to any agreement, contract,
arrangement or understanding, whether of employment or otherwise, that would in
any way restrict or prohibit him from undertaking or performing his duties in
accordance with this Agreement or that restricts his ability to be employed by
the Company in accordance with this Agreement; (ii) his employment by the
Company will not violate the terms of any agreement with or policy of any prior
employer of Executive (or any other person or entity for whom he has performed
services) regarding competition; (iii) his position with the Company, as
described in this Agreement, will not require him to improperly use any trade
secrets or confidential information of any prior employer (or any other person
or entity for whom he has performed services) and (iv) he understands that under
various federal, state and local laws, taxes may be applicable to any and all
payments, benefits and grants under this Agreement and, subject to Section 7, at
the date determined by the Company, the Executive will pay the withholding
amount on any such compensation by paying the amount directly to the Company or
the Company will withhold the applicable amount from any amounts due to the
Executive.
(46)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
CNA FINANCIAL CORPORATION
S/Robert V. Deutsch
By:__________________________________
Title: Senior Vice President, General Counsel
& Secretary
(47)
<PAGE>
Attachment I
Illustrations of Enhanced Pension Benefit
1. Executive dies on 08/17/00, pension benefit is calculated based on 11 years
of service (1 year of actual service and 10 years of additional credited
service).
2. Executive is terminated for cause by the Company or Executive voluntarily
resigns on 08/17/01, pension benefit is calculated based on 7 years of
service (2 years of actual service and 5 years of additional credited
service).
3. Executive is terminated for convenience by the Company on 08/17/02, pension
benefit is calculated based on 13 years of service (3 years of actual
service and 10 years of additional credited service).
4. Agreement is not renewed and employment is terminated on 4/01/03, pension
benefit is calculated based on 13.6 years of service (3.6 years of actual
service and 10 years of additional credited service).
5. Employment terminates 08/17/04, pension benefit is calculated based on 15
years of service (5 years of actual service and 10 years of additional
credited service).
The additional pension benefit Executive would receive attributable to the
additional years of service would be paid from the SERP or other non-qualified
plan or arrangement.
(48)
<PAGE>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF BASIC AND DILUTED NET INCOME PER COMMON SHARE
|----------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30 THREE MONTHS Nine Months |
|(In millions, except per share data) 1999 1998 1999 1998 |
|----------------------------------------------------------------------------|
| |
|Net income (loss) $ 29 $ (14) $ 178 $ 429 |
|Less preferred stock dividends 2 2 10 4 |
| ---------------------------------------|
|Net income available to common |
|stockholders $ 27 $ (16) $ 168 $ 425 |
| =======================================|
|Weighted average shares outstanding 184.3 185.2 184.2 185.2 |
| =======================================|
|Basic and diluted net income (loss) |
|per common share $0.15 $(0.09) $ 0.91 $ 2.29 |
| =======================================|
|----------------------------------------------------------------------------|
(49)
<PAGE>
EXHIBIT 12.1
CNA FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
|----------------------------------------------------------------------------|
|NINE MONTHS ENDED SEPTEMBER 30 1999 1998 |
|(In millions of dollars, except ratio data) |
|----------------------------------------------------------------------------|
|Income before income tax and cumulative effect |
|of accounting changes $442 $589 |
|Adjustments: |
| Interest expense 163 168 |
| Interest element of operating lease rental 28 37 |
| -----------------------------|
| Income before income tax, as adjusted $633 $794 |
| =============================|
| |
|Fixed charges: |
| Interest expense $163 $168 |
| Interest element of operating lease rental 28 37 |
| -----------------------------|
|Fixed charges $191 $205 |
| =============================|
|Ratio of earnings to fixed charges (1) 3.3 3.9 |
|----------------------------------------------------------------------------|
(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
|----------------------------------------------------------------------------|
|NINE MONTHS ENDED SEPTEMBER 30 1999 1998 |
|(In millions of dollars, except ratio data) |
|----------------------------------------------------------------------------|
|Net income $178 $429 |
|Adjustments: |
| Interest expense, after tax 106 109 |
| Interest element of operating lease rental, |
| after tax 19 24 |
| ------------------------|
|Net income, as adjusted $303 $562 |
| ========================|
|Fixed charges: |
| Interest expense, after tax $106 $109 |
| Interest element of operating lease rental, |
| after tax 19 24 |
| ------------------------|
|Fixed charges $125 $133 |
| ========================|
|Ratio of net income, as adjusted, to |
|fixed charges (1) 2.4 4.2 |
|----------------------------------------------------------------------------|
(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.
(50)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 27,348
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,597
<MORTGAGE> 45
<REAL-ESTATE> 4
<TOTAL-INVEST> 38,831
<CASH> 305
<RECOVER-REINSURE> 6,239
<DEFERRED-ACQUISITION> 2,650
<TOTAL-ASSETS> 63,899
<POLICY-LOSSES> 34,265
<UNEARNED-PREMIUMS> 5,525
<POLICY-OTHER> 124
<POLICY-HOLDER-FUNDS> 743
<NOTES-PAYABLE> 2,894
0
150
<COMMON> 464
<OTHER-SE> 8,097
<TOTAL-LIABILITY-AND-EQUITY> 63,899
10,274
<INVESTMENT-INCOME> 1,562
<INVESTMENT-GAINS> 308
<OTHER-INCOME> 551
<BENEFITS> 8,610
<UNDERWRITING-AMORTIZATION> 1,591
<UNDERWRITING-OTHER> 1,889
<INCOME-PRETAX> 442
<INCOME-TAX> 87
<INCOME-CONTINUING> 355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (177)
<NET-INCOME> 178
<EPS-BASIC> 0.91
<EPS-DILUTED> 0.91
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
