================================================================================
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, 2000 COMMISSION FILE NUMBER 1-5823
--------------------------
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-6169860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA PLAZA
CHICAGO, ILLINOIS 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No...
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 6, 2000
----------------------------- -------------------------------
Common Stock, Par value $2.50 183,261,373
================================================================================
Page 1
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 (Unaudited) AND DECEMBER 31, 1999............... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.............. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) SEPTEMBER 30, 2000.......................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 45
SIGNATURES ............................................................ 45
EXHIBIT 10 EMPLOYMENT CONTRACT......................................... 46
EXHIBIT 27 FINANCIAL DATA SCHEDULE .................................... 57
Page 2
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(In millions of dollars, except share data) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities available-for-sale (amortized cost: $26,978 and $27,948) $ 26,664 $ 27,248
Equity securities available-for-sale (cost: $1,224 and $1,150) 2,636 3,610
Mortgage loans and real estate (less accumulated depreciation: $1 and $1) 27 47
Policy loans 193 192
Other invested assets 1,376 1,108
Short-term investments 4,780 3,355
------------- ------------
TOTAL INVESTMENTS 35,676 35,560
Cash 174 153
Receivables:
Reinsurance 8,983 7,403
Insurance 5,087 5,115
Less allowance for doubtful accounts (314) (310)
Deferred acquisition costs 2,578 2,436
Prepaid reinsurance premiums 1,496 1,456
Accrued investment income 402 387
Receivables for securities sold 892 284
Federal income taxes recoverable (includes: $0 and $241 due from Loews) - 269
Deferred income taxes 816 852
Property and equipment at cost (less accumulated depreciation: $821 and $701) 731 746
Intangibles 320 328
Other assets 2,168 1,937
Separate account business 4,513 4,603
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 63,522 $ 61,219
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Claim and claim adjustment expense $ 27,112 $ 27,356
Unearned premiums 5,103 5,103
Future policy benefits 6,376 5,996
Policyholders' funds 656 710
Collateral on loaned securities 1,839 1,300
Payables for securities purchased 962 135
Participating policyholders' equity 139 121
Debt 2,774 2,881
Federal income taxes payable (includes: $171 and $0 due to Loews) 153 -
Other liabilities 4,371 3,881
Separate account business 4,513 4,603
------------- ------------
TOTAL LIABILITIES 53,998 52,086
------------- ------------
Commitments and contingencies
Minority Interest 217 195
Stockholders' equity:
Common stock ($2.50 par value;
Authorized - 500,000,000 shares;
Issued - 185,525,907 shares;
Outstanding as of September 30, 2000 - 183,419,823 shares,
Outstanding as of December 31, 1999 - 184,406,931 shares) 464 464
Preferred stock - 150
Additional paid-in capital 126 126
Retained earnings 8,134 7,114
Accumulated other comprehensive income 720 1,188
Treasury stock, at cost (66) (41)
------------- -------------
9,378 9,001
Notes receivable for the issue of stock (71) (63)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 9,307 8,938
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,522 $ 61,219
===================================================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
Page 3
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars, except per share data) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net earned premiums $ 2,919 $ 3,351 $ 8,467 $ 10,296
Net investment income 529 531 1,537 1,562
Realized investment gains (losses), net of participating policyholders'
and minority interest 706 (81) 1,168 308
Other 174 200 520 529
---------- ------------ ---------- ------------
Total revenues 4,328 4,001 11,692 12,695
---------- ------------ ---------- ------------
Claims, benefits and expenses:
Insurance claims and policyholders' benefits 2,465 2,758 7,156 8,606
Amortization of deferred acquisition costs 456 483 1,381 1,591
Other operating expenses 542 656 1,489 1,802
Restructuring and other related charges - 16 - 70
Interest 54 55 154 163
---------- ------------ ---------- ------------
Total claims, benefits and expenses 3,517 3,968 10,180 12,232
---------- ------------ ---------- ------------
Income before income tax and cumulative
effect of a change in accounting principle 811 33 1,512 463
Income tax (expense) benefit (251) 4 (468) (87)
Minority interest (10) (8) (23) (21)
---------- ------------ ---------- ------------
Income before cumulative effect of a change in accounting principle 550 29 1,021 355
Cumulative effect of a change in accounting principle, net of tax of $95 - - - (177)
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 550 $ 29 $ 1,021 $ 178
===================================================================================================================================
BASIC AND DILUTED EARNINGS PER SHARE AVAILABLE
TO COMMON STOCKHOLDERS
Income before cumulative effect of a change in accounting principle $ 3.00 $ 0.15 $ 5.55 $ 1.87
Cumulative effect of a change in accounting principle, net of tax - - - (0.96)
----------- ------------ ---------- ------------
Net income $ 3.00 $ 0.15 $ 5.55 $ 0.91
=========== ============ ========== ============
Weighted average outstanding common shares
and common stock equivalents (in millions of shares)
Basic 183.4 184.3 183.7 184.2
Diluted 183.5 184.3 183.7 184.2
===================================================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
Page 4
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 NINE MONTHS
(In millions of dollars) 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,021 $ 178
Adjustments to reconcile net income to net cash flows from operating
activities:
Minority interest 23 21
Deferred income tax provision 292 (50)
Net realized investment gains (1,168) (308)
Amortization of intangibles 16 18
Accretion of bond discount (232) (166)
Depreciation 111 141
Changes in:
Receivables, net (1,548) 71
Deferred acquisition costs (155) (217)
Accrued investment income (20) (2)
Federal income taxes recoverable / payable 422 101
Prepaid reinsurance premiums (40) (285)
Insurance reserves 175 168
Other 230 331
---------- ----------
Total adjustments (1,894) (177)
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (873) 1
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities (29,061) (35,854)
Proceeds from fixed maturity securities:
Sales 27,003 35,015
Maturities, calls and redemptions 3,259 2,305
Purchases of equity securities (1,388) (735)
Proceeds from sale of equity securities 2,298 892
Change in short-term investments (1,241) (3,382)
Change in collateral on loaned securities 539 2,538
Change in other investments 5 81
Purchases of property and equipment, net (108) (149)
Other, net (17) (92)
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES 1,289 619
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to preferred shareholders (1) (11)
Purchase of treasury stock, net (28) -
Receipts from investment contracts credited to policyholder account
balances 4 5
Return of policyholder account balances on investment contracts (113) (56)
Principal payments on debt (112) (447)
Proceeds from issuance of debt 5 177
Redemption of preferred stock (150) (200)
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (395) (532)
---------- ----------
Net cash flows 21 88
Cash at beginning of period 153 217
-------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 174 $ 305
=============================================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense $ (106) $ (128)
Federal income taxes 240 142
Non-cash transactions:
Notes receivable from the issuance of stock 4 17
Exchange of Canary Wharf limited partnership interest into common stock - 539
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
</TABLE>
Page 5
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements (unaudited) include CNA
Financial Corporation (CNAF) and its subsidiaries, which include
property/casualty insurance companies (principally Continental Casualty Company
and The Continental Insurance Company) and life insurance companies (principally
Continental Assurance Company and Valley Forge Life Insurance Company),
collectively CNA, or the Company. As of September 30, 2000, Loews Corporation
(Loews) owned approximately 87% of the outstanding common stock of CNAF.
The accompanying condensed consolidated financial statements are
unaudited and have been prepared in conformity with accounting principles
generally accepted in the United States (GAAP). Certain financial information
that is normally included in annual financial statements, including financial
statement footnotes, prepared in accordance with GAAP, but that is not required
for interim reporting purposes, has been condensed or omitted. 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, 1999 (incorporated by reference in Form 10-K/A filed with the
Securities and Exchange Commission for the year ended December 31, 1999). 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. Certain amounts applicable to prior
periods have been reclassified to conform to classifications followed in 2000.
All material intercompany amounts have been eliminated.
NOTE B - EARNINGS PER SHARE
Earnings per share applicable to common stock is based on weighted
average outstanding shares, retroactively adjusted for all stock splits. The
computation of earnings per share follows.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars, except per share data) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 550 $ 29 $1,021 $ 178
Less: Preferred stock dividends - (2) (1) (10)
-------------------------------------------------------------
Net income available to common stockholders $ 550 $ 27 $1,020 $ 168
=============================================================
Denominator:
Weighted average outstanding common shares
and common stock equivalents 183.4 184.3 183.7 184.2
Effect of dilutive securities:
Employee Stock Options 0.1 - - -
-------------------------------------------------------------
Adjusted weighted average shares outstanding
and assuming conversions 183.5 184.3 183.7 184.2
=============================================================
Basic and diluted earnings per share available to
common stockholders $3.00 $0.15 $5.55 $0.91
=============================================================
</TABLE>
Page 6
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
NOTE C - RESTRICTED INVESTMENTS
The Company's largest equity holding in a single issuer is Global
Crossing, Ltd. (Global Crossing) common stock. As of September 30, 2000, the
Company owned 19.3 million shares valued at $600 million, representing
approximately 2.2% of Global Crossing's outstanding common stock. Because the
Company's holdings of Global Crossing were not acquired in a public offering,
the shares may not be sold to the public unless the sale is registered or exempt
from the registration requirements of the Securities Act of 1933 (the Act)
including sales pursuant to Rule 144. In addition, the Company has the right to
require Global Crossing to register under the Act all of the Company's
current holdings. See Note G for discussion of the Company's hedge of this
investment.
NOTE D - LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES
TOBACCO LITIGATION
Four insurance subsidiaries of the Company are defendants in a lawsuit
arising out of policies allegedly issued to Liggett Group, Inc. ("Liggett"). The
lawsuit was filed by Liggett and its current parent, Brooke Group Holding Inc.,
in the Delaware Superior Court, New Castle County on January 26, 2000. Although
it did not issue policies to Liggett, CNAF also was named as a defendant.
Subsequently, Liggett voluntarily dismissed CNAF. The lawsuit, which involves
numerous insurers, concerns coverage issues relating to hundreds of
tobacco-related claims asserted against Liggett over the past twenty years.
However, Liggett only began submitting claims for coverage under the policies in
January 2000. CNA believes its coverage defenses are strong. Based on facts and
circumstances currently known, management believes that the ultimate outcome of
the pending litigation should not materially affect the financial condition or
operations of CNA.
IGI CONTINGENCY
In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an
arrangement with IOA Global, Ltd. (IOA), an independent managing general agent
based in Philadelphia, Pennsylvania, to develop and manage a book of accident
and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies,
Ltd. (IGI), a personal accident reinsurance managing general underwriter, was
appointed to underwrite and market the book under the supervision of IOA.
Between April 1, 1997 and December 1, 1999, IGI underwrote a number of
reinsurance arrangements with respect to personal accident insurance worldwide
(the IGI Program). Under various arrangements, CNA Re Ltd. both assumed risks as
a reinsurer and also ceded a substantial portion of those risks to other
companies, including other CNA insurance subsidiaries and ultimately to a group
of reinsurers participating in a reinsurance pool known as the Associated
Accident and Health Reinsurance Underwriters (AAHRU) Facility. CNA's Group
Operations business unit participated as a pool member in the AAHRU Facility in
varying percentages over the past three years.
CNA has undertaken a review of the IGI Program and, among other things,
has determined that a small portion of the premium assumed under the IGI Program
related to United States workers' compensation "carve-out" business. CNA is
aware that a number of reinsurers with workers' compensation carve-out insurance
exposure have disavowed their obligations under various legal theories. If one
or more such companies are successful in avoiding or reducing their liabilities,
then it is likely that CNA's liability will also be reduced. Moreover, based on
information known at this time, CNA reasonably believes it has strong grounds
for avoiding altogether a substantial portion of its United States workers'
compensation carve-out exposure through legal action.
Page 7
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. CNA believes it has valid and enforceable
reinsurance contracts with the AAHRU Facility and other reinsurers with respect
to the IGI Program, including the United States workers' compensation carve-out
business. It is likely that certain reinsurers will dispute their liabilities to
CNA; however, the Company is unable to predict the extent of such potential
disputes at this time. Legal actions could result, and the resolution of any
such actions could take years.
Based on the Company's review of the entire IGI Program, CNA recorded a
loss provision of $90 million in the fourth quarter of 1999. The loss provision
was net of estimated recoveries from retrocessionaires.
The Company is pursuing a number of loss mitigation strategies.
Although the results of these various actions to date are consistent with the
previous loss estimates, the estimate of ultimate losses is subject to
considerable uncertainty. As a result of these uncertainties, the results of
operations in future years may be adversely affected by potentially significant
reserve additions. Management does not believe that any such future reserve
additions will be material to the equity of the Company.
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 includes 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 the definition of an occurrence.
To date, courts have been inconsistent in their rulings on these issues.
Page 8
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
A number of proposals to reform Superfund have been made by various
parties. However, no reforms have been enacted by Congress in 1999 or thus far
in 2000 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 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, 2000 and December 31, 1999, CNA carried
$366 million and $463 million 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. 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, 2000 and December 31, 1999, CNA carried approximately $588 million
and $684 million of claim and claim expense reserves, net of reinsurance
recoverables, for reported and unreported asbestos-related claims, including
those related to Fibreboard Corporation.
Unfavorable asbestos claim reserve development totaled $12 million and
$86 million for the three months ended September 30, 2000 and 1999 and
$43 million and $215 million for the nine months ended September 30, 2000 and
1999. Unfavorable environmental pollution and other mass tort reserve
development totaled $15 million and $36 million for the three and nine months
ended September 30, 2000. Favorable environmental pollution and other mass tort
reserve development totaled $33 million and $49 million for the three and nine
months ended September 30, 1999.
The results of operations in future years may continue to be adversely
affected by environmental pollution and other mass tort and asbestos claims and
claim expenses. Management will continue to monitor these liabilities and make
further adjustments as warranted.
The following table provides additional data related to CNA's
environmental pollution, other mass tort and asbestos-related claim and claim
adjustment expense reserves.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------------------- ---------------------------------
ENVIRONMENTAL ENVIRONMENTAL
POLLUTION AND POLLUTION AND
OTHER MASS OTHER MASS
(In millions of dollars) TORT ASBESTOS TORT ASBESTOS
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross reserves $ 516 $ 849 $ 618 $ 946
Less ceded reserves (150) (261) (155) (262)
----------------------------------------------------------------------
Net reserves $ 366 $ 588 $ 463 $ 684
======================================================================
</TABLE>
Page 9
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
NOTE E - REINSURANCE
The effects of reinsurance on earned premiums are shown in the
following table.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 EARNED PREMIUMS
(In millions of dollars) DIRECT ASSUMED CEDED NET
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
Property/casualty $ 6,261 $ 1,426 $ 2,601 $ 5,086
Accident and health 2,708 406 431 2,683
Life 896 173 371 698
--------------------------------------------------------
Total premiums $ 9,865 $ 2,005 $ 3,403 $ 8,467
========================================================
1999
Property/casualty $ 6,731 $ 1,237 $ 999 $ 6,969
Accident and health 2,813 140 276 2,677
Life 812 140 302 650
--------------------------------------------------------
Total premiums $ 10,356 $ 1,517 $ 1,577 $ 10,296
========================================================
</TABLE>
See Note J for discussion of the Personal Insurance business, which had
the effect of increasing ceded earned premiums for the nine months ended
September 30, 2000 by $1,431 million.
NOTE F - DEBT
<TABLE>
<CAPTION>
Debt is comprised of the following obligations.
--------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions of dollars) 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Variable rate debt:
Commercial paper $ 675 $ 675
Credit facility--CNA - 77
Credit facility--CNA Surety 100 100
Senior notes:
7.25%, due March 1, 2003 138 143
6.25%, due November 15, 2003 249 249
6.50%, due April 15, 2005 490 497
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 68 81
6.95%, due January 15, 2018 148 148
7.25% debenture, due November 15, 2023 240 247
8.0% - 19.98% secured capital leases, due through
December 31, 2011 41 42
Other debt, due through 2019 (rates of 1.0% to 8.50%) 28 26
--------------------------------------
Total debt $ 2,774 $ 2,881
======================================
</TABLE>
During the first nine months of 2000, the Company repaid bank loans
drawn under the CNA credit facility and repurchased approximately $33 million of
its notes.
Page 10
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
NOTE G - COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes to stockholders'
equity, including net income, except for those changes resulting from
investments by and distributions to owners. The components of comprehensive
income are shown below.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 550 $ 29 $ 1,021 $ 178
Other comprehensive income (loss):
Change in unrealized gains/losses
on general account investments
Holding gains (losses) arising during
the period 441 (902) 250 (287)
Less: Unrealized gains at beginning of
period included in realized
gains/losses during the period 503 34 958 287
-----------------------------------------------------------
Net change in unrealized gains/losses on
general account investments (62) (936) (708) (574)
Net change in unrealized gains/losses on
separate accounts and other 31 (5) 28 15
Foreign currency translation adjustment (25) 8 (28) 13
Allocation to participating policyholders'
and minority interest (10) (5) (15) 4
-----------------------------------------------------------
Other comprehensive (loss), before tax (66) (938) (723) (542)
Deferred income tax benefit related
to other comprehensive income 14 280 255 130
-----------------------------------------------------------
Other comprehensive (loss), net of tax (52) (658) (468) (412)
-----------------------------------------------------------
Total comprehensive income (loss) $ 498 $ (629) $ 553 $ (234)
===========================================================
</TABLE>
As of September 30, 2000, the Company held 19.3 million shares of
Global Crossing common stock. During the first quarter of 2000, the Company
entered into option agreements intended to hedge the market risk associated with
approximately 19.3 million shares of Global Crossing common stock. These option
agreements were structured as collars in which the Company purchased put options
and sold call options on Global Crossing common stock. As of September 30, 2000,
the average exercise prices were $51.70 and $64.93 on the put options and call
options subject to adjustments on the call options under certain limited
circumstances. The options expire in the first half of 2002 and are only
exercisable on their expiration dates. The Company has designated the collars as
hedges of its investment in Global Crossing. Accordingly, the fair value of the
collars is presented in equity securities available-for-sale in the accompanying
condensed consolidated balance sheets, consistent with the hedged item. The
unrealized gain, including the fair market value of the collar, on the Company's
position in Global
Page 11
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
Crossing was $920 million as of September 30, 2000. Changes in the Company's
investment in Global Crossing were as follows, on a pretax basis.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Decrease) increase in unrealized gain on
Global Crossing common stock $ (124) $ (588) $(1,203) $ 67
(Decrease) increase in unrealized gain on
Collar (61) - 358 -
----------------------------------------------------------
Net (decrease) increase in unrealized
gain on position in Global Crossing $ (185) $ (588) $ (845) $ 67
==========================================================
Realized gain on sales of Global Crossing
common stock $ 229 - $ 485 $ 222
==========================================================
</TABLE>
NOTE H - BUSINESS SEGMENTS
The Company's reportable segments are strategic businesses that offer
different types of products and services. The Company has seven operating
segments: Agency Market Operations, Specialty Operations, CNA Re, Global
Operations, Risk Management, Group Operations and Life Operations.
The Corporate segment results include interest expense on corporate
borrowings of approximately $52 million and $54 million for the three months
ended September 30, 2000 and 1999 and $149 million and $159 million for the nine
months ended September 30, 2000 and 1999.
All significant intercompany income and expenses, as well as
intercompany dividends, have been eliminated. Risk Management intrasegment
revenues and expenses, amounting to $39 million and $34 million for the three
months ended September 30, 2000 and 1999 and $119 million and $127 million for
the nine months ended September 30, 2000 and 1999 have been eliminated at the
consolidated level.
Page 12
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
AGENCY RISK
THREE MONTHS ENDED SEPTEMBER 30, 2000 MARKET SPECIALTY GLOBAL MANAGE-
(In millions of dollars) OPERATIONS OPERATIONS CNA RE OPERATIONS MENT
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 807 $ 234 $ 289 $ 271 $ 142
Claims, benefits and expenses 939 244 312 283 177
------------------------------------------------------------------------------
Underwriting loss (132) (10) (23) (12) (35)
Net investment income 154 55 49 34 42
Other revenues 39 6 (8) 37 80
Other expenses 48 7 - 31 77
------------------------------------------------------------------------------
Pretax operating income (loss) 13 44 18 28 10
Income tax benefit (expense) 4 (12) (2) (6) (2)
Minority interest - - - (6) -
------------------------------------------------------------------------------
Net operating income (loss) (excluding realized
investment gains) 17 32 16 16 8
Realized investment gains, net of tax,
participating policyholders' interest and
minority interest 191 69 42 54 48
------------------------------------------------------------------------------
Net income (loss) $ 208 $ 101 $ 58 $ 70 $ 56
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2000 GROUP LIFE ELIMI-
(In millions of dollars) OPERATIONS OPERATIONS CORPORATE NATIONS TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 947 $ 236 $ 5 $ (12) $ 2,919
Claims, benefits and expenses 975 341 35 (12) 3,294
------------------------------------------------------------------------------
Underwriting loss (28) (105) (30) - (375)
Net investment income 38 152 5 - 529
Other revenues 12 49 1 (42) 174
Other expenses 9 27 66 (42) 223
------------------------------------------------------------------------------
Pretax operating income (loss) 13 69 (90) - 105
Income tax benefit (expense) (3) (23) 39 - (5)
Minority interest - - (4) - (10)
------------------------------------------------------------------------------
Net operating income (loss) (excluding realized
investment gains) 10 46 (55) - 90
Realized investment gains, net of tax,
participating policyholders' interest and
minority interest 32 20 4 - 460
------------------------------------------------------------------------------
Net income (loss) $ 42 $ 66 $ (51) $ - $ 550
==============================================================================
</TABLE>
Page 13
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
AGENCY RISK
THREE MONTHS ENDED SEPTEMBER 30, 1999 MARKET SPECIALTY GLOBAL MANAGE-
(In millions of dollars) OPERATIONS OPERATIONS CNA RE OPERATIONS MENT
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 1,278 $ 229 $ 335 $ 258 $ 171
Claims, benefits and expenses 1,464 241 327 270 185
Restructuring and other related charges 11 - - - -
---------------------------------------------------------------------
Underwriting (loss) gain (197) (12) 8 (12) (14)
Net investment income 170 57 42 31 38
Other revenues 16 4 (2) 33 80
Other expenses 20 7 - 26 81
Non-insurance restructuring and other related
charges - - - - 1
---------------------------------------------------------------------
Pretax operating (loss) income (31) 42 48 26 22
Income tax benefit (expense) 16 (13) (15) (7) (7)
Minority interest - - - (6) -
---------------------------------------------------------------------
Net operating (loss) income (excluding realized
investment losses) (15) 29 33 13 15
Realized investment losses, net of tax,
participating policyholders' interest and
minority interest (22) (7) (3) (3) (4)
---------------------------------------------------------------------
Net (loss) income $ (37) $ 22 $ 30 $ 10 $ 11
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999 GROUP LIFE ELIMI-
(In millions of dollars) OPERATIONS OPERATIONS CORPORATE NATIONS TOTAL
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $871 $ 231 $ (2) $ (20) $ 3,351
Claims, benefits and expenses 864 339 44 (14) 3,720
Restructuring and other related charges - - - - 11
--------------------------------------------------------------------
Underwriting (loss) gain 7 (108) (46) (6) (380)
Net investment income 30 136 27 - 531
Other revenues 11 48 58 (48) 200
Other expenses 12 21 119 (54) 232
Non-insurance restructuring and other related
charges - - 4 - 5
--------------------------------------------------------------------
Pretax operating (loss) income 36 55 (84) - 114
Income tax benefit (expense) (12) (19) 33 - (24)
Minority interest - - (2) - (8)
--------------------------------------------------------------------
Net operating (loss) income (excluding realized
investment losses) 24 36 (53) - 82
Realized investment losses, net of tax,
participating policyholders' interest and
minority interest (2) (12) - - (53)
--------------------------------------------------------------------
Net (loss) income $ 22 $ 24 $ (53) $ - $ 29
====================================================================
</TABLE>
Page 14
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
AGENCY RISK
NINE MONTHS ENDED SEPTEMBER 30, 2000 MARKET SPECIALTY GLOBAL MANAGE-
(In millions of dollars) OPERATIONS OPERATIONS CNA RE OPERATIONS MENT
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 2,477 $ 578 $ 802 $ 811 $ 448
Claims, benefits and expenses 2,818 595 868 854 554
------------------------------------------------------------------
Underwriting loss (341) (17) (66) (43) (106)
Net investment income 452 163 143 101 123
Other revenues 109 19 (5) 90 238
Other expenses 128 23 3 87 240
------------------------------------------------------------------
Pretax operating income (loss) 92 142 69 61 15
Income tax (expense) benefit (12) (43) (18) (15) -
Minority interest - - - (19) -
------------------------------------------------------------------
Net operating income (loss) (excluding realized
investment gains) 80 99 51 27 15
Realized investment gains, net of tax,
participating policyholders' interest and
minority interest 341 124 72 71 85
------------------------------------------------------------------
Net income (loss) $ 421 $ 223 $ 123 $ 98 $ 100
==================================================================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000 GROUP LIFE ELIMI-
(In millions of dollars) OPERATIONS OPERATIONS CORPORATE NATIONS TOTAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 2,708 $ 674 $ 1 $ (32) $ 8,467
Claims, benefits and expenses 2,772 990 89 (32) 9,508
--------------------------------------------------------------------
Underwriting loss (64) (316) (88) - (1,041)
Net investment income 104 444 7 - 1,537
Other revenues 36 149 14 (130) 520
Other expenses 36 77 208 (130) 672
--------------------------------------------------------------------
Pretax operating income (loss) 40 200 (275) - 344
Income tax (expense) benefit (11) (68) 108 - (59)
Minority interest - - (4) - (23)
--------------------------------------------------------------------
Net operating income (loss) (excluding realized
investment gains) 29 132 (171) - 262
Realized investment gains, net of tax,
participating policyholders' interest and
minority interest 52 13 1 - 759
--------------------------------------------------------------------
Net income (loss) $ 81 $ 145 $ (170) $ - $ 1,021
====================================================================
</TABLE>
Page 15
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
AGENCY RISK
NINE MONTHS ENDED SEPTEMBER 30, 1999 MARKET SPECIALTY GLOBAL MANAGE-
(In millions of dollars) OPERATIONS OPERATIONS CNA RE OPERATIONS MENT
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 3,974 $ 773 $ 866 $ 767 $ 591
Claims, benefits and expenses 4,582 820 900 777 640
Restructuring and other related charges 48 - - - -
---------------------------------------------------------------------
Underwriting loss (656) (47) (34) (10) (49)
Net investment income 517 174 117 100 111
Other revenues 50 12 - 93 237
Other expenses 48 22 (5) 75 227
Non-insurance restructuring and other related charges
- - - - 8
---------------------------------------------------------------------
Pretax operating (loss) income (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)) (62) 85 62 57 47
Realized investment gains (losses), net of tax, participating
policyholders' interest and minority interest 108 35 21 8 17
Cumulative effect of a change in accounting principle,
net of tax (93) (3) - (3) (74)
---------------------------------------------------------------------
Net (loss) income $ (47) $ 117 $ 83 $ 62 $ (10)
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999 GROUP LIFE ELIMI-
(In millions of dollars) OPERATIONS OPERATIONS CORPORATE NATIONS TOTAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earned premiums $ 2,680 $ 648 $ 33 $ (36) $ 10,296
Claims, benefits and expenses 2,704 925 211 (36) 11,523
Restructuring and other related charges 5 - - - 53
-----------------------------------------------------------------
Underwriting loss (29) (277) (178) - (1,280)
Net investment income 95 414 34 - 1,562
Other revenues 30 77 173 (143) 529
Other expenses 34 55 326 (143) 639
Non-insurance restructuring and other related charges
- - 9 - 17
-----------------------------------------------------------------
Pretax operating (loss) income 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)) 43 104 (181) - 155
Realized investment gains (losses), net of tax,
participating policyholders' interest and minority
interest 6 (31) 36 - 200
Cumulative effect of a change in accounting principle,
net of tax (2) (2) - - (177)
-----------------------------------------------------------------
Net (loss) income $ 47 $ 71 $ (145) $ - $ 178
=================================================================
</TABLE>
Page 16
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - 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. Under GAAP, these charges
did not qualify for the initial restructuring accrual at the end of the third
quarter of 1998 and therefore, were 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, net restructuring-related charges for
Risk Management totaled approximately $8 million. The charges included parallel
processing costs of approximately $3 million and employee severance and
outplacement costs of approximately $2 million. Other charges, including
consulting and facility charges, totaled 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 related primarily 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 and related
primarily to employee severance costs.
No restructuring-related charges related to the Plan have been incurred
in 2000; however, payments were made during 2000 related to amounts accrued
under the Plan as of December 31, 1999. The following table sets forth the major
categories of the restructuring accrual and changes therein during the first
nine months of 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
EMPLOYEE
TERMINATION
AND RELATED LEASE BUSINESS
BENEFIT TERMINATION EXIT
(In millions of dollars) COSTS COSTS COSTS TOTAL
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued costs at December 31, 1999 $ 4 $ 27 $ 15 $ 46
Payments charged against liability (4) (13) (10) (27)
----------------------------------------------------------------------
Accrued costs at September 30, 2000 $ - $ 14 $ 5 $ 19
======================================================================
</TABLE>
NOTE J - SIGNIFICANT TRANSACTIONS
PERSONAL INSURANCE TRANSACTION
On October 1, 1999, certain subsidiaries of CNA completed a transaction
with The Allstate Corporation (Allstate), whereby CNA's personal lines insurance
business (CNA Personal Insurance) and related employees were transferred to
Allstate. Approximately $1.1 billion of cash and $1.1 billion of additional
assets (primarily premium receivables and deferred policy acquisition costs)
were transferred to
Page 17
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
Allstate, and Allstate assumed $2.2 billion of claim and claim adjustment
expense reserves and unearned premium reserves. Additionally, CNA received $140
million in cash, which consisted of (i) $120 million in ceding commission for
the reinsurance of the CNA Personal Insurance business by Allstate, and (ii) $20
million for an option exercisable during 2002 to purchase 100% of the common
stock of five CNA insurance subsidiaries at a price equal to the GAAP carrying
value as of the exercise date. Also, CNA invested $75 million in a ten year
equity-linked note issued by Allstate.
CNA will continue to write new and renewal CNA Personal Insurance
policies and to reinsure this business with Allstate companies, until such time
as Allstate exercises its option to buy the five CNA subsidiaries. Prior to
2002, the Company will concentrate the direct writing of CNA Personal Insurance
business into the five optioned companies, such that most, if not all, business
related to this transaction will be written by those companies by the date
Allstate exercises its option. CNA continues to have primary liability on
policies reinsured by Allstate.
CNA will continue to have an ongoing interest in the profitability of
the CNA Personal Insurance business and the related successor business through
an agreement licensing the "CNA Personal Insurance" trademark and a portion of
CNA's Agency Market Operations distribution system to Allstate for use in
Allstate's personal insurance agency business for a period of five years. Under
this agreement, CNA will receive a royalty fee based on the business volume of
CNA Personal Insurance policies sold through the CNA agents for a period of six
years. In addition, the $75 million equity-linked note will be redeemed on
September 30, 2009 (subject to earlier redemption on stated contingencies) for
an amount equal to the face amount plus or minus an amount not exceeding
$10 million, depending on the underwriting profitability of the CNA Personal
Insurance business.
CNA also shares in any reserve development related to claim and claim
adjustment expense reserves transferred to Allstate at the transaction date.
Under the reserve development sharing agreement, 80% of any favorable or adverse
reserve development up to $40 million and 90% of any favorable or adverse
reserve development in excess of $40 million inures to CNA. CNA's obligation
with respect to unallocated loss adjustment expense reserves was settled at the
transaction date, and is therefore not subject to the reserve sharing
arrangement.
The retroactive portion of the reinsurance transaction, consisting
primarily of the cession of claim and claim adjustment expense reserves
approximating $1.0 billion, was not recognized as reinsurance because the
criteria for risk transfer was not met for this portion of the transaction. The
related consideration paid was recorded as a deposit and is included in
reinsurance receivables in the consolidated balance sheets. The prospective
portion of the transaction, which as of the transaction date consisted primarily
of the cession of $1.1 billion of unearned premium reserves, has been recorded
as reinsurance. The related consideration paid was recorded as prepaid
reinsurance premiums. Premiums ceded after the transaction date will follow this
same treatment. The $20 million received from Allstate for the option to
purchase the five CNA subsidiaries was deferred and will not be recognized until
Allstate exercises its option, at which time it will be recorded in realized
gains and losses.
The ceding commission related to the prospective portion of the
transaction has been recognized in proportion to the recognition of the unearned
premium reserve to which it relates. Approximately $8 million and $69 million of
the ceding commission was earned for the three month and nine month periods
ended September 30, 2000. The entire $120 million ceding commission has now been
earned over the twelve months since the transfer to Allstate. Approximately
$7 million and $21 million of royalty fees were earned for the three month and
nine month periods ended September 30, 2000.
Page 18
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
The CNA Personal Insurance business (which was transferred to Allstate)
contributed net earned premiums of $459 million and $1.4 billion, and net
operating income of $17 million and $42 million, during the three month and nine
month periods ended September 30, 1999.
SALE OF AMS SERVICES, INC.
On November 30, 1999, CNA sold the majority of its interest in AMS
Services, Inc. (AMS), a software development company serving the insurance
agency market. Prior to the sale, CNA owned 89% of AMS and consolidated AMS in
its financial statements. As a result of the sale, CNA owns 9% of AMS and
therefore AMS is no longer consolidated. CNA's share of AMS' operating results
included $58 million and $178 million of operating revenue, and $3 million of
net operating income and $7 million of net operating loss for the three and nine
month periods ended September 30, 1999.
NOTE K - RELATED PARTY TRANSACTIONS
CNA reimburses Loews, or pays directly to Loews employees,
approximately $13 million annually for management fees, travel and related
expenses, and expenses of investment facilities and services provided to CNA.
CNA and its eligible subsidiaries are included in the consolidated
Federal income tax return of Loews and its eligible subsidiaries. During the
first nine months of 2000, CNA received a tax refund of $282 million from Loews.
For the first nine months of 1999, CNA received a tax refund of $154 million
from Loews.
CNA writes, at standard rates, a limited amount of insurance for Loews
and its affiliates. Total premiums from Loews and its affiliates are less than
$10 million on an annual basis.
CNA assumes the risk for a limited amount of insurance from R.V.I.
Guaranty Company, Inc., a 50% owned affiliate. Written premiums assumed are less
than $10 million on an annual basis.
CNA sponsors a stock ownership plan whereby the Company finances the
purchase of Company stock by certain executive officers.
NOTE L - ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2000, the Company adopted the American
Institute of Certified Public Accountants' Statement of Position (SOP) 98-7,
"Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." Adoption of the SOP did not have a material impact on the
financial position or results of operations of the Company.
In the first quarter of 1999, the Company adopted the American
Institute of Certified Public Accountants' SOP 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." SOP 97-3 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. Adoption of the SOP resulted in an after-tax charge of
$177 million as a cumulative effect of a change in accounting principle.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This bulletin summarizes the SEC Staff's view in applying
accounting principles generally accepted in the United States (GAAP) to revenue
Page 19
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
recognition in financial statements. This bulletin, through its subsequent
revised releases SAB No. 101A and No. 101B, is effective for registrants no
later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. Adoption of this bulletin, which occurred on October 1, 2000,
will not have a significant impact on the results of operations or equity of the
Company.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 entitled "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 was
subsequently amended by SFAS No. 137, which delayed the effective date by one
year, and SFAS No. 138, which clarified four areas which were causing
difficulties in implementation. SFAS No. 133 requires the recognition of all
derivative financial instruments, including embedded derivative instruments, as
either assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The accounting for gains and
losses associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge designation
and whether the hedge is highly effective in achieving offsetting changes in the
fair value or cash flows of the asset or liability hedged. If the derivative is
designated in a fair value hedge, the changes in the fair value of the
derivative and the hedged item will be recognized in earnings. If the derivative
is designated as a cash flow hedge, changes in the fair value of the derivative
will be recorded in other comprehensive income and will be recognized in the
income statement when the hedged item affects earnings. A derivative that does
not qualify as a hedge will be marked to fair value through earnings. Under the
provisions of SFAS No. 133, the method that will be used for assessing the
effectiveness of a hedging derivative as well as the measurement approach for
determining the ineffective aspects of the hedge must be established at the
inception of the hedge. On that initial application date, hedging relationships
must be designated anew and documented pursuant to the provisions of SFAS No.
133.
The Company is required to adopt SFAS No. 133 effective January 1, 2001.
The transition adjustments resulting from adoption must be reported in net
income or other comprehensive income, as appropriate, as the cumulative effect
of a change in accounting principle. Based on current facts and circumstances,
adoption of SFAS No. 133 will not have a material impact on total equity of the
Company. It is estimated that the adoption will result in an after-tax decrease
to earnings in the range of $20 million to $35 million. However, because the
Company already carries the derivatives impacted by adoption at fair value via
unrealized gains and losses, there is an equal and offsetting favorable
adjustment to other comprehensive income. These estimates are based on the
Company's current derivative holdings and hedging strategies. Changes therein,
or changes in financial market conditions, during the fourth quarter could
result in changes in the transition adjustment estimates.
Effective January 1, 2001, the Company is required to adopt
statutory-basis accounting changes related to the National Association of
Insurance Commissioners codification of Statutory Accounting Practices. The
Company is in the process of quantifying the impact these statutory-basis
accounting changes will have on its operations and statutory capital and
surplus.
Page 20
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED OPERATIONS
The following management discussion and analysis (MD&A) should be read in
conjunction with the condensed consolidated financial statements and notes
thereto found on pages 3 to 20, which contain additional information to evaluate
operating results and financial condition.
CNA is one of the largest insurance organizations in the United States and
based on 1999 net written premiums, is the eighth largest property/casualty
company and the thirty-sixth largest life insurance company.
CNA conducts its operations through seven operating segments. In addition
to the seven operating segments, certain other activities are reported in the
corporate segment. 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.
OPERATING RESULTS
The following chart summarizes key components of operating results for the
three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars except per share data) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues (excluding realized investment gains (losses)):
Net earned premiums $ 2,919 $ 3,351 $ 8,467 $ 10,296
Net investment income 529 531 1,537 1,562
Other 174 200 520 529
---------------------------------------------
Total operating revenues (excluding realized investment gains (losses)) 3,622 4,082 10,524 12,387
Claims, benefits and expenses 3,517 3,952 10,180 12,162
Restructuring and other related charges -- 16 -- 70
---------------------------------------------
Operating income before income tax 105 114 344 155
Income tax (expense) benefit (5) (24) (59) 21
Minority interest (10) (8) (23) (21)
---------------------------------------------
Net operating income (excluding realized investment gains (losses)) 90 82 262 155
Realized investment gains (losses), net of tax, participating
policyholders' and minority interest 460 (53) 759 200
---------------------------------------------
Income before cumulative effect of a change in accounting principle 550 29 1,021 355
Cumulative effect of a change in accounting principle, net of tax -- -- -- (177)
---------------------------------------------
Net income $ 550 $ 29 $ 1,021 $ 178
============================================
BASIC AND DILUTED EARNINGS PER SHARE
Net operating income (excluding realized investments gains (losses)) $ 0.49 $ 0.43 $ 1.42 $ 0.78
Realized investment gains, net of tax, participating
policyholders' and minority interest 2.51 (0.28) 4.13 1.09
Cumulative effect of a change in accounting principle, net of tax -- -- -- (0.96)
---------------------------------------------
Net income $ 3.00 $ 0.15 $ 5.55 $ 0.91
============================================
</TABLE>
Page 21
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
The following table summarizes net operating income excluding realized
investment gains/losses (net operating income) by segment for the three and nine
months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Agency Market Operations $ 17 $ (15) $ 80 $ (62)
Specialty Operations 32 29 99 85
CNA Re 16 33 51 62
Global Operations 16 13 27 57
Risk Management 8 15 15 47
Group Operations 10 24 29 43
Life Operations 46 36 132 104
Corporate and Eliminations (55) (53) (171) (181)
--------------------------------
Net operating income $ 90 $ 82 $ 262 $ 155
================================
</TABLE>
Net operating income was $90 million, or $0.49 per share, for the third
quarter of 2000, compared with net operating income of $82 million, or $0.43 per
share, for the same period in 1999. Net operating income increased $8 million
for the third quarter of 2000 as compared with the same period of 1999,
primarily as a result of the absence of after-tax restructuring-related charges
of $10 million. The quarter benefited from decreased net catastrophe losses of
$43 million excluding losses related to CNA Personal Insurance, all of which
were reinsured. Offsetting the favorable catastrophe experience was an increase
in the current accident year loss ratio, primarily in CNA Re. Other factors in
the quarter-over-quarter net operating income results were challenges faced in
Group Operations and Risk Management as discussed in their individual MD&A
sections, partially offset by improved earnings in Life Operations.
Net operating income was $262 million, or $1.42 per share, for the first
nine months of 2000, compared with net operating income of $155 million, or
$0.78 per share, for the same period in 1999. Net operating income increased
$107 million for the nine months ended September 30, 2000 as compared with the
same period in 1999 primarily as a result of the improvement in
property/casualty underwriting results, primarily in Agency Market Operations,
and improved earnings in Life Operations. The primary drivers of the
improvements are decreased net catastrophe losses of $49 million excluding
losses related to CNA Personal Insurance, all of which were reinsured, increased
use of reinsurance of $26 million and the absence of after-tax
restructuring-related charges of $45 million. These improvements are partially
offset by decreased investment income of $16 million and challenges faced in
Group Operations and Risk Management as discussed in their individual MD&A
sections.
Net income for the third quarter of 2000 was $550 million, or $3.00 per
share, compared with net income of $29 million, or $0.15 per share, for the
third quarter of 1999. Net income for the first nine months of 2000 was
$1,021 million, or $5.55 per share, as compared with net income of $178 million,
or $0.91 per share, for the same period in 1999. 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.
Discussion of the results of operations from the Company's segments follow.
Page 22
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
AGENCY MARKET OPERATIONS
Agency Market Operations builds on the Company's long and successful
relationship with the independent agency distribution system to market a broad
range of property/casualty insurance products and services to small and middle
market businesses. Business products include workers' compensation, commercial
packages, general liability and commercial auto, as well as a variety of
creative risk management services. Prior to October 1, 1999, these operations
included personal auto and homeowners coverages and also offered personal
umbrella, separate scheduled property, boat-owners and other recreational
vehicle insurance. These personal lines (CNA Personal Insurance) were
transferred to The Allstate Corporation (Allstate) effective October 1, 1999.
See Note J of the Notes to the Condensed Consolidated Financial Statements
(Notes) for further discussion of this transaction.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $ 755 $ 1,234 $ 2,403 $ 4,000
Net earned premiums 807 1,278 2,477 3,974
Underwriting loss (132) (197) (341) (656)
Net operating income (loss) 17 (15) 80 (62)
Loss ratio 80.5% 81.7% 80.4% 83.3%
Expense ratio 33.3 33.1 31.0 32.8
Dividend ratio 2.5 0.6 2.4 0.4
---------------------------------------------
Combined ratio 116.3% 115.4% 113.8% 116.5%
=============================================
</TABLE>
Agency Market Operations' net written and net earned premiums were impacted
by the transfer of CNA Personal Insurance to Allstate. Net written premiums from
CNA Personal Insurance for the three and nine months ended September 30, 1999
were $494 million and $1,500 million, and net earned premiums were $459 million
and $1,354 million for the same periods.
Apart from the impact of CNA Personal Insurance, Agency Market Operations'
net written premiums increased $15 million, or 2%, to $755 million in the third
quarter of 2000 as compared with the third quarter of 1999. Net written premiums
for the Commercial Insurance business increased $36 million to $735 million
caused primarily by a decrease in ceded premiums relating to a change in the
structure of reinsurance which reduced ceded premiums and ceding commissions.
Net earned premiums in Agency Market Operations decreased $12 million, or 2%,
to $807 million in the same period. The decline in net earned premiums was due
to continued efforts to re-underwrite business and obtain adequate rates for
exposure.
The combined ratio for the third quarter of 2000 increased 0.9 points to
116.3% as compared with the third quarter of 1999. The overall loss ratio
improvement of 1.2 points is comprised of underwriting actions including
the increased use of reinsurance, continued efforts to achieve adequate rates
for exposure and the non-renewal of unprofitable business, and lower catastrophe
losses than in 1999. These underwriting actions provided a benefit of 5.4 points
on the loss ratio partially offset by the effects of CNA Personal Insurance
which had a favorable impact on the aggregate 1999 loss ratio that is absent in
2000. The expense ratio increased 0.2 points due to a decrease in ceding
commissions relating to reinsurance, partially offset by the absence of
restructuring-related charges. The dividend ratio increase is attributable to
favorable dividend development in 1999. Underwriting results for the third
quarter of 2000
Page 23
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
improved $65 million from a loss of $197 million to a loss of $132 million,
principally attributable to a lower loss ratio. Net operating income for the
third quarter of 2000 increased to $17 million profit as compared with a loss of
$15 million during the same period in 1999 based on improved underwriting
results, partially offset by lower investment income.
Aside from the effects of the CNA Personal Insurance transaction, net
written premiums decreased $97 million, or 4%, to $2,403 million for the first
nine months of 2000 as compared with the same period in 1999. The net written
premiums of the Commercial Insurance business decreased slightly to
$2,318 million for the same period. Net earned premiums declined by
$143 million, or 5%, to $2,477 million for the first nine months of 2000 as
compared with the same period in 1999. These declines were due principally to a
continued focus on underwriting.
The combined ratio for the nine months ended September 30, 2000 improved
2.7 points to 113.8% as compared with the same period of 1999. The overall
loss ratio improvement of 2.9 points is comprised of underwriting actions
including the continued efforts to achieve adequate rates for exposure, the
non-renewal of unprofitable business, the increased benefit from reinsurance,
and lower catastrophe losses than in 1999. These underwriting actions provided
a benefit of 7.9 points on the loss ratio partially offset by the effects of
CNA Personal Insurance which had a favorable impact on the aggregate 1999 loss
ratio that is absent in 2000. The expense ratio declined 1.8 points due to a
reduction in ongoing operating expenses and a 0.7 point decline from the
absence of restructuring-related charges. The dividend ratio increase is
attributable to favorable dividend development in 1999. Underwriting results
for the nine months ended September 30, 2000 improved $315 million from a loss
of $656 million to a loss of $341 million attributable principally to a lower
loss ratio, of which $64 million is related to the increased use of reinsurance,
and decreased operating expenses. Net operating income for the period ended
September 30, 2000 increased to $80 million profit as compared with a loss of
$62 million during the same period in 1999 based on improved underwriting
results, partially offset by lower investment income.
Commercial Insurance is currently achieving an average rate increase of
approximately 15 percent. The current reported loss trend is the first year of
loss ratio improvement for Commercial Insurance since 1993 and this improvement
is expected to accelerate as rate increases and underwriting actions are earned.
Commercial Insurance retention is in the low 70 percent range.
Page 24
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
SPECIALTY OPERATIONS
Specialty Operations provides a broad array of professional, financial and
specialty property/casualty products and services distributed through a network
of brokers, managing general agencies and independent agencies.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $ 241 $ 225 $ 584 $ 733
Net earned premiums 234 229 578 773
Underwriting loss (10) (12) (17) (47)
Net operating income 32 29 99 85
Loss ratio 79.2% 75.8% 76.1% 80.3%
Expense ratio 25.0 29.8 26.8 25.7
Dividend ratio 0.1 (0.0) 0.1 0.1
----------------------------------------
Combined ratio 104.3% 105.6% 103.0% 106.1%
========================================
</TABLE>
Net written premiums for Specialty Operations for the third quarter of 2000
increased $16 million, or 7%, to $241 million as compared with the third quarter
of 1999. In the third quarter of 2000, net earned premiums increased $5 million,
or 2%, to $234 million as compared with the third quarter of 1999. These
increases were primarily a result of $28 million of premium related to a
contract assuming a large block of existing losses in medical professional
liability, partially offset by a planned reduction in the lawyer's professional
liability line of business and the lower premiums in the directors' and
officers' business.
The combined ratio improved 1.3 points to 104.3% for the third quarter of
2000 as compared with the third quarter of 1999. This improvement resulted
primarily from the decrease in the expense ratio relating to increased net
earned premiums coupled with decreased underwriting expenses. This improvement
was partially offset by an increase in the loss ratio resulting from a
relatively higher loss ratio on the medical professional liability transaction
and an increase in the loss ratio for other medical malpractice business.
Underwriting results improved by $2 million to a loss of $10 million in the
third quarter of 2000 as compared with the same period in 1999 and net operating
income improved $3 million for the third quarter of 2000 as compared with the
third quarter of 1999 principally as a result of improvement in the expense
ratio as discussed above.
Net written premiums for the nine months ended September 30, 2000 decreased
$149 million, or 20%, to $584 million as compared with the same period of 1999.
Net earned premiums declined $195 million, or 25%, to $578 million for the nine
months ended September 30, 2000 as compared with the same period in 1999. This
premium decline related principally to 1) active decisions to renew only those
accounts which meet current underwriting guidelines supporting the ongoing
commitment to underwriting discipline, 2) a $27 million decline due to increased
use of reinsurance for the medical professional liability lines, and 3) an
increase in the retrospective return premium reserve relating to favorable loss
development in the retrospectively rated Architects' and Engineers' business.
The combined ratio improved 3.1 points to 103.0% for the first nine months
of 2000 as compared with the same period in 1999 and underwriting results
improved $30 million. These improvements are the
Page 25
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
result of the ongoing commitment to underwriting discipline reflected by a
4.2 point decline in the loss ratio partially offset by the 1.1 point increase
in the expense ratio. Acquisition and underwriting expenses have decreased year-
over-year, but the expense ratio has increased because of the reduced net earned
premium base. Net operating income increased $14 million for the first nine
months of 2000 as compared with the same period of 1999, principally from the
improvement in the underwriting results, partially offset by lower investment
income.
For the third quarter of 2000, Specialty Operations achieved an average
rate increase of 25% in the CNA HealthPro business, including an average rate
increase of 16% in the large institution and group practice business. Net
written premiums are expected to decline from third quarter 2000 levels during
the fourth quarter.
CNA RE
CNA Re operates globally as a reinsurer in the broker market, offering both
treaty and facultative products through its principal offices in Chicago and
London. While CNA Re's primary product is traditional treaty reinsurance, it
also has positions in facultative and financial reinsurance.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $ 214 $ 388 $ 769 $ 1,061
Net earned premiums 289 335 802 866
Underwriting (loss) gain (23) 8 (66) (34)
Net operating income 16 33 51 62
Loss ratio 78.1% 68.7% 76.1% 73.3%
Expense ratio 29.8 29.0 32.1 30.7
-------------------------------------------
Combined ratio 107.9% 97.7% 108.2% 104.0%
===========================================
</TABLE>
For the third quarter, net written premiums decreased $174 million, or 45%,
to $214 million as compared with the same period in 1999. This decrease reflects
decisions not to renew contracts that CNA Re believes do not meet its
underwriting profitability targets, partially offset by modest rate increases.
Net earned premiums decreased $46 million, or 14%, to $289 million for the
quarter consistent with the declines in net written premiums as discussed above.
The third quarter combined ratio increased 10.2 points to 107.9% reflecting
approximately $10 million of adverse loss development on 1999 catastrophe
losses, including Typhoon Bart and the Danish storm, and adverse loss experience
in 2000 in several lines of business including property excess of loss and
directors' and officers' liability. Catastrophe losses were $34 million
favorable from 1999. However, offsetting the favorable catastrophe experience
was an increase in the current accident year loss ratio. Underwriting losses
increased $31 million in the third quarter of 2000 as compared with the same
period in 1999 principally as a result of the increase in the loss ratio. Net
operating income decreased $17 million in the third quarter of 2000 as compared
with 1999, reflecting the increase in underwriting losses, partially offset by
increased investment income and a $3 million tax settlement recorded in the
third quarter of 2000.
For the nine months ended September 30, 2000, net written premiums
decreased $292 million, or 28%, to $769 million as compared with the same period
in 1999. Net earned premiums decreased $64 million, or 7%, to $802 million for
Page 26
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
the nine month period ended September 30, 2000. These declines reflect continued
decisions not to renew contracts that CNA Re believes do not meet its
underwriting profitability targets, partially offset by modest rate increases.
The nine month combined ratio increased 4.2 points to 108.2%. The combined ratio
increase was driven by the third quarter 2000 increase in the loss ratio
discussed above. The increase in the expense ratio was primarily due to the
decrease in net earned premiums. The underwriting loss increased $32 million for
the first nine months of 2000 as compared with the same period in 1999,
primarily as a result of the third quarter 2000 underwriting results. Net
operating income decreased $11 million for the first nine months of 2000 as
compared with the same period in 1999. Increased investment income and the
$3 million tax settlement recorded in the third quarter of 2000 partially offset
the increased underwriting losses in 2000.
In accordance with the Company's emphasis on disciplined underwriting,
CNA Re is focusing its efforts on its core products. Certain non-core, low
volume products not meeting underwriting profitability standards will no longer
be written. These products currently represent less than 5% of CNA Re's earned
premiums. Also, due to contraction of capacity in the reinsurance markets,
CNA Re expects it will be able to achieve pricing improvements during upcoming
renewal periods.
GLOBAL OPERATIONS
Global Operations provides products and services to U.S.-based customers,
customers expanding overseas and foreign customers. The major product lines
include marine, commercial and contract surety, warranty and specialty products,
as well as commercial property and casualty coverages.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $ 311 $ 311 $ 888 $ 837
Net earned premiums 271 258 811 767
Underwriting loss (12) (12) (43) (10)
Net operating income 16 13 27 57
Loss ratio 61.7% 58.9% 62.2% 56.1%
Expense ratio 43.0 45.4 43.0 44.9
Dividend ratio (0.3) 0.4 0.1 0.3
----------------------------------------
Combined ratio 104.4% 104.7% 105.3% 101.3%
========================================
</TABLE>
Net written premiums for Global Operations were consistent in the third
quarter of 2000 as compared with the same period of 1999. For the third quarter
of 2000, net earned premiums increased $13 million, or 5%, to $271 million over
the same period in 1999. This increase was due to growth in the commercial
property and warranty lines, partially offset by increased ceded premiums in the
surety business.
The combined ratio decreased 0.3 points to 104.4% for the three months
ended September 30, 2000 as compared with the same period in 1999. The slight
decrease in the combined ratio primarily related to a decreased expense ratio in
the warranty business related to a change in the mix of business which caused a
reduction in commissions, partially offset by 2.8 points in adverse loss
experience in the marine insurance line of business. Underwriting results remain
unchanged at $12 million loss for the third quarter of 2000 as compared with the
Page 27
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
same period in 1999. Net operating income increased $3 million to $16 million
for the third quarter of 2000 as compared with the third quarter of 1999. This
increase was primarily a result of increased investment income.
Net written premiums increased $51 million, or 6%, to $888 million for the
first nine months of 2000 as compared with the same period in 1999. Net earned
premiums for the nine months ended September 30, 2000 increased $44 million, or
6%, to $811 million over the same period in 1999. These increases were driven by
growth in the commercial casualty and property lines in the European operations,
as well as growth in the commercial warranty and surety lines.
The combined ratio increased 4.0 points to 105.3% for the nine months ended
September 30, 2000 as compared with the same period in 1999. The increase in the
combined ratio primarily related to adverse loss experience of 3.1 points in the
marine insurance line of business, and adverse loss experience and development
in the vehicle warranty insurance line of business which is expected to continue
into the fourth quarter of 2000. Underwriting and net operating income declined
for the nine months ended September 30, 2000 as compared with the same period in
1999 principally driven by adverse loss experience as described above.
RISK MANAGEMENT
Risk Management serves the property/casualty needs of large domestic
commercial businesses, offering customized strategies to address the management
of business risks. Also, Risk Management, primarily through RSKCo, provides
total risk management services relating to claims, loss control, cost management
and information services to the commercial insurance marketplace.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $ 129 $ 159 $ 506 $ 646
Net earned premiums 142 171 448 591
Underwriting loss (35) (14) (106) (49)
Service revenues 75 78 226 229
Net operating income 8 15 15 47
Loss ratio 93.7% 75.1% 92.5% 79.0%
Expense ratio 31.1 33.4 31.2 29.2
Dividend ratio 0.0 (0.1) 0.0 0.0
-------------------------------------
Combined ratio 124.8% 108.4% 123.7% 108.2%
=====================================
</TABLE>
Net written premiums for Risk Management declined $30 million, or 19%, to
$129 million for the third quarter of 2000, as compared with the same period in
1999. This premium decline resulted from the Company's decision to cede a larger
portion of its direct premiums, as well as a continued focus on re-underwriting
the book of business. These operational efforts resulted in a $29 million, or
17%, decrease in net earned premiums to $142 million for the third quarter of
2000 as compared with the same period in 1999.
The combined ratio increased 16.4 points to 124.8% for the three months
ended September 30, 2000 as compared with the same period in 1999. The combined
ratio increase resulted
Page 28
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
principally from an increase in the loss ratio due to adverse current year
property experience and casualty loss activity, partially offset by a decrease
in the expense ratio due to lower acquisition expenses. Underwriting losses
increased to $35 million for the third quarter of 2000 as compared with $14
million in the same period in 1999 due principally to the increased loss ratio.
Net operating income decreased $7 million in the third quarter of 2000 because
of higher underwriting losses, partially offset by increased investment income
and a $5 million improvement in net operating income from RSKCo.
Consistent with the third quarter, net written premiums for the first nine
months of 2000 decreased $140 million, or 22%, to $506 million as compared with
the same period in 1999. Likewise, net earned premiums for the first nine months
of 2000 decreased $143 million, or 24%, to $448 million as compared with the
same period in 1999. As expected, net written and net earned premiums were below
1999 due to improved underwriting focus, which led to an overall decrease in
premiums written.
The combined ratio increased 15.5 points to 123.7% for the nine months
ended September 30, 2000 as compared with the same period in 1999. Increases in
both the loss and expense ratios led to the unfavorable change in the combined
ratio. The loss ratio increase is principally the result of adverse current year
property and casualty experience. Acquisition and underwriting expenses have
decreased year-over-year, but not at the same pace as the decline in net earned
premiums. Underwriting losses deteriorated to $106 million for the first nine
months of 2000 as compared with $49 million in the same period in 1999. Net
operating income decreased $32 million in 2000 as compared with 1999, primarily
due to poor underwriting results of the property business line, partially offset
by increased investment income.
Risk Management has been involved in numerous underwriting initiatives to
improve results. In the third quarter of 2000, Risk Management achieved
double-digit price increases on average across its book of business while
maintaining premium-weighted retention in the mid-70 percent range, primarily
driven by a decline in property lines of insurance. Risk Management's
underwriting initiatives continue to: focus on risk selection, increase
attachment points, strengthen underwriting terms and conditions through
increasing deductibles and limiting the scope of coverage, and centralize all
property underwriting into one location while maintaining regional management
accountabilities.
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
purchase insurance as a group. Group Operations also provides health insurance
to federal employees, retirees and their families (Federal Markets); managed
care and self-funded medical excess insurance; medical provider network
management and administration services; and reinsurance for life and health
insurers.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earned premiums $947 $871 $2,708 $2,680
Net operating income 10 24 29 43
</TABLE>
Group Operations' net earned premiums for the third quarter increased
$76 million, or 9%, to $947 million as compared with the same period in 1999.
This increase is primarily attributable to a
Page 29
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
$34 million increase in the Federal Markets business, a $21 million increase in
Life Reinsurance and a $17 million increase in the group life and specialty
lines of the Special Benefits business. Premiums from the Federal Markets
business vary with the level of claims and the expense activity. Net operating
income for the third quarter of 2000 decreased to $10 million from $24 million
in the third quarter of 1999 due to favorable 1999 loss experience in the group
life line within Special Benefits.
Net earned premiums for the nine months ended September 30, 2000 increased
$28 million, or 1%, to $2,708 million as compared with the same period of 1999.
This increase was principally a result of a $52 million increase in Life
Reinsurance and a $21 million increase in the Special Benefits business
partially offset by a $45 million decline related to the Federal Markets
business. Net operating income for the nine months ended September 30, 2000
decreased to $29 million from $43 million as compared with the same period in
1999. This decrease relates to lower profits of $20 million in the Special
Benefits business, $7 million of costs incurred from the exit of the Management
Services Organization (MSO) business and $12 million of adverse development on
the medical stop loss business. These decreases were partially offset by a $22
million improvement in the Health Benefits business due to the 1999 exit of
unprofitable medical lines. The MSO business was a suite of comprehensive
administrative services designed to enable physician and hospital networks to
assume financial risk for the health care services they provide. The decision to
shut down the MSO business was based on lack of demand as providers are backing
away from risk contracting.
Subsequent to September 30, 2000, the Company reached an agreement to sell
its Life Reinsurance business. The transaction is expected to result in a gain
and should close by the end of 2000 or early 2001. For the nine months ended
September 30, 2000, Life Reinsurance contributed $172 million of earned premiums
and $15 million of net operating income to the overall results for Group
Operations.
LIFE OPERATIONS
Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales volume * $698 $933 $2,382 $2,568
Net earned premiums 236 231 674 648
Net operating income 46 36 132 104
</TABLE>
* Sales volume is a cash-based measure including premiums and annuity
considerations, investment contract deposits, and other sales activity that are
not reported as premiums under generally accepted accounting principles.
For the third quarter of 2000, sales volume declined primarily as a result
of a reduction in retirement products sold to institutions. These products tend
to be "large case" institutional markets' sales, which can be sporadic,
opportunistic and sensitive to independent agency ratings. Net earned premiums
increased $5 million, or 2%, to $236 million for the third quarter of 2000 as
compared with the third quarter of 1999. This increase is associated with a
growing inforce block of individual life, long term care and annuity products.
Page 30
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
These increases were partially offset by sales declines in structured
settlements and single premium group annuities, due to a competitive pricing
environment. For the third quarter, net operating income increased to
$46 million in 2000 as compared with $36 million in 1999. The increase was
primarily due to increased earnings in the Index 500 Plus guaranteed annuity
contract, sold to large institutions, and favorable investment results in
Individual Life, Long Term Care and the Retirement Services businesses.
Sales volume decreased by $186 million in the first nine months of 2000 as
compared with the same period in 1999. Most businesses in Life Operations had
increased sales volume, particularly in variable annuity contracts sold to
individuals and the Index 500 Plus guaranteed annuity contract, sold to large
institutions, as well as an increasing base of direct premiums for life and long
term care products. However, these increases in sales volume have been more than
offset by a reduction in retirement products sold to institutions as discussed
above. Net earned premiums for Life Operations increased $26 million, or 4%, to
$674 million for the first nine months of 2000 as compared with the same period
in 1999. Net operating income for the first nine months of 2000 was $28 million
higher than net operating income for the same period in 1999. The increase was
principally attributable to increased earnings in the Index 500 Plus guaranteed
annuity contract, improved mortality experience in term life and favorable
investment results for all products.
CORPORATE
The corporate segment results consist of interest expense on corporate
borrowings, certain run-off insurance operations, asbestos claims related to
Fibreboard Corporation (Fibreboard), financial guaranty insurance contracts, and
certain non-insurance operations.
Net operating loss increased to a loss of $55 million for the third quarter
of 2000 as compared with a loss of $53 million for the same period during 1999.
For the first nine months of 2000, net
Page 31
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
operating loss declined to a loss of $171 million as compared with a loss of
$181 million for the same period of 1999.
RESTRUCTURING AND OTHER RELATED CHARGES
The details of the restructuring and other related charges recognized in
the three and nine months ended September 30, 1999 are discussed in Note I of
the Notes.
The table below presents the remaining accrued restructuring and other
related charges as of September 30, 2000, and management's estimate of the
timing of the ultimate payout thereof.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
LEASE BUSINESS
TERMINATION EXIT
(In millions of dollars) COSTS COSTS TOTAL
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accrued costs at September 30, 2000 $ 14 $ 5 $19
==================================================
Remainder of 2000 - 3 3
2001 5 2 7
2002 4 - 4
2003 2 - 2
2004 1 - 1
2005 and thereafter 2 - 2
--------------------------------------------------
Total future payments $ 14 $ 5 $ 19
==================================================
</TABLE>
Page 32
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
INVESTMENTS
The components of net investment income for the three and nine month
periods ended September 30, 2000 and 1999 are presented in the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Bonds:
Taxable $ 391 $ 388 $ 1,141 $ 1,123
Tax-exempt 52 58 168 207
Short-term investments 61 54 152 147
Other 36 44 113 115
--------------------------------------
540 544 1,574 1,592
Investment expenses (11) (13) (37) (30)
--------------------------------------
Net investment income $ 529 $ 531 $ 1,537 $ 1,562
======================================
</TABLE>
Lower net investment income results for both the three month and nine month
periods of 2000 as compared with the same periods in 1999 are due to a lower
investment base attributable to asset transfers in the fourth quarter of 1999 in
connection with the Personal Insurance transaction with Allstate and the
$1.1 billion payment from escrow to the Fibreboard Corporation trust to settle
certain asbestos related claims. The bond segment of the investment portfolio
yielded 6.5% for the first nine months of 2000 as compared to 5.9% for the same
period in 1999.
The components of net realized investment gains for the three and nine
month periods ended September 30, 2000 and 1999 are presented in the following
table.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds $ 24 $ (22) $ 21 $(104)
Corporate and other taxable bonds (21) (43) (71) (54)
Tax-exempt bonds 22 (36) (25) (23)
Asset-backed securities (7) (15) (65) (13)
----------------------------------
Total fixed maturities 18 (116) (140) (194)
Equity securities 612 6 987 316
Derivative securities (8) (11) 13 23
Other invested assets 87 38 308 156
----------------------------------
Total realized investment gains (losses), net 709 (83) 1,168 301
Allocated to participating policyholders' interest (3) 2 -- 7
Income tax expense (246) 28 (409) (108)
----------------------------------
Net realized investment gains (losses) $ 460 $ (53) $ 759 $ 200
==================================
</TABLE>
Net realized investment gains increased both for the three months and nine
months period ended September 30, 2000. These increases are principally related
to realized gains for the sale of Global Crossing Ltd common stock (Global
Crossing) and Canary Wharf Group plc common stock (Canary Wharf). The increase
in net realized gains for the third quarter of 2000 as compared with 1999 was
$193 million for Canary Wharf and $149 million for Global Crossing. The increase
in net realized gains
Page 33
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
for the nine months ended September 30, 2000 as compared with 1999 was $154
million for Canary Wharf and $171 million for Global Crossing. Additionally,
decreased interest rates favorably impacted results from sales of bonds,
especially in the third quarter. Substantially all invested assets are
marketable securities classified as available-for-sale in the accompanying
condensed 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, 2000 and December 31, 1999, and the change in
unrealized gains/losses of those securities included in other comprehensive
income for the nine months ended September 30, 2000.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
CARRYING VALUE CHANGE IN UNREALIZED
-------------------------- GAINS/LOSSES
SEPTEMBER 30, DECEMBER 31, NINE MONTHS ENDED
(In millions of dollars) 2000 1999 SEPTEMBER 30, 2000
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities:
U. S. Treasury securities and obligations of
Government agencies $ 5,783 $ 8,318 $ 209
Asset-backed securities 7,042 7,039 152
Tax-exempt securities 3,435 4,396 120
Taxable securities 10,351 7,365 (29)
Redeemable preferred 53 130 (67)
------------------------------------------------------
Total fixed maturity securities 26,664 27,248 385
Equity securities:
Common stock 2,387 3,344 (1,017)
Non-redeemable preferred stock 249 266 (12)
------------------------------------------------------
Total equity securities 2,636 3,610 (1,029)
Short-term investments 4,780 3,355 --
Other investments 1,596 1,347 (64)
------------------------------------------------------
Total investments $ 35,676 $35,560 (708)
========================
Separate account business and other 13
-----------------
Decrease in net unrealized gains reported in other
comprehensive income $ (695)
=================
</TABLE>
The Company's general investment portfolio consists primarily of publicly
traded government bonds, asset-backed securities, mortgage-backed securities,
municipal bonds and corporate bonds.
A primary objective in the management of the fixed maturity portfolio
is to maximize total return relative to underlying liabilities and respective
liquidity needs. In achieving this goal, assets may be sold to take advantage of
market conditions, other investment opportunities or for credit and tax
considerations. This activity will produce realized gains and losses depending
on market conditions including interest rates.
Page 34
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Total net unrealized gains for investments at September 30, 2000 were
$1,104 million, down from $1,822 million at December 31, 1999. The unrealized
position at September 30, 2000 was composed of an unrealized loss of
$314 million for fixed maturity securities and an unrealized gain of
$1,419 million for equity securities and other. The unrealized position at
December 31, 1999 was composed of an unrealized loss of $700 million for fixed
maturity securities and an unrealized gain of $2,522 million for equity
securities and other. See Note G of the Notes for a discussion of the unrealized
position on the Company's ownership in Global Crossing.
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 (rated BBB
or higher) bonds, approximately 93% and 94% of which are rated as investment
grade at September 30, 2000 and December 31, 1999. The following table
summarizes the ratings of CNA's general account bond portfolio at carrying
value.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions of dollars) 2000 % 1999 %
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $ 8,602 32% $ 8,781 32%
Other AAA rated 7,395 28 9,692 36
AA and A rated 5,700 22 4,465 16
BBB rated 2,996 11 2,598 10
Below investment grade 1,918 7 1,582 6
-------------------------------
Total $26,611 100% $27,118 100%
===============================
</TABLE>
In the above table, approximately 98% and 95% of the general account
portfolio were U.S. Government Agency or were rated by Standard & Poor's or
Moody Investors Service at September 30, 2000 and December 31, 1999. The
remaining bonds were rated by other rating agencies, outside brokers or Company
management.
Below investment grade bonds, as presented in the table above, are high
yield securities rated below BBB by bond rating agencies, as well as other
unrated securities which, in the opinion of management, are below investment
grade. High yield securities generally involve a greater degree of risk than
investment grade securities. However, expected returns should compensate for the
added risk. This risk is also considered in the interest rate assumptions in the
underlying insurance products. CNA's concentration in high yield bonds was
approximately 7% and 6% of total investments as of September 30, 2000 and
December 31, 1999.
Included in CNA's fixed maturity securities at September 30, 2000 are
$7.0 billion of asset-backed securities, at fair value, consisting of
approximately 42% in U.S. government agency issued pass-through certificates,
37% in collateralized mortgage obligations (CMOs), 15% in corporate asset-backed
obligations and 6% in corporate mortgage-backed pass-through certificates. The
majority of CMOs held are actively traded in liquid markets and are priced by
broker-dealers.
Page 35
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Short-term investments at September 30, 2000 and December 31, 1999
primarily consisted of commercial paper and money market funds. The components
of the general account short-term investments portfolio are presented in the
following table.
<TABLE>
<CAPTION>
-----------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In millions of dollars) 2000 1999
-----------------------------------------------------------
<S> <C> <C>
Commercial paper $ 3,753 $ 1,988
U.S. Treasury securities 23 41
Money market funds 422 904
Other 582 422
--------------------------
Total short-term investments $ 4,780 $ 3,355
==========================
</TABLE>
CNA invests in certain derivative financial instruments primarily to reduce
its exposure to market risk (principally interest rate, equity price and foreign
currency risk). CNA considers the derivatives in its general account to be held
for purposes other than trading. Derivative securities, except for interest rate
swaps associated with certain corporate borrowings, are recorded at fair value
at the reporting date. The interest rate swaps on corporate borrowings are
accounted for using accrual accounting with the related income or expense
recorded as an adjustment to interest expense. Adjustments to fair value are not
recognized.
Certain derivatives in the separate accounts are held for trading purposes.
The Company uses these derivatives to mitigate market risk by purchasing
Standard & Poor's 500 (S&P 500) futures contracts in a notional amount equal to
the contract liability relating to Life Operations' Index 500 Plus guaranteed
annuity contract product. Changes in fair value of S&P 500 separate account
derivatives held for trading purposes are reported as a component of net
operating income.
The Company's largest equity holding in a single issuer is Global Crossing
common stock. See Note C and Note G for a discussion of the Company's ownership
in Global Crossing.
The Company's second largest equity holding is Canary Wharf. During the
first nine months of 2000, the Company experienced a net decrease in unrealized
gains of $211 million on its position in Canary Wharf common stock, which was
valued at $414 million on September 30, 2000. The majority of this decline was
due to the sale of 50.6 million shares, resulting in a pretax realized gain of
$358 million.
MARKET RISK
Market risk is a broad term related to changes in the fair value of a
financial instrument. Discussions herein regarding market risk focus on only one
element of market risk - price risk. Price risk relates to changes in the level
of prices due to changes in interest rates, equity prices, foreign exchange
rates or other factors that relate to market volatility of the rate, index or
price underlying the financial instrument. The Company's primary market risk
exposures are due to changes in interest rates, although the Company has certain
exposures to changes in equity prices and foreign currency exchange rates. The
fair value of the financial instruments are adversely affected when interest
rates rise, equity markets decline, and the dollar strengthens against foreign
currency.
Page 36
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Active management of market risk is integral to the Company's operations.
The Company may use the following tools to manage its exposure to market risk
within defined tolerance ranges: (1) change the character of future investments
purchased or sold, (2) use derivatives to offset the market behavior of existing
assets and liabilities or assets expected to be purchased and liabilities to be
incurred, or (3) rebalance its existing asset and liability portfolios.
For purposes of this disclosure, market risk sensitive instruments are
divided into two categories: (1) instruments entered into for trading purposes
and (2) instruments entered into for purposes other than trading. The Company's
general account market risk sensitive instruments presented in the tables on
pages 38 to 41 are classified as held for purposes other than trading.
SENSITIVITY ANALYSIS
CNA monitors its sensitivity to interest rate risk by evaluating the change
in the value of financial assets and liabilities due to fluctuations in interest
rates. The evaluation is performed by applying an instantaneous change in
interest rates of varying magnitudes on a static balance sheet to determine the
effect such a change in rates would have on the Company's market value at risk
and the resulting effect on stockholders' equity. The analysis presents the
sensitivity of the market value of the Company's financial instruments to
selected changes in market rates and prices. The range of change chosen reflects
the Company's view of changes which are reasonably possible over a one-year
period. The selection of the range of values chosen to represent changes in
interest rates should not be construed as the Company's prediction of future
market events, but rather an illustration of the impact of such events.
The sensitivity analysis estimates the decline in the market value of the
Company's interest sensitive assets and liabilities that were held on
September 30, 2000 and December 31, 1999 due to instantaneous parallel increases
in the period end yield curve of 100 and 150 basis points.
The sensitivity analysis also assumes an instantaneous 10% and 20% decline
in the foreign currency exchange rates versus the U.S. dollar from their levels
at September 30, 2000 and December 31, 1999, with all other variables held
constant.
Equity price risk was measured assuming an instantaneous 10% and 25%
decline in the S & P 500 Index (Index) from its level at September 30, 2000 and
December 31, 1999, with all other variables held constant. The Company's equity
holdings were assumed to be highly and positively correlated with the Index. At
September 30, 2000, a 10% and 25% decrease in the Index would result in a
$345 million and $863 million decrease compared to $505 million and
$1,259 million decrease at December 31, 1999, in the market rate of the
Company's equity investments.
Of these amounts, under both scenarios, approximately 38% of the decrease
indicated for the current period and approximately 25% of the decrease for the
period ending December 31, 1999 would be offset by decreases in related separate
account liabilities to customers. Similarly, increases in the market value of
the Company's equity investments would also be offset by increases in the same
related separate account liabilities by the same approximate percentages.
Page 37
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
The following tables reflect the estimated effects on the market value of
the Company's financial instruments at September 30, 2000 and December 31, 1999,
due to an increase in interest rates of 100 basis points, a 10% decline in the
Index, and a decline of 10% in foreign currency exchange rates.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
SENSITIVITY TO
-----------------------------
SEPTEMBER 30, 2000 MARKET INTEREST CURRENCY EQUITY
(In millions of dollars) VALUE RATE RISK RISK RISK
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD FOR OTHER THAN TRADING PURPOSES
General Account:
Fixed maturity securities $ 26,664 $(1,393) $(185) $ (22)
Equity securities 2,636 -- (70) (187)
Short term investments 4,780 (3) (32) --
Interest rate caps 1 2 -- --
Other derivative securities 8 (8) 12 --
-----------------------------------------
TOTAL GENERAL ACCOUNT 34,089 (1,402) (275) (209)
-----------------------------------------
Separate Account Business:
Fixed maturity securities 2,446 (115) (6) --
Equity securities 230 -- (1) (23)
Short term investments 170 -- -- --
Other derivative securities -- -- -- --
-----------------------------------------
TOTAL SEPARATE ACCOUNT BUSINESS 2,846 (115) (7) (23)
-----------------------------------------
TOTAL ALL SECURITIES HELD FOR OTHER
THAN TRADING PURPOSES 36,935 (1,517) (282) (232)
-----------------------------------------
HELD FOR TRADING PURPOSES
Separate Account Business:
Fixed maturity securities 385 (15) (2) (1)
Equity securities 19 -- -- (2)
Short term investments 356 -- -- --
Equity index futures -- 2 -- (110)
Other derivative securities 1 (4) -- --
-----------------------------------------
TOTAL ALL SECURITIES HELD FOR TRADING
PURPOSES 761 (17) (2) (113)
-----------------------------------------
TOTAL ALL SECURITIES $ 37,696 $(1,534) $(284) $(345)
=========================================
DEBT (CARRYING VALUE) $ (2,774) $ 125 $ -- $ --
=========================================
</TABLE>
Page 38
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
SENSITIVITY TO
-----------------------------
DECEMBER 31, 1999 MARKET INTEREST CURRENCY EQUITY
(In millions of dollars) VALUE RATE RISK RISK RISK
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD FOR OTHER THAN TRADING PURPOSES
General Account:
Fixed maturity securities $ 27,248 $(1,268) $ (149) $ (14)
Equity securities 3,610 -- (84) (361)
Short term investments 3,355 (2) (26) --
Interest rate caps 4 5 -- --
Equity index futures -- 19 -- --
Other derivative securities 12 (8) 59 3
-----------------------------------------
TOTAL GENERAL ACCOUNT 34,229 (1,254) (200) (372)
-----------------------------------------
Separate Account Business:
Fixed maturity securities 2,927 (115) (16) (2)
Equity securities 240 -- -- (24)
Short term investments 59 -- -- --
Other derivative securities (1) (7) -- --
-----------------------------------------
TOTAL SEPARATE ACCOUNT BUSINESS 3,225 (122) (16) (26)
-----------------------------------------
TOTAL ALL SECURITIES HELD FOR OTHER
THAN TRADING PURPOSES 37,454 (1,376) (216) (398)
-----------------------------------------
HELD FOR TRADING PURPOSES
Separate Account Business:
Fixed maturity securities 333 (12) (1) --
Equity securities 19 -- -- (2)
Short term investments 430 -- (2) --
Equity index futures -- 2 -- (105)
Other derivative securities -- (1) -- --
-----------------------------------------
TOTAL ALL SECURITIES HELD FOR TRADING
PURPOSES 782 (11) (3) (107)
-----------------------------------------
TOTAL ALL SECURITIES $ 38,236 $(1,387) $ (219) $ (505)
=========================================
DEBT (CARRYING VALUE) $ (2,881) $ 132 $ -- $ --
=========================================
</TABLE>
Page 39
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
The following tables reflect the estimated effects on the market value of
the Company's financial instruments at September 30, 2000 and December 31, 1999,
due to an increase in interest rates of 150 basis points, a 25% decline in the
Index, and a decline of 20% in foreign currency exchange rates.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
SENSITIVITY TO
-----------------------------------
SEPTEMBER 30, 2000 MARKET INTEREST CURRENCY EQUITY
(In millions of dollars) VALUE RATE RISK RISK RISK
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD FOR OTHER THAN TRADING PURPOSES
General Account:
Fixed maturity securities $ 26,664 $(2,086) $(371) $ (55)
Equity securities 2,636 -- (139) (466)
Short term investments 4,780 (4) (65) --
Interest rate caps 1 4 -- --
Other derivative securities 8 (14) 24 --
----------------------------------------------
TOTAL GENERAL ACCOUNT 34,089 (2,100) (551) (521)
----------------------------------------------
Separate Account Business:
Fixed maturity securities 2,446 (168) (12) --
Equity securities 230 -- (1) (57)
Short term investments 170 -- -- --
Other derivative securities -- -- -- --
----------------------------------------------
TOTAL SEPARATE ACCOUNT BUSINESS 2,846 (168) (13) (57)
----------------------------------------------
TOTAL ALL SECURITIES HELD FOR OTHER
THAN TRADING PURPOSES 36,935 (2,268) (564) (578)
----------------------------------------------
HELD FOR TRADING PURPOSES
Separate Account Business:
Fixed maturity securities 385 (23) (3) (4)
Equity securities 19 -- (1) (5)
Short term investments 356 -- -- --
Equity index futures -- 3 -- (276)
Other derivative securities 1 (6) -- --
----------------------------------------------
TOTAL ALL SECURITIES HELD FOR TRADING
PURPOSES 761 (26) (4) (285)
----------------------------------------------
TOTAL ALL SECURITIES $ 37,696 $(2,294) $(568) $(863)
=============================================
DEBT (CARRYING VALUE) $ (2,774) $ 182 $ -- $ --
=============================================
</TABLE>
Page 40
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
SENSITIVITY TO
------------------------------------
DECEMBER 31, 1999 MARKET INTEREST CURRENCY EQUITY
(In millions of dollars) VALUE RATE RISK RISK RISK
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD FOR OTHER THAN TRADING PURPOSES
General Account:
Fixed maturity securities $ 27,248 $(1,878) $(298) $ (35)
Equity securities 3,610 -- (168) (902)
Short term investments 3,355 (3) (51) --
Interest rate caps 4 11 -- --
Equity index futures -- 29 -- --
Other derivative securities 12 (13) 118 9
----------------------------------------------------
TOTAL GENERAL ACCOUNT 34,229 (1,854) (399) (928)
----------------------------------------------------
Separate Account Business:
Fixed maturity securities 2,927 (170) (32) (4)
Equity securities 240 -- -- (60)
Short term investments 59 -- (1) --
Other derivative securities (1) (11) -- --
----------------------------------------------------
TOTAL SEPARATE ACCOUNT BUSINESS 3,225 (181) (33) (64)
----------------------------------------------------
TOTAL ALL SECURITIES HELD FOR OTHER
THAN TRADING PURPOSES 37,454 (2,035) (432) (992)
----------------------------------------------------
HELD FOR TRADING PURPOSES
Separate Account Business:
Fixed maturity securities 333 (18) (1) (1)
Equity securities 19 -- -- (5)
Short term investments 430 -- (4) --
Equity index futures -- 3 -- (261)
Other derivative securities -- (2) -- --
----------------------------------------------------
TOTAL ALL SECURITIES HELD FOR TRADING
PURPOSES 782 (17) (5) (267)
----------------------------------------------------
TOTAL ALL SECURITIES $ 38,236 $(2,052) $(437) $(1,259)
====================================================
DEBT (CARRYING VALUE) $ (2,881) $ 193 $ -- $ --
====================================================
</TABLE>
Page 41
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
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.
For the nine months ended September 30, 2000, net cash used for operating
activities was $873 million as compared with a net cash inflow of $1 million for
the same period in 1999. The transfer of CNA Personal Insurance to Allstate
decreased cash from operations by approximately $250 million. Excluding the
effects of CNA Personal Insurance, payments of claims and claim adjustment
expenses increased approximately $1 billion, receipts of premiums and other
revenues decreased approximately $130 million and expenditures for operating
expenses decreased approximately $600 million and. In addition, inflows from
Federal income tax refunds increased $98 million.
For the nine months ended September 30, 2000, net cash inflows from
investment activities were $1,289 million as compared with $619 million for the
same period in 1999. Cash flows from investing activities were principally
related to purchases and sales of invested assets. Cash inflows increased from
the prior year as invested asset sales increased, primarily as a result of
proceeds from the sales of Global Crossing and Canary Wharf common stock.
For the nine months ended September 30, 2000, net cash used for financing
activities was $395 million as compared with $532 million for the same period in
1999. Cash flows for financing activities include the repurchase of preferred
and common equity instruments, the retirement or repurchase of senior debt
securities and mortgages, the repayment of bank loans, and the payment of
dividends and interest.
On February 15, 2000, Standard & Poor's lowered the Company's senior debt
rating from A- to BBB and lowered the Company's preferred stock rating from BBB
to BB+. As a result of these actions, the facility fee payable on the aggregate
amount of CNA's $795 million revolving credit facility (Facility) was increased
to 12.5 basis points per annum from 9.0 basis points per annum and the interest
rate was increased to London Interbank Offered Rate (LIBOR) plus 27.5 basis
points from LIBOR plus 16.0 basis points. As a result of Standard & Poor's
actions, the Company repurchased and retired all of its outstanding balance in
its $150 million of money market preferred stock in the first nine months of
2000. During the first nine months of 2000, CNA purchased a portion of its debt
notes when opportunities have arisen that made economic sense. CNA may purchase
additional securities in the future if the purchase makes economic sense. These
repurchases included approximately $19 million of The Continental Corporation
(Continental) senior notes and approximately $14 million of CNA Financial
Corporation (CNAF) senior notes.
On August 3, 2000, CNA announced that the process of exploring the sale of
its life insurance businesses was complete. The Company will retain the
individual life, long term care and retirement services businesses. CNA will
continue to explore the separate sale of the viatical settlements business. As
described in Group Operations' MD&A, an agreement in principle has been reached
to sell the life reinsurance business.
Page 42
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
The table below reflects ratings issued by A.M. Best, Standard and Poor's,
Moody's and Fitch (formerly Duff & Phelps) for the Continental Casualty Company
(CCC) Pool, the Continental Insurance Company (CIC) Pool and the
Continental Assurance Company (CAC) Pool. Also rated were CNAF's senior debt and
commercial paper and Continental's senior debt.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
INSURANCE RATINGS DEBT RATINGS
-------------------------------- ---------------------------------------------
CNAF Continental
-------------------------- ----------------
Senior Commercial Senior
CCC CAC CIC Debt Paper Debt
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A.M. Best A A A- NR NR NR
Fitch AA- AA NR A- NR NR
Moody's A2 A2* A3 Baa1 P2 Baa2
Standard & Poor's A AA- A- BBB A2 BBB-
</TABLE>
* - CAC AND VALLEY FORGE LIFE (VFL) ARE RATED SEPARATELY BY MOODY'S AND
BOTH HAVE AN A2 RATING.
NR - NOT RATED
Moody's, Fitch, A.M. Best and Standard and Poor's removed the ratings from
under review and affirmed the ratings for CAC and VFL following CNA's recent
announcement that it would retain CAC's individual life and retirement services
businesses. Moody's, Fitch and A.M. Best cited their outlook for CAC and VFL's
rating as negative. The outlook from Standard and Poor's is stable.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 entitled "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 was
subsequently amended by SFAS No. 137, which delayed the effective date by one
year, and SFAS No. 138, which clarified four areas which were causing
difficulties in implementation. SFAS No. 133 requires the recognition of all
derivative financial instruments, including embedded derivative instruments, as
either assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The accounting for gains and
losses associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge designation
and whether the hedge is highly effective in achieving offsetting changes in the
fair value or cash flows of the asset or liability hedged. If the derivative is
designated in a fair value hedge, the changes in the fair value of the
derivative and the hedged item will be recognized in earnings. If the derivative
is designated as a cash flow hedge, changes in the fair value of the derivative
will be recorded in other comprehensive income and will be recognized in the
income statement when the hedged item affects earnings. A derivative that does
not qualify as a hedge will be marked to fair value through earnings. Under the
provisions of SFAS No. 133, the method that will be used for assessing the
effectiveness of a hedging derivative as well as the measurement approach for
determining the ineffective aspects of the hedge must be established at the
inception of the hedge. On that initial application date, hedging relationships
must be designated anew and documented pursuant to the provisions of SFAS No.
133.
The Company is required to adopt SFAS No. 133 effective January 1, 2001.
The transition adjustments resulting from adoption must be reported in net
Page 43
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
income or other comprehensive income, as appropriate, as the cumulative effect
of a change in accounting principle. Based on current facts and circumstances,
adoption of SFAS No. 133 will not have a material impact on total equity of the
Company. It is estimated that the adoption will result in an after-tax decrease
to earnings in the range of $20 million to $35 million. However, because the
Company already carries the derivatives impacted by adoption at fair value via
unrealized gains and losses, there is an equal and offsetting favorable
adjustment to other comprehensive income. These estimates are based on the
Company's current derivative holdings and hedging strategies. Changes therein,
or changes in financial market conditions, during the fourth quarter could
result in changes in the transition adjustment estimates.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This bulletin summarizes certain of the SEC Staff's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases SAB
No. 101A and No. 101B, is effective for registrants no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. CNA does not
expect the implementation of this bulletin to have a significant impact on the
results of operations or equity of the Company.
FORWARD LOOKING STATEMENTS
The statements contained in this Form 10-Q, which are not historical facts,
are forward-looking statements. When included in this Form 10-Q, the words
"believes," "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 CNA; general economic and
business conditions; changes in financial markets (interest rate, credit,
currency, commodities and stocks); changes in foreign, political, social and
economic conditions; regulatory initiatives and compliance with governmental
regulations; judicial decisions and rulings; changes in rating agency policies
and practices; the results of financing efforts; changes in CNA's composition of
operating segments; the actual closing of contemplated transactions and
agreements and various other matters and risks (many of which are beyond CNA's
control) detailed in CNA's Securities and Exchange Commission filings. These
forward-looking statements speak only as of the date of this Form 10-Q. CNA
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 CNA's expectations with regard thereto or any change in
events, conditions or circumstances on which any statement is based.
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CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit Page
Description of Exhibit Number Number
---------------------- ------- ------
Employment Contract 10 46
Financial Data Schedule 27 57
(b) REPORTS ON FORM 8-K:
On August 3, 2000, CNA Financial Corporation filed a report on Form 8-K
related to its announcement that it will retain its individual life, long term
care and retirement services businesses, but will continue to explore the
separate sale of its viatical settlements and life reinsurance businesses.
On October 6, 2000, CNA Financial Corporation filed a report on Form
8-K related to its announcement of the sale of its life reinsurance business to
Munich American Reassurance Company, the U.S. life subsidiary of Munich Re.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA FINANCIAL CORPORATION
Date: NOVEMBER 9, 2000 By: /s/ ROBERT V. DEUTSCH
---------------- ---------------------
Robert V. Deutsch
Senior Vice President and
Chief Financial Officer
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