================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 AUGUST 4, 2000
----------------------------- -----------------------------
Common Stock, Par value $2.50 183,419,473
================================================================================
Page 1 of 45
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
------ --------------------- --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 (Unaudited) AND DECEMBER 31, 1999..................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999........... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999..................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) JUNE 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....................... 44
SIGNATURES ....................................................... 44
EXHIBIT 27 FINANCIAL DATA SCHEDULE................................ 45
Page 2 of 45
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)`
JUNE 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: $24,337 and $27,948) . $ 23,776 $ 27,248
Equity securities available-for-sale (cost: $1,246 and $1,150) ..................... 2,982 3,610
Mortgage loans and real estate (less accumulated depreciation: $1 and $1) .......... 48 47
Policy loans ....................................................................... 192 192
Other invested assets .............................................................. 1,290 1,108
Short-term investments ............................................................. 6,604 3,355
---------- ----------
TOTAL INVESTMENTS ............................................................. 34,892 35,560
Cash .................................................................................... 184 153
Receivables:
Reinsurance ........................................................................ 8,575 7,391
Insurance .......................................................................... 5,471 5,115
Less allowance for doubtful accounts ............................................... (307) (310)
Deferred acquisition costs .............................................................. 2,556 2,436
Prepaid reinsurance premiums ............................................................ 1,555 1,468
Accrued investment income ............................................................... 360 387
Receivables for securities sold ......................................................... 711 284
Federal income taxes recoverable (includes: $0 and $241 due from Loews) ................. - 269
Deferred income taxes ................................................................... 926 852
Property and equipment at cost (less accumulated depreciation: $803 and $701) ........... 742 746
Intangibles ............................................................................. 327 328
Other assets ............................................................................ 2,012 1,937
Separate account business ............................................................... 4,455 4,603
-------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ..................................................................... $ 62,459 $ 61,219
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Claim and claim adjustment expense ................................................. $ 27,136 $ 27,356
Unearned premiums .................................................................. 5,316 5,103
Future policy benefits ............................................................. 6,286 5,996
Policyholders' funds ............................................................... 668 710
Collateral on loaned securities ......................................................... 1,714 1,300
Payables for securities purchased ....................................................... 728 135
Participating policyholders' equity ..................................................... 128 121
Debt .................................................................................... 2,776 2,881
Federal income taxes payable (includes: $41 and $0 due to Loews) ........................ 22 -
Other liabilities ....................................................................... 4,215 3,881
Separate account business ............................................................... 4,455 4,603
---------- ----------
TOTAL LIABILITIES ............................................................... 53,444 52,086
---------- ----------
Commitments and contingencies
Minority Interest ........................................................................... 205 195
Stockholders' equity:
Common stock ($2.50 par value;
Authorized - 500,000,000 shares;
Issued - 185,525,907 shares;
Outstanding as of June 30, 2000 - 183,419,473 shares,
Outstanding as of December 31, 1999 - 184,406,931 shares) .......................... 464 464
Preferred stock ......................................................................... - 150
Additional paid-in capital .............................................................. 126 126
Retained earnings ....................................................................... 7,584 7,114
Accumulated other comprehensive income .................................................. 773 1,188
Treasury stock, at cost ................................................................. (66) (41)
---------- ----------
8,881 9,001
Notes receivable for the issue of stock ................................................. (71) (63)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ...................................................... 8,810 8,938
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $ 62,459 $ 61,219
=========================================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
Page 3 of 45
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars, except per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net earned premiums .................................................. $ 2,778 $ 3,506 $ 5,548 $ 6,945
Net investment income ................................................ 513 519 1,008 1,031
Realized investment gains, net of participating policyholders' and
minority interests ................................................. 373 167 462 389
Other ................................................................ 191 155 346 329
---------- ---------- --------- ---------
Total revenues ......................................................... 3,855 4,347 7,364 8,694
---------- ---------- --------- ---------
Claims, benefits and expenses:
Insurance claims and policyholders' benefits ......................... 2,348 2,970 4,691 5,851
Amortization of deferred acquisition costs ........................... 532 531 925 1,108
Other operating expenses ............................................. 433 563 947 1,142
Restructuring and other related charges .............................. - 19 - 54
Interest ............................................................. 48 46 100 108
---------- ---------- --------- ---------
Total claims, benefits and expenses .................................... 3,361 4,129 6,663 8,263
---------- ---------- --------- ---------
Income before income tax and cumulative
effect of a change in accounting principle ......................... 494 218 701 431
Income tax expense ..................................................... (157) (55) (217) (90)
Minority interest ...................................................... (7) (9) (13) (15)
---------- ---------- --------- ---------
Income before cumulative effect of a change in accounting principle .... 330 154 471 326
Cumulative effect of a change in accounting principle, net of tax
of $95 ............................................................... - - - (177)
----------------------------------------------------------------------------------------------------------------------------
Net income ............................................................. $ 330 $ 154 $ 471 $ 149
============================================================================================================================
BASIC AND DILUTED EARNINGS PER SHARE AVAILABLE
TO COMMON STOCKHOLDERS
Income before cumulative effect of a change in accounting principle .... $ 1.80 $ 0.82 $ 2.56 $ 1.73
Cumulative effect of a change in accounting principle, net of tax ...... - - - (0.96)
---------- ---------- --------- ---------
Net income ............................................................. $ 1.80 $ 0.82 $ 2.56 $ 0.77
========== ========== ========= =========
Weighted average outstanding common shares
and common stock equivalents (in millions of shares) ............... 183.3 184.2 183.8 184.1
============================================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
Page 4 of 45
<PAGE>
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 SIX MONTHS
(In millions of dollars) 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 471 $ 149
Adjustments to reconcile net income to net cash flows from operating activities:
Minority interest .................................................................. 13 15
Deferred income tax provision ...................................................... 162 (27)
Net realized investment gains ...................................................... (462) (389)
Amortization of intangibles ........................................................ 10 11
Accretion of bond discount ......................................................... (147) (94)
Depreciation ....................................................................... 80 92
Changes in:
Receivables, net ................................................................ (1,543) (222)
Deferred acquisition costs ...................................................... (134) (155)
Accrued investment income ....................................................... 23 (2)
Federal income taxes recoverable/payable ........................................ 291 112
Prepaid reinsurance premiums .................................................... (87) (136)
Insurance reserves .............................................................. 299 421
Other ........................................................................... 291 102
---------- ---------
Total adjustments ....................................................... (1,204) (272)
---------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES ................................ (733) (123)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities .............................................. (17,261) (24,438)
Proceeds from fixed maturity securities:
Sales ............................................................................. 19,772 22,900
Maturities, calls and redemptions ................................................. 1,133 1,639
Purchases of equity securities ...................................................... (952) (376)
Proceeds from sale of equity securities ............................................. 1,249 723
Change in short-term investments .................................................... (3,127) (2,200)
Change in collateral on loaned securities ........................................... 415 2,259
Change in other investments ......................................................... (22) 160
Purchases of property and equipment, net ............................................ (79) (113)
Other, net .......................................................................... (8) (53)
---------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES ................................ 1,120 501
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to preferred shareholders ............................................ (1) (8)
Purchase of treasury stock, net ..................................................... (30) (1)
Receipts from investment contracts credited to policyholder account balances ........ 3 4
Return of policyholder account balances on investment contracts ..................... (72) (40)
Principal payments on debt .......................................................... (110) (292)
Proceeds from issuance of debt ...................................................... 4 177
Redemption of preferred stock ....................................................... (150) (200)
---------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES ................................ (356) (360)
---------- ---------
Net cash flows .................................................. 31 18
Cash at beginning of period ............................................................ 153 217
-----------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD .................................................................. $ 184 $ 235
=======================================================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense .................................................................... $ (75) $ (101)
Federal income taxes ................................................................ 235 119
Non-cash transactions:
Notes receivable from the issuance of stock ......................................... 4 13
Exchange of Canary Wharf Limited Partnership interest into common stock ............. - 539
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
Page 5 of 45
<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 June 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.
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.
Page 6 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
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 JUNE 30 THREE MONTHS SIX MONTHS
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 330 $ 154 $ 471 $ 149
Less: Preferred stock dividends - (3) (1) (8)
----- ----- ----- -----
Net income available to common stockholders $ 330 $ 151 $ 470 $ 141
Weighted average outstanding common shares and common
stock equivalents 183.3 184.2 183.8 184.1
----- ----- ----- -----
Basic and diluted earnings per share
available to common stockholders $1.80 $0.82 $2.56 $0.77
===== ===== ===== =====
</TABLE>
NOTE C - RESTRICTED INVESTMENTS
The Company's largest equity holding in a single issuer is in Global
Crossing, Ltd. (Global Crossing) common stock. As of June 30, 2000, the Company
owned 28.2 million shares valued at $742 million, representing approximately
3.5% 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 up to 25% of the Company's original
holdings, and beginning on August 13, 2000, to require Global Crossing to
register up to an additional 25% of the Company's original holdings.
See Note G for discussion of the Company's hedge of a portion 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 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.
Page 7 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
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 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.
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 equity.
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.
Page 8 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
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.
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 June 30, 2000 and December 31, 1999, CNA carried $393 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
June 30, 2000 and December 31, 1999, CNA carried approximately $598 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.
Page 9 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
Unfavorable asbestos claim reserve development totaled $5 million and
$95 million for the three months ended June 30, 2000 and 1999 and $31 million
and $129 million for the six months ended June 30, 2000 and 1999. Unfavorable
environmental pollution and other mass tort claim reserve development totaled
$21 million for the three months and six months ended June 30, 2000. Favorable
environmental pollution and other mass tort reserve development totaled
$16 million for the three months and six months ended June 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>
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
June 30, 2000 December 31, 1999
------------------------------- --------------------------------
Environmental Environmental
Pollution and Pollution and
Other Mass Other Mass
(In millions of dollars) Tort Asbestos Tort Asbestos
--------------------------------------------------------------------------------------------------------------------
Gross reserves $577 $894 $618 $946
Less ceded reserves (184) (296) (155) (262)
--------------------------------------------------------------------
Net reserves $393 $598 $463 $684
====================================================================
</TABLE>
Page 10 of 45
<PAGE>
NOTE E - REINSURANCE
The effects of reinsurance on earned premiums are shown in the
following table.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 Earned Premiums
(In millions of dollars) Direct Assumed Ceded Net
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
Property/casualty $ 4,019 $ 903 $ 1,700 $ 3,222
Accident and health 1,969 169 261 1,877
Life 594 98 243 449
--------------------------------------------------------
Total premiums $ 6,582 $ 1,170 $ 2,204 $ 5,548
========================================================
1999
Property/casualty $ 4,534 $ 835 $ 648 $ 4,721
Accident and health 1,923 83 204 1,802
Life 534 87 199 422
-------------------------------------------------------
Total premiums $ 6,991 $ 1,005 $ 1,051 $ 6,945
========================================================
</TABLE>
See Note J for discussion of the Personal Insurance business, which had
the effect of increasing ceded earned premiums for the six months ended
June 30, 2000 by $918 million.
NOTE F - DEBT
Debt is comprised of the following obligations.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
June 30, December 31,
(In millions of dollars) 2000 1999
--------------------------------------------------------------------------------------------------------------------
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% - 17.02% secured capital leases, due through December 31, 2011 41 42
Other debt, due through 2019 (rates of 1.0% to 6.60%) 30 26
----------------------------------
Total debt $ 2,776 $ 2,881
==================================
</TABLE>
Page 11 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
During the first six months of 2000, the Company repaid the CNA credit
facility and repurchased approximately $33 million of its senior notes.
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 June 30 Three Months Six Months
(In millions of dollars) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $330 $ 154 $471 $149
Other comprehensive income:
Change in unrealized gains/losses on
general account investments
Holding gains (losses) arising during
the period (269) (427) (191) 711
Less: Unrealized gains at beginning of period
included in realized
gains/losses during the period 375 132 455 253
------------------------------------------------------------------
Net change in unrealized gains/losses on general
account investments (644) (559) (646) 458
Net change in unrealized gains/losses on
separate accounts and other (10) (86) (2) (87)
Foreign currency translation adjustment (1) (12) (3) 20
Allocation to participating policyholders' and
minority interest 1 14 (5) 17
------------------------------------------------------------------
Other comprehensive income (loss), before tax (654) (643) (656) 408
Deferred income tax benefit (expense) related to
other comprehensive income 243 195 241 (162)
------------------------------------------------------------------
Other comprehensive income (loss), net of tax (411) (448) (415) 246
------------------------------------------------------------------
Total comprehensive income (loss) $(81) $(294) $ 56 $395
==================================================================
</TABLE>
As of June 30, 2000, the Company held 28.2 million shares of Global
Crossing common stock. During the first quarter of 2000, the Company entered
into option agreements intended to hedge 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 June 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
Page 12 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
unrealized gain, including the fair market value of the collar, on the Company's
position in Global Crossing was $1,105 million as of June 30, 2000. Changes in
the Company's investment in Global Crossing were as follows, on a pretax basis.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Period Ended June 30 Three Months Six Months
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Increase (decrease) in unrealized gain on
Global Crossing common stock $(736) $(294) $(1,079) $655
Increase in unrealized gain on collar 252 - 419 -
----------------------------------------------------------------
Net increase (decrease) in unrealized gain on
position in Global Crossing $(484) $(294) $ (660) $655
================================================================
Realized gains on sales of Global Crossing
common stock $ 242 $ 222 $ 256 $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 $46 million and $45 million for the three months
ended June 30, 2000 and 1999 and $97 million and $105 million for the six months
ended June 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 $48 million for the three
months ended June 30, 2000 and 1999 and $80 million and $93 million for the six
months ended June 30, 2000 and 1999 have been eliminated at the consolidated
level.
Page 13 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
AGENCY
THREE MONTHS ENDED JUNE 30, 2000 MARKET SPECIALTY GLOBAL RISK GROUP
(In millions of dollars) OPERATIONS OPERATIONS CNA RE OPERATIONS MANAGEMENT OPERATIONS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earned premiums $ 837 $ 152 $ 270 $ 266 $ 162 $ 878
Claims, benefits and expenses 935 156 294 299 196 894
-----------------------------------------------------------------------
Underwriting loss (98) (4) (24) (33) (34) (16)
Net investment income 150 54 47 34 41 34
Other revenues 40 5 4 29 79 13
Other expenses 44 7 1 29 81 15
-----------------------------------------------------------------------
Pretax operating income (loss) 48 48 26 1 5 16
Income tax benefit (expense) (11) (16) (8) 2 - (5)
Minority interest - - - (7) - -
-----------------------------------------------------------------------
Net operating income(loss)(excluding
realized investment gains (losses)) 37 32 18 (4) 5 11
Realized investment gains (losses), net of
tax, participating policyholders'
interest and minority interest 118 43 24 13 29 15
-----------------------------------------------------------------------
Net income (loss) $ 155 $ 75 $ 42 $ 9 $ 34 $ 26
=======================================================================
<CAPTION>
-----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2000 LIFE
(In millions of dollars) OPERATIONS CORPORATE ELIMINATIONS TOTAL
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earned premiums $ 226 $ (3) $ (10) $ 2,778
Claims, benefits and expenses 333 24 (10) 3,121
--------------------------------------------------
Underwriting loss (107) (27) - (343)
Net investment income 150 3 - 513
Other revenues 52 12 (43) 191
Other expenses 25 81 (43) 240
--------------------------------------------------
Pretax operating income (loss) 70 (93) - 121
Income tax benefit (expense) (24) 36 - (26)
Minority interest - - - (7)
--------------------------------------------------
Net operating income(loss)(excluding
realized investment gains (losses)) 46 (57) - 88
Realized investment gains (losses), net of
tax, participating policyholders'
interest and minority interest (2) 2 - 242
--------------------------------------------------
Net income (loss) $ 44 $ (55) $ - $ 330
==================================================
</TABLE>
Page 14 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
AGENCY
THREE MONTHS ENDED JUNE 30, 1999 MARKET SPECIALTY GLOBAL RISK GROUP
(IN MILLIONS OF DOLLARS) OPERATIONS OPERATIONS CNA Re OPERATIONS MANAGEMENT OPERATIONS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earned premiums $ 1,337 $ 268 $ 278 $ 263 $ 212 $ 942
Claims, benefits and expenses 1,535 288 299 260 236 941
Restructuring and other related charges 17 - - - - -
-----------------------------------------------------------------------
Underwriting gain (loss) (215) (20) (21) 3 (24) 1
Net investment income 175 59 35 39 37 32
Other revenues 19 4 2 32 82 11
Other expenses 16 7 (5) 25 78 21
Non-insurance restructuring and other related
charges - - - - 3 -
-----------------------------------------------------------------------
Pretax operating income (loss) (37) 36 21 49 14 23
Income tax benefit (expense) 23 (10) (6) (15) (3) (7)
Minority interest - - - (7) - -
-----------------------------------------------------------------------
Net operating income (loss) (excluding
realized investment gains (losses)) (14) 26 15 27 11 16
Realized investment gains, net of tax,
participating policyholders' interest
and minority interest 62 21 14 2 12 -
-----------------------------------------------------------------------
Net income (loss) $ 48 $ 47 $ 29 $ 29 $ 23 $ 16
=======================================================================
<CAPTION>
---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1999 LIFE
(IN MILLIONS OF DOLLARS) OPERATIONS CORPORATE ELIMINATIONS TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earned premiums $ 214 $ - $ (8) $3,506
Claims, benefits and expenses 286 40 (8) 3,877
Restructuring and other related charges - (5) - 12
--------------------------------------------------
Underwriting gain (loss) (72) (35) - (383)
Net investment income 133 9 - 519
Other revenues 14 41 (50) 155
Other expenses 27 114 (50) 233
Non-insurance restructuring and other related
charges - 4 - 7
--------------------------------------------------
Pretax operating income (loss) 48 (103) - 51
Income tax benefit (expense) (17) 38 - 3
Minority interest - (2) - (9)
--------------------------------------------------
Net operating income (loss) (excluding
realized investment gains (losses)) 31 (67) - 45
Realized investment gains, net of tax,
participating policyholders' interest and
minority interest (30) 28 - 109
--------------------------------------------------
Net income (loss) $ 1 $ (39) $ - $ 154
==================================================
</TABLE>
Page 15 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
AGENCY
SIX MONTHS ENDED JUNE 30, 2000 MARKET SPECIALTY GLOBAL RISK GROUP
(IN MILLIONS OF DOLLARS) OPERATIONS OPERATIONS CNA RE OPERATIONS MANAGEMENT OPERATIONS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earned premiums $ 1,670 $ 344 $ 513 $ 540 $ 305 $ 1,760
Claims, benefits and expenses 1,879 351 556 573 376 1,797
-----------------------------------------------------------------------
Underwriting loss (209) (7) (43) (33) (71) (37)
Net investment income 298 108 93 67 81 67
Other revenues 70 13 3 53 159 24
Other expenses 79 16 2 54 164 27
-----------------------------------------------------------------------
Pretax operating income (loss) 80 98 51 33 5 27
Income tax benefit (expense) (16) (31) (15) (9) 2 (8)
Minority interest - - - (13) - -
-----------------------------------------------------------------------
Net operating income (loss) (excluding
realized investment gains (losses)) 64 67 36 11 7 19
Realized investment gains (losses), net of
tax, participating policyholders'
interest and minority interest 149 55 30 17 37 19
-----------------------------------------------------------------------
Net income (loss) $ 213 $ 122 $ 66 $ 28 $ 44 $ 38
=======================================================================
<CAPTION>
--------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000 LIFE
(IN MILLIONS OF DOLLARS) OPERATIONS CORPORATE ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earned premiums $ 438 $ (1) $ (21) $ 5,548
Claims, benefits and expenses 650 54 (21) 6,215
--------------------------------------------------
Underwriting loss (212) (55) - (667)
Net investment income 292 2 - 1,008
Other revenues 100 12 (88) 346
Other expenses 49 145 (88) 448
--------------------------------------------------
Pretax operating income (loss) 131 (186) - 239
Income tax benefit (expense) (44) 67 - (54)
Minority interest - - - (13)
--------------------------------------------------
Net operating income (loss) (excluding
realized investment gains (losses)) 87 (119) - 172
Realized investment gains (losses), net of
tax, participating policyholders'
interest and minority interest (8) - - 299
--------------------------------------------------
Net income (loss) $ 79 $ (119) $ - $ 471
==================================================
</TABLE>
Page 16 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
AGENCY
SIX MONTHS ENDED JUNE 30, 1999 MARKET SPECIALTY GLOBAL RISK GROUP
(IN MILLIONS OF DOLLARS) OPERATIONS OPERATIONS CNA RE OPERATIONS MANAGEMENT OPERATIONS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earned premiums $ 2,696 $ 544 $ 531 $ 509 $ 420 $ 1,809
Claims, benefits and expenses 3,118 578 573 507 454 1,843
Restructuring and other related charges 37 - - - - 5
-----------------------------------------------------------------------
Underwriting gain (loss) (459) (34) (42) 2 (34) (39)
Net investment income 347 117 74 69 73 65
Other revenues 35 8 2 59 157 20
Other expenses 29 16 (6) 48 147 20
Non-insurance restructuring and other related
charges - - - - 8 -
-----------------------------------------------------------------------
Pretax operating income (loss) (106) 75 40 82 41 26
Income tax benefit (expense) 59 (20) (11) (24) (10) (6)
Minority interest - - - (14) - -
-----------------------------------------------------------------------
Net operating income (loss) (excluding
realized investment gains (losses)) (47) 55 29 44 31 20
Realized investment gains, net of tax,
participating policyholders' interest and
minority interest 130 43 24 11 23 6
Cumulative effect of a change in accounting
principle, net of tax (93) (3) - (3) (75) (1)
-----------------------------------------------------------------------
Net income (loss) $ (10) $ 95 $ 53 $ 52 $ (21) $ 25
=======================================================================
<CAPTION>
----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999 LIFE
(IN MILLIONS OF DOLLARS) OPERATIONS CORPORATE ELIMINATIONS TOTAL
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earned premiums $ 417 $ 35 $ (16) $6,945
Claims, benefits and expenses 585 104 (22) 7,740
Restructuring and other related charges - - - 42
-------------------------------------------------
Underwriting gain (loss) (168) (69) 6 (837)
Net investment income 277 9 - 1,031
Other revenues 30 113 (95) 329
Other expenses 36 268 (89) 469
Non-insurance restructuring and other related
charges - 4 - 12
-------------------------------------------------
Pretax operating income (loss) 103 (219) - 42
Income tax benefit (expense) (36) 94 - 46
Minority interest - (1) - (15)
-------------------------------------------------
Net operating income (loss) (excluding
realized investment gains (losses)) 67 (126) - 73
Realized investment gains, net of tax,
participating policyholders' interest and
minority interest (18) 34 - 253
Cumulative effect of a change in accounting
principle, net of tax (2) - - (177)
----------- ----------- ------------- -----------
Net income (loss) $ 47 $ (92) $ - $ 149
=========== =========== ============= ===========
</TABLE>
Page 17 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(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 $54 million were
recorded in the six months ended June 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 six months of 1999, restructuring-related charges for
Agency Market Operations totaled approximately $37 million. The charges included
employee severance and outplacement costs of $15 million related to the planned
net reduction in the workforce. The Agency Market Operations charges also
included consulting costs of $5 million and parallel processing charges of
$4 million. Other charges, including relocation and facility charges, totaled
approximately $13 million.
In the first six months of 1999, restructuring-related charges for Risk
Management totaled approximately $8 million. The charges included parallel
processing costs of approximately $3 million, employee severance and
outplacement costs of approximately $2 million. Other charges, including
consulting and facility charges, totaled approximately $3 million.
In the first six 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 $5 million for the first six 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 six
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) (10) (6) (20)
-------------------------------------------------
Accrued costs at June 30, 2000 $ -- $ 17 $ 9 $ 26
=================================================
</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 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
Page 18 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
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 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 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
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
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 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 will be recognized in proportion to the recognition of the unearned
premium reserve to which it relates. Approximately $24 million and $61 million
of the ceding commission was earned for the three month and six month periods
ended June 30, 2000.
The Personal Insurance business (which was transferred to Allstate)
contributed net earned premiums of $448 million and $895 million, and net
operating income of $15 million and $25 million, during the three month and six
month periods ended June 30, 1999.
Page 19 of 45
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
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
were $61 million and $120 million of operating revenue, and $2 million and
$10 million of net operating losses for the three and six month periods ended
June 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 six months of 2000, CNA received a tax refund of $252 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.
Page 20 of 45
<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 helpful in
evaluating 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 six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars except per share data) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
Operating revenues (excluding realized investment gains):
<S> <C> <C> <C> <C>
Net earned premiums $2,778 $3,506 $5,548 $6,945
Net investment income 513 519 1,008 1,031
Other 191 155 346 329
-------------------------------------------------
Total operating revenues (excluding realized investment gains) 3,482 4,180 6,902 8,305
Claims, benefits and expenses 3,361 4,110 6,663 8,209
Restructuring and other related charges -- 19 -- 54
-------------------------------------------------
Operating income before income tax 121 51 239 42
Income tax benefit (expense) (26) 3 (54) 46
Minority interest (7) (9) (13) (15)
-------------------------------------------------
Net operating income (excluding realized investments gains) 88 45 172 73
Realized investment gains, net of tax and minority interest 242 109 299 253
-------------------------------------------------
Income before cumulative effect of a change in accounting
principle 330 154 471 326
Cumulative effect of a change in accounting principle,
net of tax -- -- -- (177)
-------------------------------------------------
Net income $ 330 $ 154 $ 471 $ 149
=================================================
BASIC AND DILUTED EARNINGS PER SHARE
Net operating income (excluding realized investments gains) $ 0.48 $ 0.23 $ 0.93 $ 0.35
Realized investment gains, net of tax and minority interest 1.32 0.59 1.63 1.38
Cumulative effect of a change in accounting principle,
net of tax -- -- -- (0.96)
-------------------------------------------------
Net income $ 1.80 $ 0.82 $ 2.56 $ 0.77
=================================================
</TABLE>
Page 21 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following table summarizes the net operating income by segment for the
three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Agency Market Operations $ 37 $ (14) $ 64 $ (47)
Specialty Operations 32 26 67 55
CNA Re 18 15 36 29
Global Operations (4) 27 11 44
Risk Management 5 11 7 31
Group Operations 11 16 19 20
Life Operations 46 31 87 67
Corporate and Eliminations (57) (67) (119) (126)
----------------------------------------------------------------------
Net operating income $ 88 $ 45 $ 172 $ 73
======================================================================
</TABLE>
Net operating income, which excludes net realized investment gains, was
$88 million, or $0.48 per share, for the second quarter of 2000, compared with
net operating income of $45 million, or $0.23 per share, for the same period in
1999. Net operating income increased $43 million for the second quarter of 2000
as compared with the same period of 1999, primarily because of improved
underwriting results in the property/casualty segments resulting from rate
increases, re-underwriting efforts and the increased use of reinsurance as well
as favorable mortality experience and investment results in the Life Operations
segment. Net operating income, which excludes net realized investment gains and
the cumulative effect of a change in accounting principle, was $172 million, or
$0.93 per share, for the first six months of 2000, compared with net operating
income of $73 million, or $0.35 per share, for the same period in 1999.
Net income for the second quarter of 2000 was $330 million, or
$1.80 per share, compared with net income of $154 million, or $0.82 per share,
for the second quarter of 1999. Net income for the first six months of 2000 was
$471 million, or $2.56 per share, as compared with net income of $149 million,
or $0.77 per share, for the same period in 1999. Included in the net income for
the six months ended June 30, 1999 was a charge of $177 million, net of tax, or
$0.96 per share, for the cumulative effect of a change in accounting principle
for insurance-related assessments.
Discussion of the results of operations from the Company's segments
follow.
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
also included personal auto and homeowners coverages and also offered personal
excess liability, separate scheduled property, boat-owners and other
recreational vehicle insurance. These personal lines (CNA Personal Insurance)
Page 22 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $821 $1,439 $1,648 $2,766
Net earned premiums 837 1,337 1,670 2,696
Underwriting loss (98) (215) (209) (459)
Net operating income (loss) 37 (14) 64 (47)
Loss ratio 79.2% 83.3% 80.3% 84.1%
Expense ratio 30.0 32.5 29.9 32.6
Dividend ratio 2.5 0.3 2.3 0.3
---------------------------------------------------------
Combined ratio 111.7% 116.1% 112.5% 117.0%
=========================================================
</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 six months ended
June 30, 1999 were $529 million and $1,007 million, and net earned premiums were
$448 million and $895 million for the same periods.
Apart from the impact of CNA Personal Insurance, Agency Market
Operations' net written premiums decreased 10% to $821 million in the second
quarter of 2000 as compared to the second quarter of 1999. Net earned premiums
decreased 6% to $837 million in the same period. These declines were due to
continued efforts to re-underwrite business, obtain adequate rates for exposure
and the increased use of reinsurance.
The combined ratio for the second quarter of 2000 improved 4.4 points
to 111.7 % as compared to the second quarter of 1999. The loss ratio improvement
of 4.1 points reflects the impact of increased use of reinsurance, continued
efforts to achieve adequate rates and the non-renewal of unprofitable business.
The expense ratio declined 2.5 points partially due to restructuring-related
charges incurred in 1999, which did not recur in 2000, as well as a reduction in
ongoing operating expenses. The dividend ratio increase is attributable to
favorable dividend development in 1999. Underwriting results for the second
quarter of 2000 improved $117 million from a loss of $215 million to a loss of
$98 million attributable principally to a lower loss ratio and decreased
operating expenses. Net operating income for the second quarter of 2000
increased to $37 million as compared to a loss of $14 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 6% to $1,648 million for the first six months of 2000
as compared to the same period in 1999. In addition, net earned premiums
declined by 7% to $1,670 million for the first six months of 2000 as compared to
the same period in 1999. These declines were due to continued focus on
underwriting and the increased use of reinsurance.
The combined ratio improved 4.5 points to 112.5% for the six months
ended June 30, 2000 as compared to the same period in 1999. Underwriting results
improved $250 million from a loss of $459 million in 1999 to a loss of
$209 million in 2000. Net operating income increased to $64 million for the six
months ended June 30, 2000 from a loss of $47 million in the same period in
1999. The positive underwriting results and increased net operating income were
Page 23 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
a direct reflection of decreased loss and expense ratios, partially offset by
the increase in the dividend ratio.
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 JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $173 $241 $343 $508
Net earned premiums 152 268 344 544
Underwriting loss (4) (20) (7) (34)
Net operating income 32 26 67 55
Loss ratio 69.3% 83.2% 74.0% 82.3%
Expense ratio 33.3 24.0 28.2 23.9
Dividend ratio 0.1 0.1 -- 0.1
---------------------------------------------------------
Combined ratio 102.7% 107.3% 102.2% 106.3%
=========================================================
</TABLE>
Net written premiums for Specialty Operations for the second quarter of
2000 declined $68 million, or 28%, as compared to the second quarter of 1999.
This premium decline related principally to active decisions to renew only those
accounts which meet current underwriting guidelines supporting the ongoing
commitment to underwriting discipline. In the second quarter of 2000, net earned
premiums declined to $152 million from $268 million in the second quarter of
1999, primarily as a result of this same underwriting discipline. In addition,
the decline in net earned premiums resulted from the reserve for retrospective
return premium increase in this quarter because of favorable loss development in
the retrospectively rated Architects and Engineers business.
The combined ratio improved 4.6 points to 102.7% for the second quarter
of 2000 as compared to the second quarter of 1999. This improvement resulted
from the decrease in the loss ratio attributable mainly to the favorable loss
development in the retrospectively rated Architects and Engineers business and
the continued efforts to renew only profitable business. The increased expense
ratio relates to reduced net earned premium, coupled with relatively flat
expense levels. Underwriting results improved by $16 million in the second
quarter of 2000 compared with the same period in 1999, principally as a result
of improvement in the loss ratio. Net operating income improved $6 million for
the second quarter of 2000 as compared to the second quarter of 1999 because of
the improved underwriting results, partially offset by lower investment income.
Net written premiums declined $165 million, or 32%, for the first six
months of 2000 as compared to the same period in 1999. Net earned premiums
declined to $344 million for the six months ended June 30, 2000 from
$544 million for the same period in 1999. These declines are a result of the
increased use of reinsurance for the medical professional liability lines, the
retrospective return premium reserve increase and continued underwriting
discipline.
Page 24 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The combined ratio improved 4.1 points to 102.2% for the first six
months of 2000 as compared with the same period in 1999. Underwriting results
improved $27 million and net operating income increased $12 million for the
first six months of 2000 as compared to the same period of 1999, principally
from the favorable change in the loss ratio offset by increases 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.
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. CNA Re's primary product is traditional treaty reinsurance. In
addition, CNA Re is developing positions in facultative and financial
reinsurance.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $ 176 $258 $ 556 $674
Net earned premiums 270 278 513 531
Underwriting loss (24) (21) (43) (42)
Net operating income 18 15 36 29
Loss ratio 79.3% 74.7% 75.0% 76.1%
Expense ratio 29.5% 32.8% 33.4% 31.9%
---------------------------------------------------------
Combined ratio 108.8% 107.5% 108.4% 108.0%
=========================================================
</TABLE>
For the second quarter, net written premiums decreased $82 million, or
32%, as compared with the same period in 1999. This decrease reflects decisions
not to renew a number of contracts that do not meet CNA Re's profitability
targets, partially offset by modest rate increases. Similarly, net earned
premiums decreased $8 million, or 3%, for the quarter. The second quarter
combined ratio increased 1.3 points to 108.8% reflecting adverse loss
experience, particularly in proportional property, property risk excess and
proportional motor liability lines of business, partially offset by the positive
impact of reinsurance and a decrease in the commissions component of the expense
ratio. The underwriting loss for the quarter was $24 million compared to
$21 million for the same period in 1999. Net operating income increased to
$18 million for the second quarter, as compared with $15 million for the second
quarter of 1999. This improvement in net operating income primarily reflects
increased net investment income.
For the six months ended June 30, 2000, net written premiums decreased
$118 million, or 18%, as compared with the same period in 1999. Net earned
premiums decreased $18 million, or 3%. These declines were a result of decisions
not to renew a number of contracts that did not meet CNA Re's profitability
targets, partially offset by modest rate increases. The six month combined ratio
increased slightly to 108.4%. The combined ratio increase was driven by an
increased expense ratio, caused by a decrease in net earned premiums, partially
offset by favorable loss reserve development in 1999. The underwriting loss of
$43 million in the first six months is comparable with same period of 1999. Net
operating income increased to $36 million for the first six months of 2000 as
compared with $29 million in 1999. This improvement in net operating income
primarily reflects increased net investment income.
Page 25 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $295 $258 $576 $525
Net earned premiums 266 263 540 509
Underwriting gain (loss) (33) 3 (33) 2
Net operating income (loss) (4) 27 11 44
Loss ratio 68.4% 53.4% 62.5% 54.7%
Expense ratio 43.6 45.4 42.9 44.5
Dividend ratio 0.4 0.3 0.4 0.3
---------------------------------------------------------
Combined ratio 112.4% 99.1% 105.8% 99.5%
=========================================================
</TABLE>
Net written premiums for Global Operations increased $37 million, or
14%, for the second quarter of 2000 as compared to the same period of 1999. The
premium increase resulted from continued growth in the surety and European
operations. For the second quarter of 2000, net earned premiums increased
$3 million over the same period in 1999.
The combined ratio increased 13.3 points to 112.4% for the three months
ended June 30, 2000 as compared to the same period in 1999. The increase in the
combined ratio primarily related to adverse loss experience, including adverse
loss development, in the vehicle warranty insurance line of business, slightly
offset by decreased expense levels in marine business. Underwriting results
declined $36 million for the second quarter of 2000 as compared with the same
period in 1999. Net operating results decreased $31 million to a loss of
$4 million for the second quarter of 2000 as compared to net operating income of
$27 million for the second quarter of 1999. This decrease was primarily related
to the loss ratio increase.
Net written premiums increased $51 million, or 10%, for the first six
months of 2000 as compared to the same period in 1999. Net earned premiums for
the six months ended June 30, 2000 increased $31 million over the same period in
1999. The combined ratio increased and underwriting and net operating income
declined for the six months ended June 30, 2000 primarily driven by the results
of the second quarter.
Page 26 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RISK MANAGEMENT
Risk Management serves the property/casualty needs of large domestic
commercial businesses, offering customized strategies to address 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 JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net written premiums $155 $232 $377 $487
Net earned premiums 162 212 305 420
Underwriting loss (34) (24) (71) (34)
Service revenues 70 74 141 146
Net operating income 5 11 7 31
Loss ratio 92.4% 84.9% 92.0% 80.7%
Expense ratio 28.8 26.5 31.2 27.4
---------------------------------------------------------
Combined ratio 121.2% 111.4% 123.2% 108.1%
=========================================================
</TABLE>
Net written premiums for Risk Management declined $77 million, or 33%,
for the second 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 its book of
business. These operational efforts resulted in a $50 million decrease in net
earned premiums for the second quarter of 2000 as compared to 1999.
The combined ratio increased 9.8 points to 121.2% for the three months
ended June 30, 2000 as compared to the same period in 1999. The loss ratio
increase is principally the result of unfavorable casualty reserve development
and adverse current year property experience. The expense ratio increase is the
net effect of increased acquisition expenses, partially offset by decreased
underwriting expenses. Underwriting losses increased to $34 million for the
second quarter of 2000 as compared to $24 million in the same period in 1999 due
principally to the increased loss and expense ratios. Net operating income
decreased $6 million in the second quarter of 2000 because of higher
underwriting losses, partially offset by increased investment income and
improved net operating income from RSKCo.
Consistent with the second quarter, net written premiums for the first
six months of 2000 decreased $110 million, or 23%, as compared to the same
period in 1999. Likewise, net earned premiums for the first six months of 2000
decreased $115 million, or 27%, as compared to the same period in 1999.
The combined ratio increased 15.1 points to 123.2% for the six months
ended June 30, 2000 as compared to 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 unfavorable casualty
reserve development and adverse current year property experience. Acquisition
expenses were flat and underwriting expenses have decreased year over year but
not at the same pace as the decline in earned premiums. Underwriting losses
deteriorated to $71 million for the first six months of 2000 as compared to
$34 million in the same period in 1999. Net operating income decreased
Page 27 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
$24 million in 2000 as compared with 1999. This decline was primarily caused by
the poor underwriting results of the property business line.
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 JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earned premiums $878 $942 $1,760 $1,809
Net operating income 11 16 19 20
</TABLE>
Group Operations' net earned premiums for the second quarter ended
June 30, 2000 decreased $64 million, or 7%, as compared with the same period in
1999. This decrease is primarily attributable to the Federal Markets business,
partially offset by growth in the life reinsurance business.
Net operating income for the second quarter of 2000 decreased to
$11 million from $16 million in the second quarter of 1999. This decrease
related to costs incurred from the exit of the Management Services Organization
(MSO) business and adverse development on medical stop loss business. 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.
Net earned premiums for the six months ended June 30, 2000 decreased
$49 million, or 3%, as compared with the same period of 1999. This decrease was
mainly attributable to second quarter declines related to the Federal Markets
business. Net operating income for the six months ended June 30, 2000 remained
essentially flat as compared with the same period in 1999.
Page 28 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
LIFE OPERATIONS
Life Operations provides financial protection to individuals through a
full product line of 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 JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales volume * $ 666 $ 850 $ 1,683 $ 1,635
Net earned premiums 226 214 438 417
Net operating income 46 31 87 67
</TABLE>
* Sales volume is a cash-based measure including premium and annuity
considerations, investment contract deposits, and other sales activity that are
not reported as premium under generally accepted accounting principles.
For the second 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 6% to $226 million for the second quarter of 2000 as compared
to $214 million for the second quarter of 1999. Net earned premiums increased
from strong renewals and growth in term products, long term care and the annuity
business in Chile, partially offset by the sales declines in structured
settlements and single premium group annuities in the retirement related
products. For the second quarter, net operating income increased to $46 million
in 2000 as compared to $31 million in 1999. The increase was primarily due to
favorable mortality experience in universal life and term insurance and
favorable investment results, principally in retirement products.
Sales volume increased by $48 million in the first six months of 2000
as compared with the same period in 1999. Life Operations had strong sales
volume in the first three months, particularly in its variable annuity products,
as well as an increasing base of direct premiums for life and long term care,
partially offset by reductions in the second quarter as described above. Net
earned premium for Life Operations increased 5% to $438 million for the first
six months of 2000 as compared to $417 million in the same period in 1999. Net
operating income for the first six months of 2000 was $20 million higher than
net operating income for the same period in 1999. The increase was principally
attributable to favorable mortality experience and investment results.
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 guarantee insurance contracts,
and certain non-insurance operations.
Net operating loss declined to a loss of $57 million for the second
quarter of 2000 as compared with a loss of $67 million for the same period
during 1999. For the first six months of 2000, net operating loss declined to a
loss of $119 million as compared to a loss of $126 million for the same period
of 1999.
Page 29 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESTRUCTURING AND OTHER RELATED CHARGES
The details of the restructuring and other related charges recognized
in the three and six months ended June 30, 1999 are discussed in Note I of the
Notes.
The table below presents the remaining accrued restructuring and other
related charges as of June 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 June 30, 2000 $ 17 $ 9 $ 26
==================================================
Remainder of 2000 $ 2 $ 7 $ 9
2001 6 2 8
2002 4 - 4
2003 2 - 2
2004 1 - 1
2005 and thereafter 2 - 2
--------------------------------------------------
Total future payments $ 17 $ 9 $ 26
==================================================
</TABLE>
INVESTMENTS
The components of net investment income for the three and six month
periods ended June 30, 2000 and 1999 are presented in the following table.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 THREE MONTHS SIX MONTHS
(In millions of dollars) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
Bonds:
Taxable $ 369 $ 374 $ 750 $ 735
Tax-exempt 58 69 116 149
Short-term investments 53 48 91 93
Other 45 37 77 71
---------------------------------------------------------
525 528 1,034 1,048
Investment expenses (12) (9) (26) (17)
---------------------------------------------------------
Net investment income $ 513 $ 519 $ 1,008 $ 1,031
=========================================================
</TABLE>
Lower net investment income results for both the three month and six
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
Page 30 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
certain asbestos related claims. The bond segment of the investment portfolio
yielded 6.4% for the first six 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 six
month periods ended June 30, 2000 and 1999 are presented in the following table.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 THREE MONTHS SIX 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 $ 23 $ (82) $ (3) $ (82)
Corporate and other taxable bonds (25) (13) (50) 13
Tax-exempt bonds (21) (2) (47) 2
Asset-backed securities (41) (35) (58) (11)
---------------------------------------------------------
Total fixed maturities (64) (132) (158) (78)
Equity securities 290 288 375 310
Derivative securities 23 7 21 34
Other invested assets 122 (1) 221 118
---------------------------------------------------------
Total realized investment gains, net 371 162 459 384
Allocated to participating policyholders interest 2 5 3 5
Income tax expense (131) (58) (163) (136)
---------------------------------------------------------
Net realized investment gains $ 242 $ 109 $ 299 $ 253
=========================================================
</TABLE>
Substantially all invested assets are marketable securities classified
as available-for-sale in the accompanying financial statements. Accordingly,
changes in fair value for these securities are reported in other comprehensive
income.
Page 31 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following table presents the carrying values of the Company's
investments as of June 30, 2000 and December 31, 1999, and the change in
unrealized gains/losses of those securities included in other comprehensive
income for the six months ended June 30, 2000.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
CARRYING VALUE JUNE 30, 2000
---------------------------------------------------------------------------------------------------- CHANGE IN
(In millions of dollars) JUNE 30, DECEMBER 31, UNREALIZED
2000 1999 GAINS/LOSSES
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities:
U. S. Treasury securities and obligations of
Government agencies $ 5,487 $ 8,318 $ 165
Asset-backed securities 5,380 7,039 66
Tax-exempt securities 3,984 4,396 96
Taxable securities 8,875 7,365 (121)
Redeemable preferred 50 130 (67)
----------------------------------------------------------------
Total fixed maturity securities 23,776 27,248 139
Equity securities:
Common stock 2,751 3,344 (711)
Non-redeemable preferred stock 231 266 (10)
----------------------------------------------------------------
Total equity securities 2,982 3,610 (721)
Short-term investments 6,604 3,355 -
Other investments 1,530 1,347 (64)
----------------------------------------------------------------
Total investments $ 34,892 $ 35,560 (646)
=========================================
Separate account business and other (7)
-----------------------
Decrease in net unrealized gains reported in other
comprehensive income $(653)
=======================
</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, credit and tax
considerations. This activity will produce realized gains and losses depending
on market conditions including interest rates.
Total net unrealized gains for investments at June 30, 2000 were
$1,176 million, down from $1,822 million at December 31, 1999. The unrealized
position at June 30, 2000 was composed of an unrealized loss of $560 million for
fixed maturity securities and an unrealized gain of $1,736 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
Page 32 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
the Notes for a discussion of the unrealized position on the Company's ownership
in Global Crossing Ltd. (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, 92.9% and 94.2% of which are rated as investment grade at
June 30, 2000 and December, 31, 1999. The following table summarizes the ratings
of CNA's general account bond portfolio at carrying value.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In millions of dollars) 2000 % 1999 %
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $ 6,522 27% $ 8,781 32%
Other AAA rated 7,480 32 9,692 36
AA and A rated 5,477 23 4,465 16
BBB rated 2,574 11 2,598 10
Below investment grade 1,673 7 1,582 6
--------------------------------------------------------
Total $ 23,726 100% $ 27,118 100%
========================================================
</TABLE>
In the above table, approximately 98.2% and 95.4% of the general
account portfolio were U.S. Government Agency or were rated by Standard & Poor's
or Moody Investors Service at June 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 7.1%
and 5.8% of total investments as of June 30, 2000 and December 31, 1999.
Included in CNA's fixed maturity securities at June 30, 2000 are
$5.4 billion of asset-backed securities, at fair value, consisting of
approximately 18.2% in U.S. government agency issued pass-through certificates,
52.2% in collateralized mortgage obligations (CMOs), 18.2% in corporate
asset-backed obligations and 11.4% 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 33 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Short-term investments at June 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>
-------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In millions of dollars) 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $ 5,618 $ 1,988
U.S. Treasury securities 125 41
Money market funds 443 904
Other 418 422
----------------------------------
Total short-term investments $ 6,604 $ 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
group annuity contract exposure. 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 plc (Canary
Wharf). During the first six months of 2000, the Company experienced a net
decrease in unrealized gains of $91 million on its position in Canary Wharf
common stock, which was valued at $535 million on June 30, 2000 including the
related currency hedge. The majority of this decline was due to the sale of
10.2 million shares, resulting in a pretax realized gain of $61 million.
Refer to the Liquidity and Capital Resources section of the MD&A for
discussion of sales of shares of Global Crossing and Canary Wharf subsequent to
June 30, 2000.
Page 34 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
MARKET RISK
Market risk is a broad term related to economic losses due to adverse
changes in the fair value of a financial instrument. Discussions 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.
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 37 to 40 are classified as held for purposes other than trading.
SENSITIVITY ANALYSIS
CNA monitors its sensitivity to interest rate risk by evaluating the
change in its financial assets and liabilities relative to fluctuations in
interest rates. The evaluation is made using an instantaneous change in interest
rates of varying magnitudes on a static balance sheet to determine the effect
such a change in rates would have on the Company's market value at risk and the
resulting effect on stockholders' equity. The analysis presents the sensitivity
of the market value of the Company's financial instruments to selected changes
in market rates and prices. The range of 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
June 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 June 30, 2000 and December 31, 1999, with all other variables held
constant.
Page 35 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Equity price risk was measured assuming an instantaneous 10% and 25%
decline in the S & P 500 from its level at June 30, 2000 and December 31, 1999,
with all other variables held constant. The Company's equity holdings were
assumed to be positively correlated with the Index. At June 30, 2000, a 10% and
25% decrease in the Index would result in a $389 million and $963 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, $111 million and $278 million in the current period,
and $105 million and $261 million at December 31, 1999, would be offset by
decreases in separate account liabilities to customers under variable annuity
contracts. Similarly, increases in the Index would result in like increases in
the market value of the Company's equity investments and increases in separate
account liabilities to customers under variable annuity contracts.
Page 36 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following tables reflect the estimated effects on the market value
of the Company's financial instruments at June 30, 2000 and December 31, 1999,
due to an increase in interest rates of 100 basis points, a 10% decline in the
S&P 500 index, and a decline of 10% in foreign currency exchange rates.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
SENSITIVITY TO
------------------------------------------------------
JUNE 30, 2000 MARKET INTEREST CURRENCY EQUITY
(In millions of dollars) VALUE RATE RISK RISK RISK
------------------------------------------------------------------------------------------------------------------
HELD FOR OTHER THAN TRADING PURPOSES
General Account:
<S> <C> <C> <C> <C>
Fixed maturity securities $23,776 $(1,243) $(158) $ (21)
Equity securities 2,982 - 4 (231)
Short term investments 6,604 (4) - -
Interest rate caps 2 3 - -
Other derivative securities 30 (75) 17 1
---------------------------------------------------------------------
TOTAL GENERAL ACCOUNT 33,394 (1,319) (137) (251)
---------------------------------------------------------------------
Separate Account Business:
Fixed maturity securities 2,537 (111) (6) -
Equity securities 241 - - (24)
Short term investments 135 - - -
Other derivative securities - - - -
----------------------------------------------------------------------
TOTAL SEPARATE ACCOUNT BUSINESS 2,913 (111) (6) (24)
---------------------------------------------------------------------
TOTAL ALL SECURITIES HELD FOR OTHER
THAN TRADING PURPOSES 36,307 (1,430) (143) (275)
---------------------------------------------------------------------
HELD FOR TRADING PURPOSES
Separate Account Business:
Fixed maturity securities 368 (15) (1) (1)
Equity securities 19 - - (2)
Short term investments 368 - - -
Equity index futures - 2 - (111)
Other derivative securities - (2) - -
---------------------------------------------------------------------
TOTAL ALL SECURITIES HELD FOR
TRADING PURPOSES 755 (15) (1) (114)
---------------------------------------------------------------------
TOTAL ALL SECURITIES $37,062 $(1,445) $(144) $ (389)
======================================================================
DEBT $ (2,776) $ 125 $ - $ -
======================================================================
</TABLE>
Page 37 of 45
<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
------------------------------------------------------------------------------------------------------------------
HELD FOR OTHER THAN TRADING PURPOSES
General Account:
<S> <C> <C> <C> <C>
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 $ (2,881) $ 132 $ - $ -
=====================================================================
</TABLE>
Page 38 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following tables reflect the estimated effects on the market value
of the Company's financial instruments at June 30, 2000 and December 31, 1999,
due to an increase in interest rates of 150 basis points, a 25% decline in the
S&P 500 index, and a decline of 20% in foreign currency exchange rates.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
SENSITIVITY TO
------------------------------------------------------
JUNE 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 $ 23,776 $ (1,834) $ (317) $ (51)
Equity securities 2,982 - 8 (571)
Short term investments 6,604 (6) - -
Interest rate caps 2 7 - -
Other derivative securities 30 (130) 34 6
---------------------------------------------------------------------
TOTAL GENERAL ACCOUNT 33,394 (1,963) (275) (616)
---------------------------------------------------------------------
Separate Account Business:
Fixed maturity securities 2,537 (164) (11) -
Equity securities 241 - - (61)
Short term investments 135 - - -
Other derivative securities - 1 - -
---------------------------------------------------------------------
TOTAL SEPARATE ACCOUNT BUSINESS 2,913 (163) (11) (61)
---------------------------------------------------------------------
TOTAL ALL SECURITIES HELD FOR OTHER
THAN TRADING PURPOSES 36,307 (2,126) (286) (677)
---------------------------------------------------------------------
HELD FOR TRADING PURPOSES
Separate Account Business:
Fixed maturity securities 368 (22) (1) (3)
Equity securities 19 - - (5)
Short term investments 368 - - -
Equity index futures - 3 - (278)
Other derivative securities - (4) - -
---------------------------------------------------------------------
TOTAL ALL SECURITIES HELD FOR
TRADING PURPOSES 755 (23) (1) (286)
---------------------------------------------------------------------
TOTAL ALL SECURITIES $ 37,062 $ (2,149) $ (287) $ (963)
=====================================================================
DEBT $ (2,776) $ 182 $ - $ -
=====================================================================
</TABLE>
Page 39 of 45
<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 $ (2,881) $ 193 $ - $ -
======================================================================
</TABLE>
Page 40 of 45
<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 six months ended June 30, 2000, net cash used for operating
activities was $733 million as compared with a net cash outflow of $123 million
for the same period in 1999. The significant increase in net cash used for
operating activities was attributable to cash outflows for increased paid claims
and claim adjustment expenses of approximately $500 million, accelerated health
and benefit plan fundings of approximately $180 million, and estimated foregone
net cash flows from CNA Personal Insurance of approximately $190 million,
partially offset by increased Federal income tax refunds of approximately
$120 million and improved operating earnings.
For the six months ended June 30, 2000, net cash inflows from
investment activities was $1,120 million as compared with $501 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.
For the six months ended June 30, 2000, net cash used for financing
activities was relatively flat with $356 million as compared with $360 million
for the same period in 1999. Cash flows from financing activities include
proceeds from the issuance of debt or equity, outflows for dividends or
repayment of debt, and outlays to reacquire equity instruments.
On May 26, 2000, CNA announced that Continental Casualty Company (CCC),
a wholly owned subsidiary, has withdrawn its March 20, 2000 proposal to make a
tender offer for the shares of CNA Surety Corporation not already owned by CCC
and its affiliates. This decision was based on market conditions that no longer
made the proposed cash tender offer a favorable transaction.
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 12.5 basis points per annum and the interest rate was increased to
London Interbank Offered Rate (LIBOR) plus 27.5 basis points. Effective
April 1, 2000, CNA's revolving credit facility was reduced from $795 million to
$770 million. 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 six months of 2000. In addition on April 28, 2000,
CNA repaid the $77 million bank loan outstanding under the syndicated bank
revolving credit facility.
During the first six months of 2000, CNA bought some of its debt notes
when opportunities have arisen that made economic sense. This process will
continue provided that individual purchases make economic sense. These
repurchases included approximately $19 million of The Continental Corporation
Page 41 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
(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 and life
reinsurance businesses.
The Company sold shares for its two largest equity investments, Global
Crossing and Canary Wharf subsequent to June 30, 2000 and through
August 4, 2000. For Global Crossing, the Company sold approximately 8.9 million
common shares resulting in pretax realized gains of $229 million. For Canary
Wharf, the Company sold 25 million common shares resulting in pretax realized
gains of $163 million. The subsequent sales of Global Crossing bring the
Company's holdings down to 19.3 million shares, which is the number of shares
hedged via the collar discussed in Note G of the Notes.
The table below reflects ratings issued by A.M. Best, Standard and
Poor's, Moody's and Fitch (formerly Duff & Phelps) for the 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
-------------------------- ----------------
CCC CAC CIC Senior Commercial Senior
---------------------------------------------------------------------------------
<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.
** NOT RATED
Moody's and Fitch 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 and
Fitch cited their outlook for CAC and VFL's rating as negative.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities". This statement requires that an entity recognize all
derivative instruments as either assets or liabilities in the balance sheet and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
Page 42 of 45
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. CNA is currently evaluating the effects of this Statement
on its accounting and reporting for derivative securities and hedging
activities.
In 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
"believe," "expects," "intends," "anticipates," "estimates," and analogous
expressions are intended to identify forward-looking statements. Such statements
inherently are subject to a variety of risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and
uncertainties include, among others, the impact of competitive products,
policies and pricing; product and policy demand and market responses;
development of claims and the effect on loss reserves; the performance of
reinsurance companies under reinsurance contracts with the Company; general
economic and business conditions; changes in financial markets (interest rate,
credit, currency, commodities and stocks); changes in foreign, political, social
and economic conditions; regulatory initiatives and compliance with governmental
regulations; judicial decisions and rulings; changes in rating agency policies
and practices; the results of financing efforts; changes in the Company's
composition of operating segments; the actual closing of contemplated
transactions and agreements and various other matters and risks (many of which
are beyond the Company's control) detailed in the Company's Securities and
Exchange Commission filings. These forward-looking statements speak only as of
the date of this Form 10-Q. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any statement is based.
Page 43 of 45
<PAGE>
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
---------------------- ------ ------
Financial Data Schedule 27 45
(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.
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: August 7, 2000 By:
-------------- ------------------------------
Robert V. Deutsch
Senior Vice President and
Chief Financial Officer
Page 44 of 45
