-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L3XLY+T9BRSnGgBTSB//U0B5VEjP2Dhh3dVP7AG9uyHK3P74tK/zTG6JnOAG757M MjCd/AUjbbpL+3LtPBxUpw== 0000021175-97-000020.txt : 19970815 0000021175-97-000020.hdr.sgml : 19970815 ACCESSION NUMBER: 0000021175-97-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: CSE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNA FINANCIAL CORP CENTRAL INDEX KEY: 0000021175 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 366169860 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05823 FILM NUMBER: 97663236 BUSINESS ADDRESS: STREET 1: CNA PLZ CITY: CHICAGO STATE: IL ZIP: 60685 BUSINESS PHONE: 3128225000 MAIL ADDRESS: STREET 1: CNA PLAZA CITY: CHICAGO STATE: IL ZIP: 60685 10-Q 1 FORM 10-Q 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, 1997 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 1, 1997 - ------------------------------ ----------------------------- Common Stock, Par value $2.50 61,798,262 - -------------------------------------------------------------------------------- Page (1) of (27) CNA FINANCIAL CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE NO. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (Unaudited) and DECEMBER 31, 1996................... 3 STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996......... 4 STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996................... 5 STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996................... 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 1997.............................. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................... 14 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 24 SIGNATURES............................................................. 25 EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE................ 26 EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES.............................. 27 EXHIBIT 12.2 COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED, TO FIXED CHARGES.............................. 27 EXHIBIT 27 FINANCIAL DATA SCHEDULE............................... 28 (2) CNA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET - -------------------------------------------------------------------------------- June 30 December 31 1997 1996 (In millions of dollars) (Unaudited) - -------------------------------------------------------------------------------- Assets Investments: Fixed maturities available for sale (cost: $25,849 and $27,540).................... $ 25,940 $ 27,721 Equity securities available for sale (cost: $541 and $702).......................... 657 859 Mortgage loans and real estate (less accumulated depreciation: $4 and $4)...... 114 123 Policy loans................................... 179 174 Other invested assets.......................... 649 681 Short-term investments......................... 9,003 5,854 ------------ ----------- Total investments......................... 36,542 35,412 Cash........................................... 402 257 Insurance receivables: Reinsurance receivables..................... 6,599 6,965 Other insurance receivables................. 6,458 5,943 Less allowance for doubtful accounts........ (278) (277) Deferred acquisition costs..................... 2,123 1,854 Accrued investment income...................... 427 508 Receivables for securities sold................ 517 264 Federal income taxes recoverable (includes $22 and $151 due from Loews)......... 11 134 Deferred income taxes.......................... 1,263 1,347 Property and equipment at cost (less accumulated depreciation: $539 and $436)................................ 672 645 Prepaid reinsurance premiums................... 249 295 Intangibles.................................... 411 418 Other assets................................... 1,166 849 Separate Account business...................... 6,023 6,121 ----------------------------------------------------------------------------- Total assets $ 62,585 $ 60,735 ============================================================================= CNA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET - CONTINUED - -------------------------------------------------------------------------------- June 30 December 31 1997 1996 (In millions of dollars) (Unaudited) - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Liabilities: Insurance reserves: Claim and claim expense..................... $ 30,619 $ 30,830 Unearned premiums........................... 5,107 4,659 Future policy benefits...................... 4,526 4,181 Policyholders' funds........................ 720 746 Securities sold under repurchase agreements..... 1,618 100 Payables for securities purchased............... 1,042 405 Participating policyholders' equity............. 122 119 Long-term debt.................................. 2,763 2,765 Other liabilities............................... 2,705 3,749 Separate Account business....................... 6,023 6,121 ---------- ----------- Total liabilities........................... 55,245 53,675 ---------- ----------- Stockholders' equity: Common stock ($2.50 par value; Authorized - 200,000,000 shares; Issued - 61,841,969 shares)..................... 155 155 Money market cumulative preferred stock......... 150 150 Additional paid-in capital...................... 435 435 Retained earnings............................... 6,433 6,024 Net unrealized investment gains(losses)......... 170 299 Treasury stock, at cost......................... (3) (3) ---------- ----------- Total stockholders' equity.................. 7,340 7,060 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity.. $ 62,585 $ 60,735 ================================================================================ See accompanying Notes to Condensed Consolidated Financial Statements. (3) CNA FINANCIAL CORPORATION STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited) - -------------------------------------------------------------------------------- PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS 1997 1996 1997 1996 (In millions of dollars, except per share data) - -------------------------------------------------------------------------------- Revenues: Premiums.....................................$ 3,348 $ 3,321 $ 6,695 $ 6,614 Net investment income........................ 547 558 1,111 1,135 Realized investment gains.................... 172 73 238 378 Other........................................ 176 143 331 283 --------- ------- ------- ------ 4,243 4,095 8,375 8,410 --------- ------- ------- ------ Benefits and expenses: Insurance claims and policyholders' benefits.. 2,860 2,774 5,752 5,561 Amortization of deferred acquisition costs.... 596 484 1,116 1,057 Other operating expenses...................... 399 502 841 916 Interest expense.............................. 46 45 96 104 --------- -------- ------- ------ 3,901 3,805 7,805 7,638 --------- -------- ------- ------ Income before income tax................... 342 290 570 772 Income tax expense............................ 107 88 158 241 --------- -------- ------- ------ Net Income $ 235 $ 202 $ 412 $ 531 ================================================================================ EARNINGS PER SHARE - ------------------ Net income.................................... $ 3.78 $ 3.25 $ 6.63 $ 8.55 ====== ====== ====== ====== Weighted average outstanding shares of common stock (in millions of shares).......... 61.8 61.8 61.8 61.8 ================================================================================ See accompanying Notes to Condensed Consolidated Financial Statements(Unaudited) (4) CNA FINANCIAL CORPORATION STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited) - ------------------------------------------------------------------------------- Six Months Ended June 30, 1997 and 1996 Additional Net Unrealized Total Capital Paid in Retained Investment Gains Stock Capital Earnings (Losses) (In millions of dollars) - ------------------------------------------------------------------------------- Balance, December 31, 1995 $ 302 $ 435 $5,066 $ 933 $6,736 New Income - - 531 - 531 Unrealized investment - - - (888) (888) Preferred dividends - - (3) - (3) - ------------------------------------------------------------------------------- Balance, June 30, 1996 302 435 $5,594 $ 45 $6,376 =============================================================================== Balance, December 31, 1996 302 435 $6,024 $ 299 $7,060 Net income - - 412 - 412 Unrealized investment - - - (129) (129) Preferred dividends - - (3) - (3) - ------------------------------------------------------------------------------- Balance, June 30, 1997 $ 302 $ 435 $6,433 $ 170 $7,340 =============================================================================== See accompanying Notes to Condensed Consolidated Financial Statements. (5) CNA FINANCIAL CORPORATION STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) - ------------------------------------------------------------------------------ Six Months Ended June 30 1997 1996 (In millions of dollars) - ------------------------------------------------------------------------------ Cash flows from operating activities: Net income....................................... $ 412 $ 531 -------- ---------- Adjustments to reconcile net income to net cash flows from operating activities: Net realized investment gains, pre-tax......... (238) (378) Participating policyholders' interest.......... (1) 4 Amortization of intangibles.................... 13 11 Amortization of bond discount.................. (150) (85) Depreciation................................... 93 79 Changes in: Insurance receivables, net.................. (148) (302) Deferred acquisition costs.................. (269) (205) Accrued investment income................... 81 87 Federal income taxes........................ 123 99 Deferred income tax recoverable............. 115 28 Prepaid reinsurance premiums................ 46 (36) Insurance reserves.......................... 564 312 Reinsurance payables........................ (17) 227 Other liabilities........................... (1,156) (98) Other, net.................................. (138) (387) ------------ --------- Total adjustments......................... (1,082) (644) ------------ --------- Net cash flows from operating activities.. (670) (113) ------------ --------- Cash flows from investing activities: Purchases of fixed maturities.................... (17,652) (16,864) Proceeds from fixed maturities: Sales........................................... 18,656 17,128 Maturities, calls and redemptions............... 1,106 1,311 Purchases of equity securities.................. (564) (602) Proceeds from sale of equity securities......... 781 779 Change in short-term investments................ (2,852) (1,600) Purchases of property and equipment............. (130) (91) Change in securities sold under repurchase agreements........................... 1,518 135 Change in other investments..................... 26 278 Investment in affiliates........................ (65) -- Other, net...................................... 3 2 ----------- --------- Net cash flows from investing activities.. 827 476 ----------- --------- CNA FINANCIAL CORPORATION STATEMENT OF CONSOLIDATED CASH FLOWS - CONTINUED (Unaudited) - ------------------------------------------------------------------------------ Six Months Ended June 30 1997 1996 (In millions of dollars) - ------------------------------------------------------------------------------ Cash flows from financing activities: Dividends paid to preferred shareholders.......... (3) (3) Receipts from investment contracts credited to policyholder account balances..................... 4 9 Return of policyholder account balances on investment contracts.............................. (11) (18) Change in short-term debt......................... -- (255) Principal payments on long-term debt.............. (3) (1) Proceeds from issuance of long-term debt.......... 1 9 ----------- -------- Net cash flows from financing activities... (12) (259) ------------ -------- Net cash flows........................ 145 104 Cash at beginning of period........................ 257 222 - ------------------------------------------------------------------------------ Cash at end of period $ 402 $ 326 ============================================================================== Supplemental disclosures of cash flow information: Cash (paid) received: Interest expense................................ $ (106) $ (111) Federal income taxes............................ 153 (92) ============================================================================== See accompanying Notes to Condensed Consolidated Financial Statements. (6) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) NOTE A. Basis of Presentation: The Condensed Consolidated Financial Statements (unaudited) include CNA Financial Corporation (CNA or the Company) and its operating subsidiaries which consist of 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). Loews Corporation (Loews) owns approximately 84% of the outstanding common stock of CNA. CNA is a multiple-line insurer underwriting property and casualty coverages; life, accident and health insurance; and pension and annuity business. CNA serves a wide spectrum of insureds, including individuals; small, medium and large businesses; associations; professionals and groups. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the financial statements and notes thereto included in CNA's Annual Report to Shareholders (incorporated by reference in Form 10-K) for the year ended December 31, 1996, filed with the Commission on March 31, 1997, and the information shown below. The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Certain amounts applicable to prior years have been reclassified to conform to classifications followed in 1997. All significant intercompany amounts have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of CNA's management, these statements include all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial position, results of operations and cash flows in the accompanying condensed consolidated financial statements. NOTE B. Restricted Investments: On December 30, 1993, CNA deposited $987 million in an escrow account, pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note C below. At June 30, 1997, the escrow account amounted to $1.09 billion. The funds are included in short-term investments and are invested substantially in U. S. Treasury securities. The escrow account is the prefunding mechanism to the trust fund for future claimants. NOTE C. Legal Proceedings and Contingent Liabilities: The following information updates legal proceedings and contingent liabilities reported in Note F of the Notes to the Consolidated Financial Statements in the 1996 Annual Report to Shareholders. (7) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED FIBREBOARD LITIGATION CNA's primary property/casualty subsidiary, Continental Casualty Company ("Casualty"), has been party to litigation with Fibreboard Corporation ("Fibreboard") involving coverage for certain asbestos-related claims and defense costs (San Francisco Superior Court, Judicial Council Coordination Proceeding 1072). As described below, Casualty, Fibreboard, another insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a negotiating committee of asbestos claimant attorneys (collectively referred to as Settling Parties) have reached a Global Settlement (the "Global Settlement") to resolve all future asbestos-related bodily injury claims involving Fibreboard, which is subject to court approval. Casualty, Fibreboard and Pacific Indemnity have also reached an agreement (the "Trilateral Agreement"), on a settlement to resolve the coverage litigation in the event the Global Settlement does not obtain final court approval or is subsequently successfully attacked. The implementation of either the Global Settlement or the Trilateral Agreement would have the effect of settling Casualty's litigation with Fibreboard. On July 27, 1995, the United States District Court for the Eastern District of Texas entered judgment approving the Global Settlement Agreement and the Trilateral Agreement. As expected, appeals were filed as respects both of these decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of Appeals in New Orleans affirmed the judgment approving the Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and Suggestions for Rehearing by the entire Fifth Circuit Court of Appeals as respects the decision on the Global Settlement Agreement were denied. Two petitions for certiorari were filed in the Supreme Court as respects the Global Settlement Agreement. On June 27, 1997, the Supreme Court granted these petitions, vacated the Fifth Circuit's judgment as respects the Global Settlement Agreement, and remanded to the Fifth Circuit for reconsideration in light of the Supreme Court's decision in Amchem Products Co. v. Windsor. The Fifth Circuit has not yet rendered a decision on this remand. No further appeal was filed with respect to the Trilateral Agreement; therefore, court approval of the Trilateral Agreement has become final. Global Settlement Agreement On April 9, 1993, Casualty and Fibreboard entered into an agreement pursuant to which, among other things, the parties agreed to use their best efforts to negotiate and finalize a global class action settlement with asbestos-related bodily injury and death claimants. On August 27, 1993, the Settling Parties reached an agreement in principle for an omnibus settlement to resolve all future asbestos-related bodily injury claims involving Fibreboard. The Global Settlement Agreement was executed on December 23, 1993. The agreement calls for contribution by Casualty and Pacific Indemnity of an aggregate of $1.53 billion to a trust fund for a class of all future asbestos claimants, defined generally as those persons whose claims against Fibreboard were neither filed nor settled before August 27, 1993. An additional $10 million is to be contributed to the fund by Fibreboard. As indicated above, the Global Settlement approval is presently before the Fifth Circuit on remand by order of the Supreme Court vacating the Fifth Circuit's previous decision approving the Global Settlement. There is limited precedent for settlements which determine the rights of future claimants to seek relief. (8) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED Through June 30, 1997, Casualty, Fibreboard and plaintiff attorneys had reached settlements with respect to approximately 134,800 claims, for an estimated settlement amount of approximately $1.62 billion plus any applicable interest. Final court approval of the Trilateral Agreement obligates Casualty to pay under these settlements. Approximately $1.53 billion was paid through June 30, 1997, including approximately $590 million paid in the fourth quarter of 1996 and the first quarter of 1997 as a result of the Trilateral Agreement becoming final. As described above, such payments are partially recoverable from Pacific Indemnity. Casualty may negotiate other agreements with various classes of claimants including groups who may have previously reached agreement with Fibreboard. Final court approval of the Trilateral Agreement and its implementation has eliminated any further material exposure with respect to the Fibreboard matter, and subsequent reserve adjustments, if any, will not materially affect the results of operations or equity of CNA. OTHER LITIGATION CNA and its subsidiaries are also parties to other litigation arising in the ordinary course of business. The outcome of this other litigation will not, in the opinion of management, materially affect the results of operations or equity of CNA. ENVIRONMENTAL POLLUTION AND ASBESTOS-RELATED CLAIMS The CNA property/casualty insurance companies have potential exposures related to environmental pollution and asbestos-related claims. Environmental pollution clean-up is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to clean-up. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern the clean-up and restoration of abandoned toxic waste sites and formalize the concept of legal liability for clean-up and restoration by "Potentially Responsible Parties" ("PRP's"). Superfund and the mini-Superfunds (Environmental Clean-up Laws or "ECLs") establish a mechanism to pay for clean-up of waste sites if PRP's fail to do so, and to assign liability to PRP's. 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 on its National Priorities List. On the other hand, the Congressional Budget Office is estimating that there will be 4,500 National Priority List sites, and other estimates project as many as 30,000 sites that will require clean-up under ECLs. Very few sites have been subject to clean-up to date. The extent of clean-up necessary and the assignment of liability has not been established. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether Superfund response costs are considered damages under the policies, trigger of coverage, applicability of pollution exclusions, the potential for joint and several liability and definition of an occurrence. Similar coverage issues exist for clean-up of waste sites not covered under Superfund. To date, courts have been inconsistent in their rulings on these issues. (9) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED A number of proposals to reform Superfund have been made by various parties. Despite Superfund taxing authority expiring at the end of 1995, no reforms have yet been enacted by Congress. While the current Congress may address this issue, no predictions can be made as to what legislation, if any, will result. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental clean-up may be materially 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 exposure to CNA for environmental pollution claims cannot be meaningfully quantified. Claim and claim expense reserves represent management's estimates of ultimate liabilities based on currently available facts and case law. However, in addition to the uncertainties previously discussed, additional issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct by the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based on new data. As of June 30, 1997 and December 31, 1996, CNA carried approximately $882 million and $908 million, respectively, of claim and claim expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution claims. The reserves relate to claims for accident years 1988 and prior, which coincides with CNA's adoption of the Simplified Commercial General Liability coverage form which included an absolute pollution exclusion. There was no unfavorable reserve development for the six months ended June 30, 1997 and 1996. CNA has exposure to asbestos-related claims, including those attributable to the Fibreboard Claim. A detailed discussion of CNA's litigation with Fibreboard Corporation regarding asbestos-related bodily injury claims is discussed at the beginning of this note. Estimation of asbestos-related claim reserves encounter many of the same limitations discussed above for environmental pollution claims such as inconsistency of court decisions, specific policy provisions, multiple insurers and allocation of liability among insurers, missing policies and proof of coverage. As of June 30, 1997 and December 31, 1996, CNA carried approximately $1,516 million and $1,506 million, respectively, of claim and claim expense reserves, net of reinsurance recoverable, for reported and unreported asbestos-related claims. Unfavorable reserve development for the six months ended June 30, 1997 and 1996, totaled $25 million and $26 million, respectively. The following table provides additional data related to CNA's environmental pollution and asbestos-related claims reserves. |------------------------------------------------------------------------------| | | |RESERVE SUMMARY JUNE 30, 1997 DECEMBER 31, 1996 | | ------------------------ ------------------------| | ENVIRONMENTAL ASBESTOS ENVIRONMENTAL ASBESTOS| | POLLUTION POLLUTION | |------------------------------------------------------------------------------| |(In millions of dollars) | | | |Gross reserves: | | Reported claims $ 306 $ 1,517 $ 289 $ 1,551 | | Unreported claims 659 105 714 94 | | ---- ------ ---- ----- | | 965 1,622 1,003 1,645 | |Less reinsurance recoverable (83) (106) (95) (139)| |------------------------------------------------------------------------------| |NET RESERVES $ 882 $ 1,516 $ 908 $ 1,506 | |==============================================================================| (10) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED The results of operations in future years may continue to be adversely affected by environmental pollution and asbestos claims and claim expenses. Management will continue to monitor potential liabilities and make further adjustments as warranted. OTHER Other reserve development for the six months ended June 30, 1997 and 1996 was favorable and aggregated to $116 million and $267 million, respectively. Reserve development for the six months ended June 30, 1997 reflects continued favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business as well as favorable experience in the surety line of business. Reserve development for the six months ended June 30, 1996 was principally due to favorable experience in workers' compensation. These trends reflect the positive effects of changes in workers' compensation laws, or moderate increases in medical costs, and a generally strong economy in which individuals return to the workplace more quickly. CNA, consistent with sound reserving practices, regularly adjusts its reserve estimates in subsequent reporting periods as new facts and circumstances emerge that indicate the previous estimates need to be modified. NOTE D. Reinsurance: CNA assumes and cedes insurance with other insurers and reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss to provide greater diversification of risk and to minimize exposures on larger risks. The reinsurance coverages are tailored to the specific risk characteristics of each product line with CNA's retained amount varying by type of coverage. Generally, reinsurance coverage for property risks is on an excess of loss, per risk basis. Liability coverages are generally reinsured on a quota share basis in excess of CNA's retained risk. The ceding of insurance does not discharge the primary liability of the original insurer. CNA places reinsurance with other carriers only after careful review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claim settlement performance. Further, for carriers that are not authorized reinsurers in its states of domicile, CNA receives collateral, primarily in the form of bank letters of credit, securing a large portion of the recoverables. |------------------------------------------------------------------------------| |SIX MONTHS ENDED JUNE 30 EARNED PREMIUMS | | ----------------------------------------- ASSUMED/ | | NET | |(In millions of dollars) DIRECT ASSUMED CEDED NET % | |------------------------------------------------------------------------------| | | |1997 | | Life $ 435 $ 61 $ 57 $ 439 13.8 %| | Accident and health 1,859 57 65 1,851 3.1 | | Property and casualty 4,304 560 459 4,405 12.7 | |------------------------------------------------------------------------------| | TOTAL PREMIUMS $6,598 $ 678 $ 581 $ 6,695 10.1 %| |==============================================================================| | | |1996 | | Life $ 354 $ 57 $ 15 $ 396 14.5 %| | Accident and health 1,661 90 34 1,717 5.2 | | Property and casualty 4,249 1,003 751 4,501 22.3 | |------------------------------------------------------------------------------| | TOTAL PREMIUMS $6,264 $1,150 $ 800 $ 6,614 17.4 %| |==============================================================================| (11) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED In the table above, life premium revenue is from long duration contracts, property/casualty earned premium is from short duration contracts, and approximately three-quarters of accident and health earned premiums are from short duration contracts. Insurance claims and policyholders' benefits are net of reinsurance recoveries of $394 and $604 million at June 30, 1997 and June 30, 1996, respectively. NOTE E. Debt: Long-term borrowings consisted of the following: |----------------------------------------------------------------------------| |LONG-TERM DEBT JUNE 30 DECEMBER 31| |(In millions of dollars) 1997 1996 | |----------------------------------------------------------------------------| | | | Variable Rate Debt: | | Credit Facility $ 400 $ 400 | | Commercial Paper 675 675 | | Senior Notes: | | 8 7/8%, due March 1, 1998 150 150 | | 8 1/4%, due April 15, 1999 102 102 | | 7 1/4%, due March 1, 2003 146 146 | | 6 1/4%, due November 15, 2003 249 248 | | 6 3/4%, due November 15, 2006 248 248 | | 8 3/8%, due August 15, 2012 98 98 | | 7 1/4% Debenture, due November 15, 2023 247 247 | | 11% Secured Mortgage Notes, due June 20, 2013 387 387 | | 6.90% - 16.29% Secured Capital Leases, | | due December 31, 2011 46 47 | | Other 15 17 | |----------------------------------------------------------------------------| | TOTAL LONG-TERM DEBT $ 2,763 $ 2,765 | |============================================================================| To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt) CNA entered into a five-year $1.325 billion revolving credit facility. In 1996, the company renegotiated the facility, extending the maturity to May 2001. The interest rate for the facility is based on the London Interbank Offered Rate (LIBOR), plus 16 basis points. Additionally, there is a facility fee of 9 basis points annually. The average interest rate on the borrowings under the revolver at June 30, 1997 was 5.83%. Under the terms of the facility, CNA may prepay the debt without penalty. On November 15, 1996, CNA issued $250 million of 6 3/4% senior notes, due November 15, 2006. The net proceeds from this issuance of approximately $248 million were used to pay down a portion of the borrowings outstanding under the revolving credit facility. As a result of this debt issuance, borrowing capacity under the revolving credit facility was reduced by $250 million to $1.075 billion. Concurrent with the paydown of $250 million on the revolving credit facility, CNA terminated interest rate swaps with a total notional amount of $250 million. An additional $250 million of securities remain available for issuance under a shelf registration. CNA maintains a Commercial Paper Program to take advantage of favorable interest rate spreads. The commercial paper borrowings are classified as long-term as $675 million of the committed bank facility will support the commercial paper program. The weighted-average yield on commercial paper at June 30, 1997 was 5.92%. As of August 1, 1997, the outstanding loans under the revolving credit facility were $400 million. There was no unused borrowing capacity under the facility after the effects of the commercial paper program. (12) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONCLUDED To offset the variable rate characteristics of the facility, CNA entered into interest rate swap agreements with several banks having a total notional principal amount of $950 million. These agreements terminate from May to December 2000. These agreements provide that CNA pay interest at a fixed rate, averaging 6.20% at June 30, 1997, in exchange for the receipt of interest at the three month LIBOR rate. The effect of these interest rate swaps was to increase interest expense by $2.3 million for the six months ended June 30, 1997. The weighted average interest rate (interest and facility fees) on the variable rate acquisition debt, which includes the revolving credit facility and commercial paper was 6.32% at June 30, 1997. This rate reflects the effect of the interest rate swaps. NOTE F. Pending Acquisition In the fourth quarter of 1996, CNA entered into a merger agreement with Capsure Holdings Corp. (Capsure) to form a new stock company, CNA Surety Corporation. CNA will be the majority shareholder of the new company owning approximately 62% of the shares. The remaining shares will be held by existing Capsure shareholders and option holders. The transaction will be accounted for as a purchase and is expected to close in the third quarter of 1997. The transaction closing is subject to the approvals of the Capsure shareholders, state insurance regulators, certain governmental authorities and the satisfaction of certain other conditions. Until the required approvals are received and the transaction is complete, the companies will continue to operate independently. Capsure provides surety and fidelity bonds nationwide through its subsidiaries Western Surety Company and Universal Surety of America. Capsure's revenues for the year ended December 31, 1996 were approximately $111 million. Total assets were approximately $313 million at December 31, 1996. (13) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto found on pages 3 to 13, which contain additional information helpful in evaluating operating results and financial condition. CNA is one of the largest commercial insurers in the United States, the third largest property-casualty company and the twenty-second largest life insurance company in the country, based on 1996 net written premium. Based on market share, CNA ranks first among United States insurers in commercial affiliation marketing, commercial multiple peril, personal packages, surety, and ocean marine; second in commercial auto, general liability, medical malpractice, federal employees health benefit plans, multiple peril crop, offshore energy, accounts receivable credit; third in automobile warranty, directors & officers, farmowners multiple peril, recreational watercraft and workers' compensation; and sixth in reinsurance in the United States. In addition, CNA ranks first, second or third for various errors & omissions coverages for architects and engineers, accountants, lawyers and other professionals. RESULTS OF OPERATIONS: The following chart summarizes key components of operating results for the six months and quarter ended June 30, 1997 and 1996.
|------------------------------------------------------------------------------------------------| |PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS | |(In millions of dollars) 1997 1996 1997 1996 | |------------------------------------------------------------------------------------------------| |OPERATING SUMMARY (EXCLUDING REALIZED INVESTMENT | | GAINS/LOSSES): | |Revenues: | | Premiums: | | Property/Casualty $ 2,529 $ 2,479 $ 5,000 $ 4,987 | | Life 819 842 1,695 1,627 | | ------ ------ ------ ----- | | 3,348 3,321 6,695 6,614 | | Net investment income 547 558 1,111 1,135 | | Other 176 143 331 283 | | ------ ------ ------ ----- | | 4,071 4,022 8,137 8,032 | |Benefits and expenses 3,900 3,805 7,800 7,625 | | ------ ------ ------ ----- | | Operating income before income tax 171 217 337 407 | | (45) (66) (75) (110) | |Income tax expense ------ ------ ----- ----- | | Net operating income $ 126 $ 151 $ 262 $ 297 | | ------ ------ ----- ----- | |SUPPLEMENTAL FINANCIAL DATA: | |Net operating income (loss) by group: | | Property/Casualty $ 125 $ 146 $ 264 $ 298 | | Life 24 26 47 55 | | Other, primarily interest expense (23) (21) (49) (56) | | ----- ----- ----- ------ | | 126 151 262 297 | | ----- ---- ----- ------ | |Net realized investment gains (losses) by group: | | Property/Casualty 82 46 94 180 | | Life 26 8 44 57 | | Other 1 (4) 12 (3)| | ------ ----- ----- ------ | | 109 50 150 234 | | ------ ----- ----- ------ | |Net income (loss) by group: | | Property/Casualty 207 192 358 478 | | Life 50 34 90 111 | | Other, primarily interest expense (22) (24) (36) (58)| | ------ ----- ----- ------ | | $ 235 $ 202 $ 412 $ 531 | | | |================================================================================================|
(14) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Consolidated Results Consolidated revenues for the first six months of both 1997 and 1996 were approximately $8.4 billion. Consolidated revenues excluding realized investment gains, increased to $8.1 billion for the first half of 1997 as compared to $8.0 billion for the first half of 1996. For the first six months, revenues reflect an increase of $81 million (1.2%) in earned premiums, a decrease of $25 million (2.2%) in investment income and an increase of $48 million (16.9%) in other income. Net operating income, which excludes net realized investment gains, for the first half of 1997 was $262 million, or $4.19 per share, compared to net operating income of $297 million, or $4.76 per share, for the first six months of 1996. Net operating income for the second quarter was $126 million, or $2.01 per share, compared with $152 million, or $2.44 per share, for the same quarter in 1996. CNA's income in the first half of 1997 is net of pretax losses of $76 million related to catastrophe claims; pretax catastrophe losses in the first half of 1996 were $208 million. Realized investment gains, net of tax, for the first half of 1997 were $150 million, or $2.44 per share, compared to net realized investment gains for the first half of 1996 of $234 million, or $3.79 per share. The components of the net realized investment gains (losses) are as follows: |--------------------------------------------------------------------------| |REALIZED INVESTMENT GAINS(LOSSES) | |SIX MONTHS ENDED JUNE 30 1997 1996 | |(In millions of dollars) | |--------------------------------------------------------------------------| |Bonds: | | U.S. Government $ 49 $ 112 | | Tax exempt 2 10 | | Asset-backed 9 21 | | Taxable 84 45 | | ------ ----- | | Total bonds 144 188 | | | |Stocks 39 129 | |Derivative securities (1) 12 | |Separate accounts and other 55 49 | | ------ ----- | | Realized investment gains reported in revenues 237 378 | |Participating policyholders' interest (5) (13) | |Income tax expense (82) (131) | | ------ ----- | | Net realized investment gains | | $ 150 $ 234 | |==========================================================================| Net income was $412 million, or $6.63 per share, compared to $531 million, or $8.55 per share, for the first six months of 1996. Net income for the second quarter was $235 million, or $3.78 per share, compared with a net income of $202 million, or $3.25 per share, for the second quarter of 1996. (15) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Property/Casualty Operations |------------------------------------------------------------------------------| |PROPERTY/CASUALTY GROUP SECOND QUARTER SIX MONTHS | |PERIOD ENDED JUNE 30 1997 1996 1997 1996 | |(In millions of dollars) | |------------------------------------------------------------------------------| |OPERATING SUMMARY (EXCLUDING REALIZED | |INVESTMENT GAINS/LOSSES): | |Revenues: | | Premiums $ 2,537 $ 2,479 $ 5,000 $ 4,986 | | Net investment income 450 458 911 940 | | Other 142 126 275 241 | | ------ ------ ------ ------ | | 3,129 3,063 6,186 6,167 | |Benefits and expenses 2,956 2,848 5,845 5,761 | | ----- ----- ------ ----- | | Income before income tax 173 215 341 406 | |Income tax expense (48) (69) (77) (108)| | ------ ----- ------- ------| | Net operating income (excluding realized | | investment gains/losses) $ 125 $ 146 $ 264 $ 298 | |==============================================================================| Property/casualty revenues, excluding net realized investment gains/losses, increased $19 million for the six months ended June 30, 1997 when compared to the same period a year ago. Property/casualty earned premium increased $14 million from the prior years comparable period. The increase in earned premium is due primarily to an increase in commercial operations particularly in professional and specialty, accident and health and reinsurance business partially offset by a decrease in involuntary risk business. Property/casualty pretax operating income before realized gains reflects a decrease of $65 million for the first six months of 1997 compared to the same period in 1996. The decrease in operating income stems from an increase in underwriting losses as well as a decline in investment income. This decrease was offset in part by lower operating expenses and favorable catastrophe loss experience. Underwriting losses for the six and three months ended June 30, 1997, were $570 million and $277 million, compared to $534 million and $243 million for the same periods in 1996. The GAAP combined ratio for the six months ending June 30, 1997 was 109.3% as compared to 108.6% for the comparable period in 1996. GAAP expense ratios were 29.8% and 30.0% for the six month periods ended June 30, 1997 and June 30, 1996, respectively. Deterioration in the loss ratio reflects continued competitive pressures on virtually all segments of the insurance market, particularly commercial insurance. CNA incurred pre-tax catastrophe losses of approximately $76 million and $45 million for the six and three months ended June 30, 1997 compared to $208 million and $115 million for the respective periods in 1996. Pretax operating income excluding net realized investment gains/losses, for the property/casualty insurance subsidiaries was $341 million and $173 million for the six months and three months ended June 30, 1997, compared to $406 million and $215 million for the same period a year ago. Investment income decreased 3.1% and 1.7% for the six and three months ended June 30, 1997, to $911 million and $450 million, respectively, when compared with the comparable periods a year ago of $940 million and $458 million, respectively. The decrease reflects reduced operating cash flow and a movement to shorter duration investments. The fixed maturities segment of the investment portfolio yielded 6.4% in the first half of 1997 as compared to 6.9% for the first half of 1996. (16) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED The net income of CNA's property/casualty insurance subsidiaries, excluding net realized investment gains/losses, was $264 and $125 million for the six and three months ended June 30, 1997, compared to $298 million and $146 million for the same periods in 1996. Net realized investment gains for the six and three months ended June 30, 1997 were $94 million and $82 million, compared to $180 million and $46 million in the comparable periods of 1996. Life Operations |------------------------------------------------------------------------------| |LIFE GROUP SECOND QUARTER SIX MONTHS | | | |PERIOD ENDED JUNE 30 1997 1996 1997 1996 | |(In millions of dollars) | |------------------------------------------------------------------------------| |OPERATING SUMMARY (EXCLUDING REALIZED | | INVESTMENT GAINS/LOSSES): | |Revenues: | | Premiums $ 812 $ 847 $1,697 $ 1,640 | | Net investment income 99 100 204 197 | | Other 33 17 56 42 | | ---- ---- ----- ------ | | 944 964 1,957 1,879 | |Benefits and expenses 909 924 1,884 1,793 | | ---- ----- ----- ------ | | Income before income tax 35 40 73 86 | |Income tax expense (11) (14) (26) (31)| | ---- ----- ----- ------ | | Net operating income (excluding realized | | investment gains/losses) $ 24 $ 26 $ 47 $ 55 | |==============================================================================| Life group revenues, excluding realized investment gains, were approximately $2.0 billion, up 4.2% for the six months ended June 30, 1997 compared to the same period a year ago. Life premium revenues were $1.697 billion for the six months ended June 30, 1997 compared to $1.640 billion and $847 million for the same period in 1996. The increase is due to the continued growth in sales in the Viaterm life product, continued growth in Disability and Accident premium and an increase in premiums in the Federal Employees Health Benefits Program, due to strong enrollment through the first six months at 1997. The increase in premiums is offset by a drop in group reinsurance premium. Investment income for the six months ended June 30, 1997 was $204 million as compared to $197 million for the same period a year ago, this increase can be mainly attributed to a larger asset base generated from increased operating cash flows. The fixed maturities segment of the life investment portfolio, which is the primary investment segment, yielded 6.4% in the first half of 1997 compared with 6.8% for the same period a year ago. Life group revenues, excluding realized investment gains, were down 4.13% to $812 million from $847 million for the second quarter of 1997 when compared to the second quarter of 1996. The primary reasons for this decline are a decrease in annuity business and group reinsurance business offset in part by increases in Viaterm and Disability and Accident premium. Pretax operating income for the life insurance subsidiaries, excluding net realized investment gains/losses, was $73 million and $35 million for the six and three months ended June 30, 1997, compared to $86 million and $40 million for the same periods in 1996. CNA's life insurance subsidiaries' net operating income, excluding net realized investment gains/losses was $47 million and $24 million for the six and three months ended June 30, 1997 compared to $55 million and $26 million for the (17) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED same period in 1996. Net realized investment gains for the six and three months ended June 30, 1997 were $44 million and $26 million, compared to $57 million and $8 million for the same periods of 1996. INVESTMENTS:
|--------------------------------------------------------------------------------------------------------| |SUMMARY OF GENERAL ACCOUNT INVESTMENTS SIX MONTHS ENDED JUNE 30, 1997| | ------------------------------| | AT MARKET VALUE CHANGE IN | | JUNE 30 DECEMBER 31 NET UNREALIZED REALIZED | |(In millions of dollars) 1997 1996 GAINS(LOSSES) GAINS(LOSSES) | |--------------------------------------------------------------------------------------------------------| |FIXED MATURITY SECURITIES: | |U. S. Treasury securities and | | obligations of government agencies $ 10,460 $ 9,835 $ (72) $ 49 | |Asset-backed securities 4,634 6,292 15 9 | |Tax exempt securities 4,425 4,951 20 2 | |Taxable securities 6,421 6,643 (53) 84 | | -------- -------- ----- ---- | | Total fixed maturity securities 25,940 27,721 (90) 144 | |Stocks 657 859 (41) 39 | |Short-term investments and other 9,944 6,830 (11) 13 | |Derivative security investments 1 2 -- (1) | | -------- -------- ---- ---- | | TOTAL INVESTMENTS $ 36,542 $ 35,412 (142) 195 | | ======== ======== | |Separate accounts and discontinued operations (15) 42 | |Participating policyholders' interest (3) (5) | |Income tax benefit (expense ) 31 (82) | | ---- ---- | | NET INVESTMENT GAINS (LOSSES) $(129) $ 150 | | | |--------------------------------------------------------------------------------------------------------| | |-----------------------------------------------------------------------| |SHORT-TERM INVESTMENTS: | |-----------------------------------------------------------------------| |Security repurchase collateral $ 1,626 $ 101 | |Escrow 1,092 1,062 | |Commercial paper 3,707 3,207 | |Money markets 813 746 | |Other 1,765 738 | |-----------------------------------------------------------------------| | TOTAL SHORT-TERM INVESTMENTS $ 9,003 $ 5,854 | |-----------------------------------------------------------------------|
CNA's general account investment portfolio is managed to maximize after-tax investment return, while minimizing credit risks, with investments concentrated in high quality securities to support its insurance underwriting operations. CNA has the capacity to hold its fixed maturity portfolio to maturity. However, securities may be sold as part of CNA's asset/liability strategies or to take advantage of investment opportunities generated by changing interest rates, prepayments, tax and credit considerations, or other similar factors. Accordingly, the fixed maturity securities are classified as available for sale. CNA has a securities lending program where securities are loaned to third parties, primarily major brokerage firms. Borrowers of these securities must deposit cash or securities in excess of 100% of the fair value of the securities borrowed. Cash deposits from these transactions are invested in short-term investments (primarily commercial paper). CNA continues to receive the interest on loaned debt securities, as beneficial owner, and accordingly, loaned debt securities are included within fixed maturity securities. The liabilities for securities sold subject to repurchase agreements are recorded at their contractual repurchase amounts. On December 30, 1993, CNA deposited $987 million in an escrow account, pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note C. The funds are included in short-term investments and are invested mainly in U.S. Treasury securities. The escrow account at June 30, 1997 amounted to $1.094 billion as compared to $1.071 billion at year end 1996. (18) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED In addition to interest rate swaps used to covert CNA's acquisition debt from a variable rate to a fixed rate, CNA holds derivative financial instruments for purposes of enhancing income and total return. The derivative securities are marked-to-market with valuation changes reported as realized investment gains and losses. CNA's investment in, and risk in relation to, derivative securities is not significant. The general account portfolio consists primarily of high quality marketable fixed maturity securities, approximately 94% of which are rated as investment grade. At June 30, 1997, tax-exempt securities and short-term investments, excluding collateral for securities sold under repurchase agreements, comprised approximately 12% and 20%, respectively, of the general account's total investment portfolio compared to 14% and 16%, respectively, at December 31, 1996. Historically, CNA has maintained short-term assets at a level that provided for liquidity to meet its short-term obligations, as well as reasonable contingencies and anticipated claim payout patterns. At June 30, 1997, the major components of the short-term investment portfolio consist primarily of high-grade commercial paper and U.S. Treasury bills. Collateral for securities sold under repurchase agreements increased $1,525 million to $1,626 million. As of June 30, 1997, the market value of CNA's general account investments in fixed maturities was $25.9 billion and was greater than amortized cost by approximately $91 million. This compares to a market value of $27.7 billion and $181 million of net unrealized investment gains at December 31, 1996. The gross unrealized investment gains and losses for the fixed maturity securities portfolio at June 30, 1997, were $323 million and $232 million, respectively, compared to $444 million and $263 million, respectively, at December 31, 1996. The decline in unrealized investment gains is attributable, in large part, to increases in interest rates which have an adverse effect on bond values. Net unrealized investment losses on general account fixed maturities at June 30, 1997 include net unrealized losses on high yield securities of $10 million, compared to net unrealized gains of $41 million at December 31, 1996. High yield securities are bonds rated as below investment grade by bond rating agencies, plus private placements and other unrated securities which, in the opinion of management, are below investment grade. Fair values of high yield securities in the general account were $1.46 billion at June 30, 1997 as compared to $2.02 billion at December 31, 1996. At June 30, 1997, total Separate Account cash and investments amounted to $5.8 billion with taxable fixed maturity securities representing approximately 83% of the separate accounts' portfolio. Approximately 77% of separate account investments are used to fund guaranteed investments for which Continental Assurance Company guarantees principal and a specified return to the contractholders. The duration of fixed maturity securities included in the guaranteed investment portfolio are matched approximately with the corresponding payout pattern of the guaranteed investment contracts. The fair value of all fixed maturity securities in the guaranteed investment portfolio was $4.0 billion at June 30, 1997 compared to $3.8 billion at December 31, 1996. At June 30, 1997, fair value was greater than the amortized cost by approximately $9 million. This compares to an unrealized loss of $1 million at December 31, 1996. The gross unrealized investment gains and losses for the guaranteed investment fixed maturity securities portfolio at June 30, 1997 were $45 million and $36 million, respectively. Carrying values of high yield securities in the guaranteed investment portfolio were $444 million at June 30, 1997 and $472 million December 31, 1996. Net unrealized investment losses on such high yield securities held were $6 million at June 30, 1997, and December 31, 1996. (19) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED High yield securities generally involve a greater degree of risk than that of investment grade securities. Expected returns should, however, compensate for the added risk. The risk is also considered in the interest rate assumptions in the underlying insurance products. As of June 30, 1997, CNA's investment in high yield bonds, including Separate Accounts, was approximately 3.3% of total assets. In addition, CNA's investment in mortgage loans and investment real estate are substantially below the industry average, representing less than one quarter of one percent of its total assets. Included in CNA's fixed maturity securities at June 30, 1997 (general and guaranteed investment portfolios) are $7.1 billion of asset-backed securities, consisting of approximately 52% in collateralized mortgage obligations ("CMOs"), 9% in corporate asset-backed obligations, and 39% in U.S. Government issued pass-through certificates. The majority of CMOs held are U.S. Government agency issues, which are actively traded in liquid markets and are priced monthly by broker-dealers. At June 30, 1997, the fair value of asset-backed securities was more than amortized cost by approximately $22 million compared to net unrealized investment losses of $5 million at December 31, 1996. CNA limits the risks associated with interest rate fluctuations and prepayment by concentrating its CMO investments in early planned amortization classes with relatively short principal repayment windows. Over the last few years, much concern has been raised regarding the quality of insurance company invested assets. At June 30, 1997, 46% of the general account's fixed maturity securities portfolio was invested in U.S. Government securities, 30% in other AAA rated securities and 13% in AA and A rated securities. CNA's guaranteed investment portfolio includes fixed maturity securities comprised of 4% U.S. Government securities, 62% in other AAA rated securities and 13% in AA and A rated securities. These ratings are primarily from Standard & Poor's. FINANCIAL CONDITION: |------------------------------------------------------------------------| |FINANCIAL POSITION JUNE 30 DECEMBER 31| |(In millions of dollars, except per share data) 1997 1996 | |------------------------------------------------------------------------| | | |Assets $ 62,585 $ 60,735 | |Stockholders' equity 7,340 7,060 | |Unrealized net appreciation included | | in stockholders' equity 170 299 | |Book value per common share 116.35 111.81 | |------------------------------------------------------------------------| CNA's assets increased approximately $1.85 billion from December 31, 1996 to $62.6 billion as of June 30, 1997. This change was primarily the result of an increase in securities sold under repurchase agreements of approximately $1.5 billion. During the first six months of 1997, CNA's stockholders' equity increased by $280 million, or 4.0%, to $7.3 billion. The major component of this change was net income of $412 million which was offset by a $129 million decline in net unrealized investment gains. When compared to December 31, 1996, the statutory surplus of the property/casualty subsidiaries remained at approximately $6.4 billion. The statutory surplus of the life insurance subsidiaries remained at approximately $1.2 billion, when compared to year end 1996. (20) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED LIQUIDITY AND CAPITAL RESOURCES: The liquidity requirements of CNA have been met primarily by funds generated from operations. The principal operating cash flow sources of CNA's property/casualty and life insurance subsidiaries are premiums and investment income and sales and maturities of investments. The primary operating cash flow uses are payments for claims, policy benefits and operating expenses. CNA's operating activities generated net negative cash flows of approximately $670 million and $113 million for the six months ended June 30, 1997 and 1996, respectively. Negative cash flows in 1997 are primarily the result of substantial claim payments resulting from the settlement of the Fibreboard litigation. CNA believes that future liquidity needs will be met primarily by cash generated from operations. Net cash flows from operations are invested in marketable securities. Investment strategies employed by CNA's insurance subsidiaries consider the cash flow requirements of the insurance products sold and the tax attributes of the various types of marketable investments. CNA and the insurance industry are exposed to liability for environmental pollution, primarily related to toxic waste site clean-up. Refer to Note C to the Condensed Consolidated Financial Statements for further discussion of environmental pollution exposures. ACCOUNTING STANDARDS: In June 1996, the Financial Accounting Standards Board (FASB) issued Statements on Financial Accounting Standards (SFAS) 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement has been amended and is now effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 or 1997, depending on the type of transaction. This Statement will not have a significant impact on CNA. In January 1997, the Securities and Exchange Commission approved amendments to Regulation S-X, Regulation S-K, Regulation S-B, and various forms to clarify and expand existing disclosure requirements with respect to derivative financial instruments and derivative commodity instruments. The new rules require enhanced descriptions in the footnotes to the financial statements of accounting policies for derivative financial instruments and derivative commodity instruments. They also require disclosure outside the financial statements of qualitative and quantitative information about market risk related to derivative financial instruments, other financial instruments, and derivative commodity instruments. These amendments are effective for the year end 1997 financial statements and will not have a significant impact on CNA. (21) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONCLUDED In February 1997, the FASB issued SFAS 128, "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share (EPS), which simplifies the computations originally established in APB Opinion No. 15, "Earnings per Share" and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with basic EPS, which excludes dilution. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation between the two computations. This Statement is effective for financial statements issued for periods ending after December 15, 1997. This Statement will not have a significant impact on CNA. In February 1997, the FASB issued SFAS 129, "Disclosure of Information about Capital Structure," which establishes standards for disclosing information about an entity's capital structure. The Statement consolidates existing disclosure requirements for ease of retrieval and greater visibility to nonpublic entities. The new Statement contains no change in disclosure requirements for companies previously subject to the requirements of APB Opinion No. 10, "Omnibus Opinion--1966," APB Opinion No. 15, "Earnings per Share," and FASB Statement 47, "Disclosure of Long-Term Obligations." It applies to all entities and is effective for financial statements issued for periods ending after December 15, 1997. This Statement has no impact on CNA. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which establishes accounting standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This Statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This Statement is effective for fiscal years beginning after December 15, 1997. This Statement is not expected to result in a significant change on CNA's disclosures. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in interim and annual financial statements. It requires that those enterprises report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets, and that the enterprises reconcile the total of those amounts to the general-purpose financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement is effective for financial statements for periods beginning after December 15, 1997. This Statement will redefine CNA's business segment disclosure. (22) CNA FINANCIAL CORPORATION PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Set forth below is information relating to the 1997 Annual Meeting of Shareholders of CNA Financial Corporation. The annual meeting was called to order at 10:00 A.M., May 7, 1997. Represented at the meeting, in person or by proxy, were 57,238,056 shares, approximately 92.621% of the issued and outstanding shares entitled to vote. The following business was transacted: Election of Directors Over 99.0% of the votes cast for directors were votes for the election of the following directors. The number of votes cast FOR and WITHHELD with respect to each director were as follows: Votes For Votes Withheld ----------- --------------- Antoinette Cook Bush 57,164,043 74,013 Dennis H. Chookaszian 57,164,043 74,013 Philip L. Engel 57,164,043 74,013 Robert P. Gwinn 57,164,003 74,053 Walter F. Mondale 57,163,924 74,132 Edward J. Noha 57,164,043 74,013 Joseph Rosenberg 57,164,043 74,013 Richard L. Thomas 57,164,043 74,013 James S. Tisch 57,164,043 74,013 Laurence A. Tisch 57,164,043 74,013 Preston R. Tisch 57,164,043 74,013 Marvin Zonis 57,164,043 74,013 Ratification of the Appointment of Independent Certified Public Accountants The appointment of Deloitte & Touche LLP as independent public auditors for the Company was ratified by a vote of 57,223,432 shares or 99.975% of the shares voting. 12,350 shares or approximately 0.021% of the shares voting, were cast against, and 2,274 shares, or approximately 0.004% of the shares voting, abstained. (23) CNA FINANCIAL CORPORATION PART II OTHER INFORMATION - CONTINUED ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: Description of Exhibit Exhibit Page Number Number ------- ------ (11) Computation of Net Income per Common Share 11 27 (12.1) Computation of Ratio of Earnings to Fixed Charges 12.1 28 (12.2) Computation of Ratio of Net Income, As Adjusted, to Fixed Charges 12.2 28 (27) Financial Data Schedule 27 29 (b) REPORTS ON FORM 8-K: There were no reports on Form 8-K for the three months ended June 30, 1997. (24) CNA FINANCIAL CORPORATION PART II OTHER INFORMATION - CONCLUDED SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNA FINANCIAL CORPORATION Date: August 14, 1997 By: S/PATRICIA L. KUBERA --------------- -------------------------------- Patricia L. Kubera Group Vice President, and Controller (Principal Accounting Officer) EXHIBIT 11 CNA FINANCIAL CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE - -------------------------------------------------------------------------------- PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS (In millions, except per share data) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Earnings per share: Net income ................................... $ 235 $ 202 $ 412 $ 531 Less preferred stock dividends................ 1 1 3 3 ----- ---- ---- ------ Net income available to common stockholders.. $ 234 $ 201 $ 409 $ 529 ===== ==== ==== ===== Weighted average shares outstanding........... 61.8 61.8 61.8 61.8 ===== ==== ==== ===== Net income per common share................... $ 3.78 $ 3.25 $ 6.63 $ 8.55 ===== ==== ===== ===== - -------------------------------------------------------------------------------- (26) EXHIBIT 12.1 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - --------------------------------------------------------------------------- PERIOD ENDED JUNE 30 1997 1996 (In millions of dollars, except ratios) - --------------------------------------------------------------------------- Income before income tax and cumulative effect of accounting changes.................................. $ 570 $ 772 Adjustments: Interest expense......................................... 96 105 Interest element of operating lease rental............... 12 18 ---- ----- Income before income tax and cumulative effect of accounting changes, as adjusted........................ $ 678 $ 895 ==== ===== Fixed charges: Interest expense......................................... $ 96 $ 105 Interest element of operating lease rental............... 12 18 ---- ---- Fixed charges............................................... $ 108 $ 123 ==== ==== Ratio of earnings to fixed charges (1)...................... 6.3 7.3 - --------------------------------------------------------------------------- (1) For purposes of computing this ratio, earnings consist of income before income taxes and cumulative effect of accounting changes plus fixed charges of consolidated companies. Fixed charges consist of interest and that portion of operating lease rental expense which is deemed to be an interest factor for such rentals. EXHIBIT 12.2 CNA FINANCIAL CORPORATION COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED, TO FIXED CHARGES - -------------------------------------------------------------------------- PERIOD ENDED JUNE 30, 1997 1996 (In millions of dollars, except ratios) - -------------------------------------------------------------------------- Net income...................................................$ 412 $ 531 Adjustments: Interest expense, after tax............................... 62 68 Interest element of operating lease rental, after tax..... 8 12 ----- ----- Net income, as adjusted......................................$ 482 $ 611 ==== ===== Fixed charges: Interest expense, after tax...............................$ 62 $ 68 Interest element of operating lease rental, after tax..... 8 12 ----- ---- Fixed charges................................................$ 70 $ 80 ===== ==== Ratio of net income, as adjusted, to fixed charges (1)....... 6.9 7.6 - -------------------------------------------------------------------------- (1) For purposes of computing this ratio, net income has been adjusted to include fixed charges of consolidated companies, after tax. Fixed charges consist of interest and that portion of operating lease rental expense which is deemed to be an interest factor for such rentals. (27) EX-27 2 ARTICLE 7 FDS FOR 10-Q
7 0000021175 CNA FINANCIAL CORPORATION 1,000,000 6-MOS DEC-31-1997 JAN-1-1997 JUN-30-1997 25,940 0 0 657 108 6 36,542 402 6,599 2,123 62,585 35,145 5,107 122 720 2,763 0 150 155 7,035 62,585 6,695 1,111 238 331 5,752 1,116 841 570 158 412 0 0 0 412 6.63 6.63 23,734 3,933 91 896 2,843 23,837 91
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