<PAGE>
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1994 Commission File Number 1-5823
--------------------------
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-6169860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA Plaza
Chicago, Illinois 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes /X/ No...
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 1, 1994
----------------------------- -------------------------------
Common Stock, Par value $2.50 61,797,856
===============================================================================
Page (1) of (27)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- - ------- --------------------- --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
MARCH 31, 1994 (Unaudited) and DECEMBER 31, 1993 . . . . . . . . . . 3
STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993 . . . . . . . . . 4
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993 . . . . . . . . . 5
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993 . . . . . . . . . 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION
- - -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
EXHIBIT 11. COMPUTATION OF NET INCOME PER COMMON SHARE. . . . . . . . . 27
(2)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
March 31 December 31
1994 1993
(In thousands of dollars) (Unaudited)
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities available for sale (cost: $20,499,770 and $17,103,240) . . . . $20,492,056 $17,607,635
Equity securities available for sale (cost: $400,919 and $432,738) . . . . . . 456,633 508,249
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,124 57,641
Real estate (less accumulated depreciation: $3,317 and $3,532) . . . . . . . . 3,178 3,963
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,487 174,006
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,168 67,891
Short-term investments--Note B. . . . . . . . . . . . . . . . . . . . . . . . . 7,356,482 6,943,976
---------- ----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,633,128 25,363,361
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,179 129,631
Insurance receivables:
Reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,994,761 2,951,664
Other insurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . 3,870,724 3,657,048
Less allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . . (117,311) (117,324)
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . 1,008,331 985,383
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,862 245,880
Receivables for securities sold . . . . . . . . . . . . . . . . . . . . . . . . 433,994 387,477
Federal income taxes recoverable (includes $111,979 and $71,774 due from Loews) 118,771 78,512
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,256,238 1,029,657
Property and equipment at cost (less accumulated depreciation: $227,404 and
$219,417) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,137 221,507
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . 156,022 167,292
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314,994 271,639
Separate Account business . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,114,025 6,540,557
- - ------------------------------------------------------------------------------------------------------------
Total assets $43,345,855 $41,912,284
============================================================================================================
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET-continued
Liabilities and Stockholders Equity
Liabilities:
Insurance reserves:
Claim and claim expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,992,414 $21,670,202
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,805,718 2,753,591
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,714,190 2,556,015
Policyholders' funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456,181 478,616
Participating policyholders' equity . . . . . . . . . . . . . . . . . . . . . . 118,929 141,501
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . 4,146,706 613,250
Payables for securities purchased . . . . . . . . . . . . . . . . . . . . . . . 250,993 40,070
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912,966 913,279
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 848,430 822,126
Separate Account business . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,114,025 6,540,557
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,362,552 36,531,207
---------- ----------
Commitments and contingent liabilities
Stockholders' equity:
Common stock ($2.50 par value; Authorized - 200,000,000 shares;
Issued - 61,841,969 shares). . . . . . . . . . . . . . . . . . . . . . . . . . 154,605 154,605
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 150,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 434,692 434,692
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,205,133 4,284,293
Net unrealized investment gains . . . . . . . . . . . . . . . . . . . . . . . . 41,389 360,003
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,516) (2,516)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 4,983,303 5,381,077
- - -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $45,345,855 $41,912,284
=============================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
(3)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1994 1993
(In thousands of dollars, except per share data)
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums ........................................................................ $ 2,308,921 $ 2,084,810
Net investment income ........................................................... 346,300 346,238
Realized investment gains (losses) .............................................. (105,715) 439,782
Other............................................................................ 54,953 46,716
---------- ----------
2,604,459 2,917,546
---------- ----------
Benefits and expenses:
Insurance claims and policyholders' benefits .................................... 2,121,178 1,960,687
Amortization of deferred acquisition costs....................................... 323,890 275,562
Other operating expenses......................................................... 307,972 278,318
Interest expense................................................................. 17,613 9,125
---------- ----------
2,770,653 2,523,692
---------- ----------
Income (loss) before income tax............................................... (166,194) 393,854
Income tax benefit (expense)...................................................... 88,141 (80,272)
- - ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (78,053) $ 313,582
================================================================================================================
EARNINGS PER SHARE $ (1.28) $ 5.06
================================================================================================================
Weighted average outstanding shares of
common stock (in thousands of shares)............................................ 61,798 61,798
================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
(4)
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------
Three Months Ended March 31, 1994 and 1993
Net
Unrealized
Additional Investment
Capital Paid-in Retained Gains
(In thousands of dollars) Stock Capital Earnings (Losses) Total
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992..... $302,089 $434,692 $4,020,743 $ 31,673 $4,789,197
Net income................... - - 313,582 - 313,582
Unrealized investment losses. - - - (1,066) (1,066)
Preferred dividends.......... - - (1,000) - (1,000)
- - -------------------------------------------------------------------------------------------
Balance, March 31, 1993 $302,089 $434,692 $4,333,325 $ 30,607 $5,100,713
===========================================================================================
Balance, December 31, 1993..... $302,089 $434,692 $4,284,293 $360,003 $5,381,077
Net loss..................... - - (78,053) - (78,053)
Unrealized investment losses. - - - (318,614) (318,614)
Preferred dividends.......... - - (1,107) - (1,107)
- - -------------------------------------------------------------------------------------------
Balance, March 31, 1994 $302,089 $434,692 $4,205,133 $ 41,389 $4,983,303
===========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
(5)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
Three Months Ended March 31 1994 1993
(In thousands of dollars)
- - --------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ (78,053) $ 313,582
------------ ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Pretax realized (gains) losses....................... 105,715 (439,782)
Participating policyholders' interest................ (9,207) (1,964)
Amortization of bond discount........................ (14,868) (26,434)
Depreciation......................................... 15,031 10,736
Changes in:
Other insurance receivables....................... (213,688) 71,515
Reinsurance receivables........................... (43,097) 32,355
Prepaid reinsurance premiums...................... 11,270 (10,618)
Deferred acquisition costs........................ (22,949) (29,684)
Accrued investment income......................... (9,983) 37,548
Insurance reserves................................ 506,987 153,937
Federal income taxes.............................. (40,259) 311,813
Deferred income taxes............................. (42,329) 6,727
Other, net........................................ (941) (9,704)
------------ -----------
Total adjustments......................... 241,682 106,445
------------ -----------
Net cash provided by operating activities. 163,629 420,027
------------ -----------
Cash flows from investing activities:
Purchases of fixed maturities.......................... (17,960,153) (5,869,027)
Proceeds from fixed maturities:
Sales................................................ 14,180,199 9,403,157
Maturities, calls and redemptions.................... 455,892 606,881
Purchases of equity securities......................... (93,780) (171,896)
Proceeds from sale of equity securities................ 138,115 255,029
Change in short-term investments....................... (417,082) (4,273,823)
Purchases of property and equipment.................... (25,107) (9,711)
Change in securities sold under repurchase agreements.. 3,533,456 (403,422)
Change in other investments............................ (31,567) 11,345
Other, net............................................. 506 (3,062)
------------ ----------
Net cash used in investing activities..... (219,521) (454,529)
------------ ----------
</TABLE>
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS-continued
(Unaudited)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
Three Months Ended March 31 1994 1993
(In thousands of dollars)
- - --------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to preferred shareholders............... (1,120) (1,139)
Receipts from investment contracts credited to
policyholder account balances........................ 10,804 12,479
Return of policyholder account balances on investment
contracts............................................ (7,712) (4,023)
Principal payments on long-term debt................... (773) (284)
Proceeds from issuance of long-term debt............... 241 -
------------ ----------
Net cash provided by financing
activities............................... 1,440 7,033
------------ ----------
Net decrease in cash...................... (54,452) (27,469)
Cash at beginning of period ............................. 129,631 84,120
- - --------------------------------------------------------------------------------------
Cash at end of period $ 75,179 $ 56,651
======================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense...................................... $ (17,644) $ (17,728)
Federal income taxes.................................. 11,550 245,511
======================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
(6)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(Unaudited)
NOTE A. Basis of Presentation:
The consolidated financial statements (unaudited) include CNA Financial
Corporation and subsidiaries (CNA) and have been prepared in accordance with
generally accepted accounting principles. In the opinion of management,
these statements include all adjustments (consisting of normal recurring
accruals) which are necessary for a fair presentation of the financial
position, results of operations and cash flows in the accompanying unaudited
consolidated financial statements.
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, 1993, filed with
the Commission on March 30, 1994 and the information shown below.
Certain amounts applicable to 1993 have been reclassified to conform to
classifications followed in 1994.
NOTE B. Restricted Investments:
On December 30, 1993, CNA deposited $986.8 million in an escrow account,
pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note
E below. The funds are included in short-term investments and are invested
in U. S. Treasury securities. The escrow account is the prefunding
mechanism to the trust fund for future claimants.
NOTE C. New Accounting Standard:
In 1992, the Financial Accounting Standards Board issued SFAS 112,
"Employers' Accounting for Postemployment Benefits," which establishes
accounting standards for employers who provide benefits to former employees
after employment but before retirement. This Statement is effective
beginning in 1994. CNA has been historically following the requirements of
SFAS 112.
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
(7)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
the reinsurers' credit quality and claim settlement performance. Further,
for carriers that are not authorized reinsurers in Illinois, CNA receives
collateral primarily in the form of bank letters of credit, securing a large
portion of the recoverables. At March 31, 1994, such collateral totaled
approximately $164 million. CNA's largest recoverable from a single
reinsurer, including prepaid reinsurance premiums, at March 31, 1994, was
approximately $475 million with Lloyd's of London. The recoverable from
Lloyd's of London is dispersed among thousands of individual members who
have unlimited liability, most of which are Illinois authorized reinsurers.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Written Premium
(In millions of dollars) Direct Assumed Ceded Net Direct Assumed Ceded Net
- - -------------------------------------------------------------------------------------------------------------
Quarter Ended March 31 1994 1993
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Duration Contracts $ 120.6 26.9 5.6 141.9 97.7 32.8 4.6 125.9
Short Duration Contracts 2,107.5 345.1 151.8 2,300.8 1,895.8 312.9 137.9 2,070.8
------- ------- ----- ------- ------- ------- ----- -------
Total $2,228.1 372.0 157.4 2,442.7 1,993.5 345.7 142.5 2,196.7
======= ======= ===== ======= ======= ======= ===== =======
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Earned Premium
(In millions of dollars) Direct Assumed Ceded Net Direct Assumed Ceded Net
- - -------------------------------------------------------------------------------------------------------------
Quarter Ended March 31 1994 1993
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Duration Contracts $ 105.2 26.9 5.6 126.5 79.1 32.4 4.6 106.9
Short Duration Contracts 2,004.7 340.7 163.0 2,182.4 1,897.7 218.1 137.9 1,977.9
------- ----- ----- ------- ------- ------- ----- -------
Total $2,109.9 367.6 168.6 2,308.9 1,976.8 250.5 142.5 2,084.8
======= ===== ===== ======= ======= ======= ===== =======
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $111.8 million and $100.8 million for the period ending March
31, 1994 and March 31, 1993, respectively.
<PAGE>
<PAGE>
NOTE E. Legal Proceedings and Contingent Liabilities:
The following information updates legal proceedings and contingent
liabilities reported in Note J of the Notes to the Consolidated Financial
Statements in the 1993 Annual Report to Shareholders.
FIBREBOARD LITIGATION
CNA's primary property/casualty subsidiary, Continental Casualty
Company ("Continental"), is 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, Continental, Fibreboard, another
insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a
negotiating committee of asbestos claimant attorneys have reached a Global
Settlement (the "Global Settlement") to resolve all future asbestos-related
bodily injury claims involving Fibreboard. Continental, Fibreboard and
Pacific Indemnity have also reached an agreement, which is subject to court
approval, (the "Trilateral Agreement") on a settlement to resolve the
coverage litigation in the event the Global Settlement does not obtain final
court approval. The implementation of the Global Settlement or the
Trilateral Agreement would have the effect of settling Continental's
litigation with Fibreboard. Pending final court approval of either the
Global Settlement or the Trilateral Agreement, at the request of
Continental, Fibreboard and Pacific Indemnity, the California Court of
Appeal withheld its ruling on the issues discrete to Continental and Pacific
Indemnity in the appeal in that litigation.
(8)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Coverage Litigation
Between 1928 and 1971, Fibreboard manufactured insulation products
containing asbestos. Since the 1970's, thousands of claims have been filed
against Fibreboard by individuals claiming bodily injury as a result of
asbestos exposure.
Continental insured Fibreboard under a comprehensive general liability
policy between May 4, 1957 and March 15, 1959. Fibreboard disputed the
coverage positions taken by its insurers and, in 1979, Fireman's Fund,
another of Fibreboard's insurers, brought suit with respect to coverage for
defense and indemnity costs. In January 1990, the San Francisco Superior
Court (Judicial Council Coordination Proceeding 1072) rendered a decision
against the insurers including Continental and Pacific Indemnity. The court
held that the insurers owed a duty to defend and indemnify Fibreboard for
certain of the asbestos-related bodily injury claims asserted against
Fibreboard (in the case of Continental, for all claims involving exposure to
Fibreboard's asbestos products if there was exposure to asbestos at any time
prior to 1959 including years prior to 1957, regardless of when the claims
were asserted or injuries manifested) and that the policies contained no
aggregate limit of liability in relation to such claims. The judgment was
appealed.
The Court of Appeal entered an opinion on November 15, 1993, as
modified on December 13, 1993, which substantially affirmed the lower
court's decisions on scope of coverage and trigger of coverage issues, as
described below. The Court of Appeal withheld its ruling on the issues
discrete to Continental and Pacific Indemnity pending final court approval
of either the Global Settlement or the Trilateral Agreement described below.
On January 27, 1994, the California Supreme Court granted a Petition for
Review filed by several insurers, including Continental, of, among other
things, the trigger and scope of coverage issues. The order granting review
has no effect on the Court of Appeal's order severing the issues unique to
Continental and Pacific Indemnity. Continental cannot predict the time frame
within which the issues before the California Supreme Court may be resolved.
If neither the Global Settlement nor the Trilateral Agreement is approved,
it is anticipated that Continental and Pacific Indemnity will resume the
appeal process. Continental's appeal of the coverage judgment raises many
legal issues. Key issues on appeal under the policy are trigger of coverage,
scope of coverage, dual coverage requirements and number of occurrences:
. The trial court adopted a continuous trigger of coverage
theory under which all insurance policies in effect at any
time from first exposure to asbestos until the date of the
claim filing or death are triggered. The Court of Appeal
endorsed the continuous trigger theory, but modified the
ruling to provide that policies are triggered by a claimant's
first exposure to the policyholder's products, as opposed to
the first exposure to any asbestos product. Therefore, an
insurance policy is not triggered if a claimant's first
exposure to the policyholder's product took place after the
policy period. The court, however, placed the burden on the
insurer to prove the claimant was not exposed to its
policyholder's product before or during the policy period. The
trigger of coverage issue is now on appeal to the California
Supreme Court.
<PAGE>
<PAGE>
Continental's position is that its policy is triggered under
California law by manifestation of appreciable harm. The
bodily injury cannot be said to occur within the meaning of
the policy until actual physical symptoms and associated
functional impairment manifest themselves. Thus, Continental's
position is that if existing California law were applied,
there would be no coverage under Continental's policy.
(9)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
. The scope of coverage decision imposed a form of "joint and
several" liability that makes each triggered policy liable in
whole for each covered claim, regardless of the length of the
period the policy was in effect. This decision was affirmed by
the Court of Appeal, and is now on appeal to the California
Supreme Court. Continental's position is that liability for
asbestos claims should be shared not jointly, but severally
and on a pro rata basis between the insurers and insured.
Under this theory, Continental would only be liable for that
proportion of the bodily injury that occurred during the 22-
month period its policy was in force.
. Continental maintains that both the occurrence and the injury
resulting therefrom must happen during the policy period for
the policy to be triggered. Consequently, if the court holds
that the occurrence is exposure to asbestos, Continental's
position is that coverage under the Continental policy is
restricted to those who actually inhaled Fibreboard asbestos
fibers and suffered injury from May 4, 1957 to March 15, 1959.
The Court of Appeal withheld ruling on this issue, as noted
above.
. Continental's policy had a $1 million per occurrence limit.
Continental contends the number of occurrences under
California law must be determined by the general cause of the
injuries, not the number of claimants, and that the cause of
the injury was the continuous sale and manufacture of the
product. Because the manufacture and sale proceeded from two
locations, Continental maintains that there were only two
occurrences and thus only $2 million of coverage under the
policy. However, the per occurrence limit was interpreted by
the trial court to mean that each claim submitted by each
individual constituted a separate occurrence. The Court of
Appeal withheld ruling on this issue, as noted above.
Under various reinsurance agreements, Continental has asserted a right
to reimbursement for a portion of its potential exposure to Fibreboard. The
reinsurers have disputed Continental's right to reimbursement and have taken
the position that any claim by Continental is subject to arbitration under
provisions in the reinsurance agreement. A Federal court has ruled that the
dispute must be resolved by arbitration. There can be no assurance that
Continental will be successful in obtaining a recovery under its reinsurance
agreements.
Interim Agreement
While the state court action in regard to the coverage issues was
pending, Continental and Fibreboard entered into an Interim Agreement in
1988 under which Continental agreed to fund Fibreboard's defense costs and
certain settlements up to specified dollar limits through 1992. Continental
funded approximately $96 million in defense costs under the Interim
Agreement.
<PAGE>
<PAGE>
Assignments
Beginning in 1991, Fibreboard unilaterally reached settlements with
various classes of claimants by purporting to assign to plaintiffs potential
proceeds from its insurance policy with Continental. Continental disputed
Fibreboard's right to make such settlements and assignments, asserted that
they violated the terms of the policy and the Interim Agreement described
above and asserted that the settlement amounts were unreasonable and
excessive. In June 1992 a California trial court ruled in one case that
(10)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Fibreboard could make such settlements and assignments since, in its view,
Continental was not fully defending Fibreboard against the claims.
Continental is appealing this decision. The trial court did rule that
Continental could challenge the reasonableness of individual settlements and
assignments. Following that ruling, Continental agreed to fund Fibreboard's
reasonable defense costs without limitation as to amount pending resolution
of Continental's appeal. Fibreboard continued to make settlements and
assignments following such agreement, and Continental vigorously disputed
Fibreboard's right to do so.
This settlement and assignment process by Fibreboard escalated
significantly in the fourth quarter of 1992. Through December 31, 1992,
Fibreboard entered into unilateral assignment agreements covering 31,100
claims for a total of approximately $400 million or an average of $12,800
per claim. Of these claims, approximately 30,000 were settled and assigned
by Fibreboard in the month of December, 1992.
Settlement Negotiations
Based on the facts and circumstances of the Fibreboard case prior to
the fourth quarter of 1992, including the strength of Continental's legal
arguments, a material loss to Continental was not known or believed to be
probable. Significant fourth quarter developments, including the assignments
noted above, and the continuing trend for court decisions to expand
liability of policies beyond their original intent, led management to
consider negotiation of an all-inclusive settlement of Continental's
asbestos-related bodily injury litigation with Fibreboard.
On April 9, 1993, Continental 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.
Through March 31, 1994, Continental, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 126,000 claims,
subject to resolution of the coverage issues, for a maximum settlement
amount of approximately $1.4 billion. If neither the Global Settlement nor
the Trilateral Agreement receive final court approval, Continental's
obligation to pay under all settlements will be partially subject to the
results of the pending appeal in the coverage litigation. Minimum amounts
payable under all such agreements, regardless of the outcome of coverage
litigation, total approximately $675 million, of which $239 million was paid
through March 31, 1994. Continental may negotiate other agreements with
various classes of claimants including groups who may have previously
reached agreement with Fibreboard.
Continental will continue to pursue its appeals in respect of the
coverage litigation and all other litigation involving Fibreboard if the
Global Settlement or the Trilateral Agreement cannot be implemented.
<PAGE>
<PAGE>
Global Settlement
On August 27, 1993, Continental, Pacific Indemnity, Fibreboard and a
negotiating committee of asbestos claimant attorneys reached an agreement in
principle for an omnibus settlement to resolve all future asbestos-related
bodily injury claims involving Fibreboard. The Global Settlement was
executed on December 23, 1993. The agreement calls for contribution by
Continental and Pacific Indemnity of an aggregate of $1.525 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 on or before August 27, 1993. An additional $10 million is to be
contributed to the fund by Fibreboard. The Global Settlement is subject to
(11)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
court approval and possible appeals. As noted below, there is limited
precedent with settlements which determine the rights of future claimants to
seek relief.
Subsequent to the announcement of the agreement in principle,
Continental, Fibreboard and Pacific entered into the Trilateral Agreement
which sets forth the parties' obligations in the event the Global Settlement
is not approved by the court. In such case, Continental and Pacific would
contribute to a settlement fund an aggregate of $2 billion, less certain
adjustments. Such fund would be devoted to the payment of Fibreboard's
asbestos liabilities other than liabilities in respect of previously settled
claims. Continental's share of such fund would be $1.44 billion reduced by a
portion of an additional payment of $635 million which Pacific Indemnity has
agreed to pay in respect of unsettled present claims and previously settled
claims. Continental has agreed that if either the Global Settlement or the
Trilateral Agreement is approved, it will assume responsibility for the
claims that had been settled and paid on or before August 27, 1993. A
portion of the additional $635 million to be contributed by Pacific
Indemnity would be applied to the payment of such claims as well. As a part
of the Global Settlement and the Trilateral Agreement, Continental would be
released by Fibreboard from any further liability under the comprehensive
general liability policy written for Fibreboard by Continental, including
but not limited to liability for asbestos-related claims against Fibreboard.
The Trilateral Agreement is subject to court approval and possible appeals.
Continental and Fibreboard have entered into a supplemental agreement
(the "Supplemental Agreement") which governs the interim arrangements and
obligations between the parties until such time as the Global Settlement is
either approved or disapproved by the court and also governs certain
obligations between the parties in the event the Global Settlement is
approved, including the payment of present claims which had been filed or
settled and not included in the Global Settlement.
In addition, Continental and Pacific Indemnity have entered into an
agreement (the "Continental-Pacific Agreement") which sets forth the
parties' agreement with respect to the means for allocating among themselves
responsibility for payments arising out of the Fibreboard insurance policies
whether or not the Global Settlement or the Trilateral Agreement is
approved. Under the Continental-Pacific Agreement, Continental and Pacific
Indemnity have agreed to pay 64.71% and 35.29%, respectively, of the $1.525
billion plus interest and expenses to be used to satisfy the claims of
future claimants. If neither the Global Settlement nor the Trilateral
Agreement is approved, Continental and Pacific Indemnity would share, in the
same percentages, most but not all liabilities and costs of either insurer
including, but not limited to, liabilities in respect of unsettled present
claims and presently settled claims. If either the Trilateral Agreement or
the Global Settlement is approved by the court, Pacific Indemnity's share
for unsettled present claims and presently settled claims will be $635
million.
<PAGE>
<PAGE>
Reserves
In the fourth quarter of 1992, Continental increased its reserve with
respect to potential exposure to asbestos-related bodily injury cases by
$1.5 billion. In connection with the agreement in principle announced on
August 27, 1993, Continental added $500 million to such claim reserve. The
Fibreboard litigation represents the major portion of Continental's
asbestos-related claim exposure.
There are inherent uncertainties in establishing a reserve for complex
litigation of this type. Courts have tended to impose joint and several
liability, and because the number of manufacturers who remain potentially
liable for asbestos-related injuries has diminished on account of
bankruptcies, as has the potential number of insurers due to operation of
policy limits, the liability of the remaining defendants is difficult to
estimate. Further, a recent trend by courts to consolidate like cases into
(12)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
mass tort trials limits the discovery ability of insurers, generally does
not allow for individual claim adjudication, restricts the identification of
appropriate allocation methods and thereby results in an increasing
likelihood for fraud and disproportionate and potentially excessive
judgments. Additionally, management believes that recent court decisions
would appear to be based on social or other considerations irrespective of
the facts and legal issues involved.
The Global Settlement and the Trilateral Agreement are subject to court
approval. There is limited precedent with settlements which determine the
rights of future claimants to seek relief. It is extremely difficult to
assess the magnitude of Continental's potential liability in respect of such
future claimants if neither the Global Settlement nor the Trilateral
Agreement is approved and upheld, keeping in mind that Continental's
potential liability is limited to persons exposed to asbestos prior to the
termination of the policy in 1959.
Projections by experts of future trends differ widely, based upon
different assumptions with respect to a host of complex variables. Some
recently published studies, not specifically related to Fibreboard, conclude
that the number of future asbestos-related bodily injury claims against
asbestos manufacturers could be several times the number of claims brought
to date. Such studies include claims asserted against asbestos manufacturers
for all years, including claims filed or projected to be filed in respect of
periods after 1959. As indicated above, Continental, Fibreboard and
plaintiff attorneys have reached settlements with respect to approximately
126,000 claims, subject to the resolution of coverage issues. Such amount
does not include presently pending or unsettled claims, claims previously
dismissed or claims settled pursuant to agreements to which Continental is
not a party.
Another aspect of the complexity in establishing a reserve arises from
the widely disparate values that have been ascribed to claims by courts and
in the context of settlements. Under the terms of a settlement reached with
plaintiff counsel in August, 1993, the expected settlement for approximately
34,000 claims for exposure to asbestos prior to 1959 is expected to be $445
million, or an average of $13,000 per claim. Based on reports by Fibreboard,
since September 1988 Fibreboard resolved approximately 40,000 claims (other
than by the assignment process noted above), approximately 45% of which
involved no cost to Fibreboard other than defense costs, with the remaining
claims involving the payment of approximately $11,000 per claim. On the
other hand, a trial court in Texas in 1990 rendered a verdict in which
Fibreboard's liability in respect of 2,300 claims was found to be
approximately $310,000 per claim including interest and punitive damages.
Fibreboard entered into a settlement of such claims by means of an
assignment of its potential proceeds from its policy with Continental.
Continental intervened and settled these claims for approximately $77,000 on
average, with a portion of the payment contingent on approval of the Global
Settlement or the Trilateral Agreement, and if neither is approved, subject
to resolution of the coverage appeal.
<PAGE>
<PAGE>
Continental believes that as a result of the Global Settlement and the
Trilateral Agreement it has greatly reduced the uncertainty of its exposure
with respect to the Fibreboard matter. However, if neither the Global
Settlement, nor the Trilateral Agreement is approved and upheld, in light of
the factors discussed herein the range of Continental's potential liability
cannot be meaningfully estimated and there can be no assurance that the
reserves established would be sufficient to pay all amounts which ultimately
could become payable in respect of asbestos-related bodily injury
liabilities.
While it is possible that the ultimate outcome of this matter could
have a material adverse impact on the equity of the Company, management does
not believe that a further loss material to equity is probable. Management
will continue to monitor the potential liabilities with respect to asbestos-
related bodily injury claims and will make adjustments to the claim reserves
if warranted.
(13)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
ENVIRONMENTAL POLLUTION
Potential exposures exist for claims involving environmental
pollution, including toxic waste clean-up. 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.
Under federal regulation, the Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("Superfund") governs the clean-up
and restoration of abandoned toxic waste sites and formalizes the concept of
legal liability for clean-up and restoration by "Potentially Responsible
Parties" ("PRP's"). Superfund establishes 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 the other hand, the Congressional Budget
Office is estimating that there will be 4,500 National Priority List sites
and other estimates run as high as 30,000 sites will require clean-up. 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.
The Superfund legislation must be reauthorized in 1994. A number of
proposals to reform Superfund have been made by various parties. It is too
early to determine the future impact of these proposals on CNA and the
insurance industry.
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 exposure to CNA
for environmental pollution claims cannot be meaningfully quantified. Prior
to 1993, no specific allocation of reserves was made for unreported claims
or for litigation expenses. CNA identified reserves only for reported
environmental pollution claims. In 1993, CNA allocated approximately $340
million of claim and claim expense reserves for unreported environmental
pollution claims in addition to the $94 million of reserves recorded for
reported claims. At March 31, 1994, reserves for reported and unreported
claims were $99 million and $307 million, respectively. Claim and claim
expense reserves represent management's estimates of ultimate liabilities
based on currently available facts and 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.<PAGE>
<PAGE>
The number of claims filed for environmental pollution coverage
continues to increase. Approximately 425 claims were reported in the first
quarter of 1994 and approximately 19,600 claims have been reported to date.
Pending claims totaled approximately 10,500 and 10,600 at March 31, 1994 and
December 31, 1993, respectively. Approximately 9,100 claims were closed
through March 31, 1994, of which approximately 8,300 claims were settled
(14)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - concluded
without payment, except for claim expenses of $18 million. Settlements for
the remaining 800 claims totaled $95 million, plus claim expenses of $25
million. Reserve development for environmental claims totaled $30 million
in the three months ended March 31, 1993. No reserve development for
environmental claims was recognized in 1994. The results of operations in
future years may continue to be adversely affected by environmental
pollution claims and claim expenses. Management will continue to monitor
potential liabilities and make further adjustments as warranted.
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.
(15)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto found on pages 3 to 15,
which contain additional information helpful in evaluating results and
financial condition.
Results of Operations:
The following chart summarizes key components of operating results for the
three months ended March 31, 1994 and 1993.
- - -----------------------------------------------------------------------------
Three Months Ended March 31 1994 1993
(In millions of dollars)
- - -----------------------------------------------------------------------------
Operating Summary (excluding
realized investment gains/losses):
Revenues:
Premiums:
Property/Casualty $1,624.9 $1,470.5
Life 684.0 614.3
------- -------
2,308.9 2,084.8
Net investment income 346.3 346.2
Other 55.0 46.8
------- -------
2,710.2 2,477.8
Benefits and expenses 2,782.0 2,522.0
------- -------
Operating loss before income tax (71.8) (44.2)
Income tax benefit 55.0 68.7
------- -------
Net operating income (loss) $ (16.8) $ 24.5
======= =======
Supplemental Financial Data:
Net operating income (loss) by group:
Property/Casualty $ (20.3) $ 18.8
Life 15.1 11.3
Other (11.6) (5.6)
------- -------
(16.8) 24.5
------- -------
Net realized investment gains (losses)
by group:
Property/Casualty (42.0) 264.6
Life (19.2) 18.3
Other (.1) 6.2
------- -------
(61.3) 289.1
------- -------
Net income (loss) by group:
Property/Casualty (62.3) 283.4
Life (4.1) 29.6
Other (11.7) .6
------- -------
$ (78.1) $ 313.6
=============================================================================
<PAGE>
<PAGE>
Overview
- - --------
Consolidated revenues were $2.6 billion for the first three months of
1994. This compares to revenues of $2.9 billion for the same period in
1993. Consolidated revenues, excluding realized investment gains (losses),
were up 9.4 percent in the first quarter to $2.71 billion compared to $2.48
billion for the first quarter of 1993.
CNA reported a net loss of $78.1 million, or $1.28 per share, for the
first three months of 1994, compared to net income of $313.6 million, or
$5.06 per share, for the first three months of 1993.
The net operating loss for the first three months of 1994, excluding net
realized investment losses, was $16.8 million, or $.29 per share, compared
to net operating income of $24.5 million, or $.38 per share, for the first
three months of 1993. CNA incurred pre-tax catastrophe losses of
(16)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
approximately $100 million in the first quarter of 1994 compared to $25.8
million in the first quarter of 1993. The catastrophe claims stem from the
California earthquake and severe winter storms throughout the northeastern
part of the United States.
Net realized investment losses for the first quarter of 1994 were $61.3
million, or $.99 per share, compared to net realized investment gains for
the first quarter of 1993 of $289.1 million, or $4.68 per share. The
realized investment losses are principally the result of repositioning the
portfolios to slightly longer maturities, primarily in government bonds, in
order to improve future overall investment returns. In the first quarter of
1993, CNA began realigning its portfolio which resulted in realized gains in
its investment portfolio that increased Continental Casualty Company's surplus.
This realignment also reduced the concentration of tax-exempt securities to more
quickly utilize the alternative minimum tax credit carryforward generated in
1992. (See also the discussion under "Investments" herein.)
CNA's total income tax benefit for the three months ended March 31, 1994
amounted to $88.1 million compared to an expense of $80.3 million for the
same period in 1993. CNA's income tax benefit excluding realized investment
gains/losses amounted to $55.0 million for the three months ended March 31,
1994, compared to $68.7 million in the first three months of 1993. The
income tax benefit on realized investment losses for the three months ended
March 31, 1994, totaled $33.1 million compared with an income tax expense of
$149.0 million for the same period a year ago.
Other adverse factors affecting the industry also curtailed CNA's first
quarter earnings, particularly the long-standing cycle of inadequate pricing
in property/casualty commercial lines and low investment yields. In
addition, complex and costly litigation has been continuing, fueled by the
tendency of the courts to interpret insurance contracts beyond their stated
intent.
CNA's commercial lines remain in a down cycle that has lasted over seven
years and has seriously depressed profitability. The down cycle continues
to be characterized by a difficult pricing environment caused by strong
market competitiveness, a trend toward alternative risk mechanisms such as
self-insurance, and regulatory constraints on adequate premium rates. Weak
investment yields have further adversely affected quarterly results.
CNA continues to take a number of initiatives to respond to the many
uncertainties and changes impacting the insurance environment. One of these
has been to continue to focus on the risk characteristics and premium rates
in commercial lines. CNA will continue to seek business in lines where it
has a sizable market share, substantial experience, and foresees clear
profit potential over the long term. At the same time, however, the
emphasis is on reasonable rates rather than volume growth.
<PAGE>
<PAGE>
Net operating income for the life segment remains stable, although
negatively affected by intense competition and high health care costs which
have resulted in a continued market shift away from traditional indemnity
forms of health coverage toward managed care products. The Federal
Government's initiative to control health care costs and provide universal
access to quality health care may impact both individual and group accident
and health, workers' compensation, automobile liability and medical
malpractice businesses of CNA. With national health care still the subject
of intense debate, CNA advocates a responsible role for the insurance
industry in any program that may be adopted. CNA believes the public is
best served by a system that relies on the private sector's competence and
competitiveness rather than on rigid, governmental dictates. CNA's ability
to compete in this market will be increasingly dependent on its ability to
control costs through managed care techniques, innovation, and quality
customer-focused service in order to properly position CNA in the evolving
health care environment.
(17)
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
CNA also is pursuing opportunities in new marketing areas, expanding our
alternative marketing capabilities, and working with partners in strategic
alliances whose business focus complements our own. One indication of the
broader marketing approach is the recent consolidation of CNA's reinsurance
operations under a single, cohesive management group. CNA believes this move
positions us more favorably for growth and leadership in the international
reinsurance marketplace.
Of all CNA's priorities, preserving a strong financial foundation remains
among the highest. During the first quarter, CNA continued to implement a
number of initiatives to improve productivity, efficiency, and
competitiveness with emphasis on adding value in serving our customers.
These actions include authorizing more decision-making at lower levels to
speed response time and heighten quality service; increasing management
accountability and customer orientation through Strategic Business Units and
substantially expanding the use of personal computer-based automation tools.
CNA is working closely with policyholders to reduce claim costs through
integrated processes that enable commercial insureds to control their total
loss costs and through stepped-up fraud prevention activities. Other areas
of emphasis include providing professional services to self-insured accounts
and other alternative markets; continuing medical and workers'
compensation cost management programs; and reinforcing business
partnerships with independent agents who represent us and equipping them
with new or upgraded products tailored to specific customer needs.
CNA also continues to devote time and effort to legislative concerns in
the interests of a more equitable and stable insurance marketing climate.
CNA has enjoyed some success in enlisting support for workers' compensation
reform in several states and opposing unnecessary restrictions on the
insurance industry in others.
As described in Note E to CNA's March 31, 1994 Notes to Consolidated
Financial Statements, Casualty substantially eliminated a major source of
financial uncertainty by reaching a Global Settlement to resolve all future
asbestos-related bodily injury claims involving Fibreboard Corporation
(Fibreboard), a former asbestos manufacturer. The agreement, executed in
December 1993, was reached with Fibreboard, Pacific Indemnity Company (Pacific)
(a subsidiary of the Chubb Corporation) and a negotiating committee of asbestos
claimant attorneys. The agreement calls for Casualty and Pacific to
contribute an aggregate of $1.525 billion to an escrow account for a class
of all future asbestos claimants. CNA funded its obligations under the
escrow account with approximately $1.0 billion at the end of 1993.The escrow
account is included in its short-term investment portfolio. CNA believes
the reserves established pursuant to this agreement will be sufficient to
cover all asbestos-related Fibreboard claims. While the Fibreboard
agreement must receive court approval and meet other conditions, settlement
of this litigation substantially reduces the uncertainty about CNA's
exposure to future asbestos-related liabilities.
(18)
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
Property/Casualty Operations
- - ----------------------------
- - ----------------------------------------------------------------------------
Property/Casualty Group
Three Months Ended March 31 1994 1993
(In millions of dollars)
- - ----------------------------------------------------------------------------
Operating Summary (excluding realized
investment gains/losses):
Revenues:
Premiums: $ 1,624.9 $ 1,470.5
Net investment income 277.6 281.0
Other 44.8 35.8
------- -------
1,947.3 1,787.3
Benefits and expenses 2,024.5 1,840.5
------- -------
Loss before income tax (77.2) (53.2)
Income tax benefit 56.9 72.0
------- -------
Net operating income (loss) (excluding
realized investment gains/losses) $ (20.3) $ 18.8
============================================================================
Property/casualty revenues, excluding net realized investment
gains/losses, increased 9.0% for the three months ended March 31, 1994
compared to the same period a year ago. Property/casualty earned premium
increased $154 million, or 10.5% from the prior years comparable period.
The increase was principally attributable to increases in new excess
policies, and new business and higher renewal rates for medium-sized
commercial accounts.
Pretax operating losses excluding net realized investment gains/losses for
the property/casualty insurance subsidiaries were $77.2 million for the
first three months of 1994 compared to $53.2 million for the same period a
year ago. Investment income decreased 1.2% for the three months ended
March 31, 1994 to $277.6 million compared with $281.0 million a year ago.
Investment income decreased for the three months ended March 31, 1994,
when compared to the first three months of 1993 primarily due to the change
in portfolio mix due to a partial shift from long-term tax exempt bonds to
shorter term taxable securities. Underwriting losses for the three months
ended March 31, 1994, were $354.8 million, compared to $334.2 million for
the same period in 1993. The first quarter 1994 statutory combined ratio was
119.9 compared with 121.1 for the same period in 1993.
The net loss of CNA's property/casualty insurance subsidiaries,excluding
net realized investment gains/losses, was $20.3 million for the first three
months of 1994, compared to income of $18.8 million for the same period in
1993. Net realized investment losses for the first quarter of 1994 were
$42.0 million, compared to net realized investment gains of $264.6 million
in the first three months of 1993.
(19)
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
Life Operations
- - ---------------
- - ---------------------------------------------------------------------------
Life Group
Three Months Ended March 31 1994 1993
(In millions of dollars)
- - ---------------------------------------------------------------------------
Operating Summary (excluding realized
investment gains/losses):
Revenues:
Premiums: $ 687.8 $ 618.2
Net investment income 69.4 66.3
Other 9.2 9.8
------- -------
766.4 694.3
Benefits and expenses 743.1 676.6
------- -------
Loss before income tax 23.3 17.7
Income tax benefit (8.2) (6.4)
------- -------
Net operating income (excluding
realized investment gains/losses) $ 15.1 $ 11.3
===========================================================================
Life insurance revenues, excluding realized investment gains, were $766.4
million, up 10.4% for the three months ended March 31, 1994 compared to the
same period a year ago. Life earned premium was $687.8 million, up 11.3%
for the quarter with the primary growth in group and pension operations.
Life investment income increased 4.7% compared to the same period a year
ago primarily due to a first quarter shift out of short-term investments
described earlier.
Pretax operating income for the life insurance subsidiaries, excluding
net realized investment gains/losses, was $23.3 million for the first three
months of 1994, compared to $17.7 million for the same period in 1993.
CNA's life insurance subsidiaries' net income excluding net realized
investment gains/losses was $15.1 million for the first three months of 1994
compared to $11.3 million for the same period in 1993. Net realized
investment losses for the first three months of 1994 were $19.2 million,
compared to $18.3 million of net realized investment gains in the first
three months of 1993.
<PAGE>
<PAGE>
INVESTMENTS:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
Summary of General Account Investments | |
at Market Value | |
| Change in |
March 31 December 31 | Unrealized | Realized
(In millions of dollars) 1994 1993 | Gains(losses)| Gains(losses)
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income securities: | |
U. S. Treasury securities and | |
obligations of government | |
agencies $ 9,988 $ 6,554 | $ (197) | $ (139)
Asset-backed securities 2,127 2,547 | (67) | 12
Tax exempt securities 4,740 5,015 | (147) | 19
Other 3,637 3,491 | (101) | (3)
------ ------ | ------ | ------
Total fixed income securities 20,492 17,607 | (512) | (111)
Stocks 457 508 | (20) | 13
Other 7,684 7,248 | 16 | (7)
------ ------ | ------ | ------
Total investments $28,633 $25,363 | (516) | (105)
====== ====== | |
Participating policyholders' interest | 13 | 11
Income tax expense | 184 | 33
| ------ | ------
Net investment gains(losses) | $ (319) | $ (61)
| ====== | ======
- - -----------------------------------------------------------------------------------------------
</TABLE>
- - ----------------------------------------------------------------|
Short-term investments: |
- - ----------------------------------------------------------------|
Security repurchase collateral $ 4,270 $ 623 |
Escrow 984 987 |
Other 2,102 5,334 |
------ ------- |
Total short-term investments $ 7,356 $ 6,944 |
====== ======= |
- - -----------------------------------------------------------------
(20)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
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 income 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 income securities are classified as
available for sale.
In early 1994, CNA began to reposition its portfolios to slightly longer
maturities. The repositioning of the portfolios was undertaken in order to
improve future overall investment returns. As a result, both the Casualty
and Life groups shifted out of their short-term portfolios into five and ten
year government securities resulting in a decrease in short-term
investments. Short-term investments (excluding investments relating to
loaned securities) for the Casualty Group decreased from $5.1 billion at
December 31, 1993 to $2.8 billion at March 31, 1994, while the Life Group's
decreased from $1.2 billion at December 31, 1993 to $256.8 million at March
31, 1994. These actions were taken in a period of rising interest rates
which resulted in realized losses in the investment portfolio.
The components of the net realized investment gains (losses) are as
follows:
- - ----------------------------------------------------------------------------
Realized investment gains (losses)
Three Months Ended March 31 1994 1993
(In millions of dollars)
- - ----------------------------------------------------------------------------
Bonds:
U.S. Government $(138.5) $ 31.1
Tax exempt 18.6 284.5
Asset-backed 12.3 51.6
Taxable (3.4) 33.4
----- -----
Total bonds (111.0) 400.6
Stocks 12.5 35.7
Other (7.2) 3.5
----- -----
Realized investment gains (losses)
reported in revenues (105.7) 439.8
Participating policyholders' interest 11.3 (1.7)
Income tax expense 33.1 (149.0)
----- -----
Net realized investment
gains (losses) $ (61.3) $289.1
============================================================================
<PAGE>
<PAGE>
As of March 31, 1994, Casualty had sold approximately $12 billion of fixed
income and equity securities since December 31, 1993, realizing pre-tax net
losses of $65.0 million. Of the $12 billion of securities sold,
approximately $8 billion and $2 billion, respectively, were from the U.S.
Treasury and Government mortgage-backed bond portfolios.
During the first three months of 1994, consolidated investments increased
$3.3 billion to $28.6 billion. This increase is entirely due to a $3.6
billion increase in collateral related to securities sold under agreements
to repurchase. The general account portfolio consists primarily of high
quality marketable debt securities, approximately 97% of which are rated as
investment grade. At March 31, 1994, tax-exempt securities and short-term
investments excluding collateral for securities sold under repurchase
agreements, comprised approximately 17% and 11%, respectively, of the
general account's total investment portfolio compared to 19% and 28%,
respectively, at December 31, 1993. 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 March 31, 1994, the major component of the short-term
(21)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
investment portfolio was approximately $2.3 billion of U.S. Treasury bills.
Collateral for securities sold under repurchase agreements totaled $4.3
billion and were invested in high-grade commercial paper.
As of March 31, 1994, the market value of CNA's general account
investments in bonds and redeemable preferred stocks was $20.5 billion and
was less than amortized cost by approximately $8 million. This compares to
$504 million of net unrealized investment gains at December 31, 1993. The
gross unrealized investment gains and losses for the fixed income
securities portfolio at March 31, 1994, were $334 million and $342 million,
respectively, compared to $564 million and $60 million, respectively, at
December 31, 1993.
Net unrealized investment losses on general account bonds at March 31,
1994 include net unrealized losses on high yield securities of $2 million,
compared to net unrealized investment gains of $15 million at December 31,
1993. 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 $803 million at
March 31, 1994, compared to $727 million at December 31, 1993.
At March 31, 1994, total separate account cash and investments amounted to
$6.0 billion with taxable debt securities representing approximately 96% of
the separate accounts' portfolio. Approximately 87% of separate account
investments are used to fund guaranteed investment contracts (GIC's) for
which Continental Assurance Company guarantees principal and a specified
return to the contractholders. The fair value of all fixed income
securities in the GIC portfolio was $5.1 billion compared to $5.4 billion
at December 31, 1993. At March 31, 1994, fair values exceeded the amortized
costs by approximately $2 million. This compares to $148 million at
December 31, 1993. The gross unrealized investment gains and losses for the
GIC fixed income securities portfolio at March 31, 1994, were $98 million
and $96 million, respectively.
Carrying values of high yield securities in the GIC portfolio were $1.4
billion at March 31, 1994, compared to $1.1 billion December 31, 1993. Net
unrealized investment losses on high yield securities held in such separate
accounts were $9 million at March 31, 1994, compared to net unrealized
investment gains of $56 million at December 31, 1993.
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 March 31,
1994, CNA's concentration in high yield bonds including separate accounts
was approximately 4.8% 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.
<PAGE>
<PAGE>
Included in CNA's fixed income securities at March 31, 1994 (general and
GIC portfolios) are $3.7 billion of asset-backed securities, consisting of
approximately 54% in collateralized mortgage obligations ("CMO's"), 10% in
corporate asset-backed obligations, and 36% in U.S. Government issued pass-
through certificates. The majority of CMO's held are U.S. Government agency
issues, which are actively traded in liquid markets and are priced monthly
by broker-dealers. At March 31, 1994, the fair value of asset-backed
securities was less than amortized cost by approximately $20 million
compared to unrealized investment gains of $87 million at December 31,
1993. CNA limits the risks associated with interest rate fluctuations and
(22)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
prepayment by concentrating its CMO investments in early planned
amortization classes with wide bands and relatively short principal
repayment windows.
Over the last few years, much concern has been raised regarding the
quality of insurance company invested assets. At March 31, 1994, 59% of the
general account's debt securities portfolio was invested in U.S. Government
securities, 20% in other AAA rated securities and 14% in AA and A rated
securities. CNA's GIC fixed income portfolio is comprised of 23% U.S.
Government securities, 15% other AAA rated securities and 22% in AA and A
rated securities. These ratings are primarily from Standard & Poor's (95%
of the general account portfolio and 93% of the GIC portfolio).
FINANCIAL CONDITION:
- - -----------------------------------------------------------------------
Financial Position
(In millions of dollars, March 31 December 31
except per share data) 1994 1993
- - -----------------------------------------------------------------------
Assets $45,345.9 $41,912.3
Stockholders' Equity 4,983.3 5,381.1
Unrealized Net Appreciation Included
in Stockholders' Equity 41.4 360.0
Book Value per Common Share 78.21 84.65
- - -----------------------------------------------------------------------
CNA's assets increased approximately $3.4 billion to $45.3 billion as of
March 31, 1994. CNA's investment portfolio increased by $3.3 billion from
December 31, 1993 to $28.6 billion. These increases were the result of
security lending activity of $4.1 billion where CNA sells securities to
brokers while agreeing to repurchase them at a future date.
During the first three months of 1994, CNA's stockholders' equity
decreased by $397.8 million, or 7.4%, to approximately $5.0 billion. The
major component of this change was a $318.6 million decline in unrealized
net appreciation, primarily related to changes in market values of debt
securities. Debt security carrying values are highly susceptible to changes
in interest rates and were adversely affected as a general rise in interest
rates occurred in the first quarter of 1994. Interest rates have continued
to rise throughout April resulting in additional unrealized investment
losses in the bond portfolio, primarily relating to government securities.
The statutory surplus of the property/casualty subsidiaries decreased 5.2%
to approximately $3.4 billion. The decrease resulted from the aforementioned
catastrophe losses and net realized investment losses. The statutory surplus
of the life insurance subsidiaries remained at $1.0 billion.
<PAGE>
<PAGE>
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. The primary operating cash flow uses are payments for
claims, policy benefits and operating expenses.
For the first three months of 1994, CNA's operating activities generated
net cash flows of $164 million, compared to $420 million for the same period
in 1993. The decrease in cash flows is due primarily to a decline in tax
recoveries to $12 million for the first three months of 1994, as compared
to $245 million for the same period in 1993.
(23)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-concluded
Net cash flows 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 an unknown amount of
liability for environmental pollution, primarily related to toxic waste site
clean-up. Refer to Note E of Notes to Financial Statements for further
discussion of environmental pollution exposures.
ACCOUNTING STANDARDS:
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 114, "Accounting by
Creditors for Impairment of a Loan." This Statement addresses the
accounting by creditors for impairment of certain loans. It is applicable
to all creditors and to all loans, uncollateralized as well as
collateralized, except large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment, loans that are measured at
fair value or at the lower of cost or fair value, leases, and debt
securities. The Statement requires that applicable loans be treated as
impaired when it is probable that a creditor will be unable to collect all
amounts (both principal and interest) contractually due. It requires that
impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate. Impairments
may also be measured at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. In early 1994, the
FASB began deliberating certain amendments to the Statement and an exposure
draft was issued on March 31, 1994 which would simplify the Statement by
allowing a creditor to use existing methods for recognizing interest income
on impaired loans.This Statement applies to financial statements for fiscal
years beginning after December 15, 1994. This Statement will not have a
significant impact on CNA.
In April 1994, the Financial Accounting Standards Board (FASB) issued an
exposure draft on "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments." This proposed Statement would require
expanded disclosures about derivative financial instruments-futures,
forward, swap, or option contracts, or other financial instruments with
similar characteristics. It would also amend certain existing requirements
of SFAS 105 and SFAS 107. This proposed Statement would be effective for
financial statements issued for fiscal years ending after December 15, 1994.
If adopted, this Statement will not have a significant impact on CNA.
(24)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS:
Description of Exhibit Exhibit Page
---------------------- Number Number
------- ------
(11) Computation of Net Income per Common Share. 11.1 27
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the three
months ended March 31, 1994.
(25)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - Concluded
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA FINANCIAL CORPORATION
-------------------------
Date: May 12, 1994 By: PETER E. JOKIEL
------------ ---------------------
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
(26)<PAGE>
<PAGE>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
- - ------------------------------------------------------------------------------
Three Month Ended March 31 1994 1993
(In millions, except per share data)
- - ------------------------------------------------------------------------------
Net income (loss).................................. $ (78.1) $ 313.6
Less preferred stock dividends..................... 1.1 1.0
------ ------
Net income (loss) available to common stockholders. $ (79.2) $ 312.6
====== ======
Weighted average shares outstanding................ 61.8 61.8
====== ======
Net income (loss) per common share.............. $ (1.28) $ 5.06
====== ======
- - ------------------------------------------------------------------------------
(27)
<PAGE>
