<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 June 30, 1995 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, 1995
----------------------------- -----------------------------
Common Stock, Par value $2.50 61,798,262
===============================================================================
Page (1) of (33)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
------- --------------------- --------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
JUNE 30, 1995 (Unaudited) and DECEMBER 31, 1994 . . . . . . . . . . 3
STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994 . . . . . 4
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 . . . . . . . . . . 5
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 . . . . . . . . . . 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 18
PART II. OTHER INFORMATION
-------- -----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 30
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
EXHIBIT 11. COMPUTATION OF NET INCOME PER COMMON SHARE. . . . . . . . 32
EXHIBIT 27. FINANCIAL DATA SCHEDULE . . . . . . . . . . . . . . . . . 33
(2)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
June 30 December 31
1995 1994
(In millions of dollars) (Unaudited)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities available for sale (cost: $25,240.3 and $21,623.1) . . . . . . $25,666.4 $20,827.7
Equity securities available for sale (cost: $739.6 and $736.3). . . . . . . . . 910.1 754.8
Mortgage loans and real estate (less accumulated depreciation: $3.5 and $3.4) . 129.4 46.9
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175.7 176.3
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367.3 101.1
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,974.7 5,036.1
---------- ----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,223.6 26,942.9
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197.7 147.6
Insurance receivables:
Reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,568.8 3,187.7
Other insurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . 5,393.4 3,861.4
Less allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . . (297.4) (127.5)
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . 1,437.0 1,026.4
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 482.1 407.1
Receivables for securities sold . . . . . . . . . . . . . . . . . . . . . . . . 1,956.8 258.7
Federal income taxes recoverable (includes $106.8 and $85.8 due from Loews) . . 88.3 93.4
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,739.8 1,662.5
Property and equipment at cost (less accumulated depreciation: $584.0 and
$244.9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508.4 263.3
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . 610.4 175.1
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 841.5 341.5
Separate Account business . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,907.0 6,080.3
------------------------------------------------------------------------------------------------------------
Total assets $62,657.4 $44,320.4
============================================================================================================
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET-continued
------------------------------------------------------------------------------------------------------------
June 30 December 31
1995 1994
(In millions of dollars) (Unaudited)
------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders Equity
Liabilities:
Insurance reserves:
Claim and claim expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,356.1 $22,564.7
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,272.8 3,049.8
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,624.8 2,690.7
Policyholders' funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613.6 632.5
Participating policyholders' equity . . . . . . . . . . . . . . . . . . . . . . 129.7 98.0
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . 2,781.9 2,478.6
Payables for securities purchased . . . . . . . . . . . . . . . . . . . . . . . 1,278.8 281.4
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 2.0
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,994.8 911.8
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,684.1 984.7
Separate Account business . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,907.0 6,080.3
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,648.3 39,774.5
---------- ----------
Commitments and contingent liabilities
Stockholders' equity:
Common stock ($2.50 par value; Authorized - 200,000,000 shares;
Issued - 61,841,969 shares). . . . . . . . . . . . . . . . . . . . . . . . . . 154.6 154.6
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150.0 150.0
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 434.7 434.7
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,721.3 4,315.5
Net unrealized investment gains (losses). . . . . . . . . . . . . . . . . . . . 526.3 (506.4)
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . 24.7 -
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.5) (2.5)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 6,009.1 4,545.9
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $62,657.4 $44,320.4
============================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(3)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
-----------
PERIOD ENDED JUNE 30 SECOND QUARTER
SIX MONTHS
1995 1994 1995
1994
(In millions of dollars, except per share data)
-------------------------------------------------------------------------------------------------------------
-----------
<S> <C> <C> <C>
<C>
Revenues:
Premiums ............................................................. $2,868.9 $2,366.9 $5,384.9
$4,675.8
Net investment income ................................................ 514.7 384.1 945.6
730.4
Realized investment gains (losses) ................................... 205.8 (76.3) 241.6
(182.0)
Other................................................................. 69.8 56.3 139.9
111.3
-------- -------- --------
--------
3,659.2 2,731.0 6,712.0
5,335.5
-------- -------- --------
--------
Benefits and expenses:
Insurance claims and policyholders' benefits ......................... 2,418.2 2,180.6 4,573.9
4,301.7
Amortization of deferred acquisition costs............................ 421.7 337.7 782.7
661.6
Other operating expenses.............................................. 416.1 286.4 732.4
594.4
Interest expense...................................................... 38.0 17.6 55.7
35.3
-------- -------- --------
--------
3,294.0 2,822.3 6,144.7
5,593.0
-------- -------- --------
--------
Income (loss) from continuing operations before income tax......... 365.2 (91.3) 567.3
(257.5)
Income tax benefit (expense)........................................... (108.5) 55.1 (157.8)
143.2
-------- -------- --------
--------
Income (loss) from continuing operation............................ 256.7 (36.2) 409.5
(114.3)
Income from discontinued operations, net of income taxes............... - - -
-
-------------------------------------------------------------------------------------------------------------
-----------
NET INCOME (LOSS) $ 256.7 $ (36.2) $ 409.5
(114.3)
=============================================================================================================
===========
EARNINGS PER SHARE
------------------
Income (loss) from continuing operations............................... $ 4.12 $ (0.61) $ 6.57
$ (1.89)
Income from discontinued operations, net of income taxes............... - - -
-
-------------------------------------------------------------------------------------------------------------
-----------
Net Income (loss)...................................................... $ 4.12 $ (0.61) $ 6.57
$ (1.89)
=============================================================================================================
===========
Weighted average outstanding shares of
common stock (in millions of shares).................................. 61.8 61.8 61.8
61.8
=============================================================================================================
===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(4)
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1995 and 1994
Net
Unrealized Foreign
Additional Investment Currency
Capital Paid-in Retained Gains Translation
(In millions of dollars) Stock Capital Earnings (Losses) Adjustment Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993..... $302.1 $434.7 $4,284.3 $ 360.0 $ - $5,381.1
Net loss..................... - - (114.3) - - (114.3)
Unrealized investment losses. - - - (551.8) - (551.8)
Preferred dividends.......... - - (2.5) - - (2.5)
------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 $302.1 $434.7 $4,167.5 $ (191.8) $ - $4,712.5
======================================================================================================
Balance, December 31, 1994..... $302.1 $434.7 $4,315.5 $ (506.4) $ - $4,545.9
Net income................... - - 409.5 - - 409.5
Unrealized investment gains.. - - - 1,032.7 - 1,032.7
Foreign currency translation
adjustment................. - - - - 24.7 24.7
Preferred dividends.......... - - (3.7) - - (3.7)
------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $302.1 $434.7 $4,721.3 $ 526.3 $ 24.7 $6,009.1
======================================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(5)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Six Months Ended June 30 1995 1994
(In millions of dollars)
--------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 409.5 $ (114.3)
------------ ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Pretax realized (gains) losses....................... (241.6) 182.0
Participating policyholders' interest................ (0.2) (10.2)
Amortization of bond discount........................ (69.2) (36.7)
Amortization of goodwill............................. 7.1 2.1
Depreciation......................................... 45.8 30.0
Changes in:
Other insurance receivables....................... (427.7) (275.4)
Reinsurance receivables........................... (325.3) (9.6)
Prepaid reinsurance premiums...................... 14.7 (15.3)
Deferred acquisition costs........................ (104.6) (48.3)
Accrued investment income......................... 32.9 (126.9)
Insurance reserves................................ 481.8 806.3
Federal income taxes.............................. 5.2 (66.8)
Deferred income taxes............................. 39.6 (37.9)
Reinsurance payables.............................. 113.4 1.4
Other liabilities.................................. 461.4 107.8
Other, net........................................ 182.1 (58.5)
------------ -----------
Total adjustments......................... 215.4 444.0
------------ -----------
Net cash provided by operating activities. 624.9 329.7
------------ -----------
Cash flows from investing activities:
Purchase of The Continental Corporation................ (1,125.5) -
Cash acquired in connection with the
Continental merger................................... 165.1 -
Purchases of fixed maturities.......................... (12,469.7) (25,758.6)
Proceeds from fixed maturities:
Sales................................................ 11,857.5 18,864.9
Maturities, calls and redemptions.................... 1,657.7 3,156.5
Purchases of equity securities......................... (460.7) (419.0)
Proceeds from sale of equity securities................ 589.6 303.3
Change in short-term investments....................... (2,327.2) 453.2
Purchases of property and equipment.................... (38.6) (51.6)
Change in securities sold under repurchase agreements.. 303.3 3,122.2
Change in other investments............................ 172.8 (7.8)
Other, net............................................. 1.9 0.9
------------ ----------
Net cash used in investing activities..... (1,673.8) (336.0)
------------ ----------
</TABLE>
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS-continued
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Six Months Ended June 30 1995 1994
(In millions of dollars)
-------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to preferred shareholders............... (3.8) (2.3)
Receipts from investment contracts credited to
policyholder account balances........................ 15.8 21.3
Return of policyholder account balances on investment
contracts............................................ (17.5) (16.4)
Principal payments on long-term debt................... (23.1) (2.6)
Retirement of notes payable............................ (205.0) -
Proceeds from issuance of long-term debt............... 1,332.6 0.2
------------ ----------
Net cash provided by financing
activities............................... 1,099.0 0.2
------------ ----------
Net increase (decrease) in cash........... 50.1 (6.1)
Cash at beginning of period ............................. 147.6 129.6
--------------------------------------------------------------------------------------
Cash at end of period $ 197.7 $ 123.5
======================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense...................................... $ (50.4) $ (34.6)
Federal income taxes.................................. (73.3) 44.9
======================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(6)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(Unaudited)
NOTE A. Basis of Presentation:
The condensed consolidated financial statements (unaudited) include CNA
Financial Corporation and its subsidiaries (CNA) and have been prepared in
accordance with generally accepted accounting principles. Results of
operations for the three-month and six-month periods ended June 30, 1995
include the operations of The Continental Corporation (Continental) since
May 10, 1995, the date of acquisition of Continental. Results of operations
for the comparable periods ended June 30, 1994 reflect historical results of
CNA and do not include earnings related to the acquisition of Continental
(See Note B). 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 condensed 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, 1994, filed with
the Commission on March 30, 1995 and the information shown below.
Certain amounts applicable to 1994 have been reclassified to conform to
classifications followed in 1995.
NOTE B. Acquisition of Continental:
On December 6, 1994, CNA entered into a merger agreement providing for the
payment of $20.00 per share to holders of Continental common stock. On May 9,
1995, at a Special Meeting of Continental Shareholders called to approve the
merger agreement, holders of 77% of the outstanding shares of Continental
common stock voted to approve the Merger. Final regulatory approvals of the
merger were received on May 9, 1995 and the merger was consummated on
May 10, 1995.
The acquisition of Continental has been accounted for as a purchase,
therefore Continental's operations are included in the Condensed Consolidated
Financial Statements as of May 10, 1995. CNA has completed its
preliminary purchase accounting analysis. The purchase of Continental reflects
preliminary goodwill of approximately $300 million which will be amortized over
twenty years at an annual charge to income of $15 million. Evaluation and
appraisal of the net assets is continuing and allocation of the purchase
price may be adjusted.
(7)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
The unaudited pro forma condensed results of operations presented below
assume the above transaction had occurred at the beginning of the periods
presented:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
PRO FORMA
PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS
(In millions of dollars, except per share data) 1995 1994 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $4,079.2 $4,044.4 $8,199.6 $7,930.2
Realized investment gains (losses)
included in revenue 233.0 (82.9) 361.7 (156.6)
------- ------- ------- ------
Income (loss) from continuing operations
before income tax 325.9 (105.2) 596.1 (402.7)
Income tax benefit (expense) (91.7) 59.8 (181.2) 176.9
------ ------- ------- -------
Income (loss) from continuing operations $ 234.2 $ (45.4) $ 414.9 $ (225.8)
====== ======= ======= =======
Net income (loss) per share $ 3.87 $ (0.75) $ 6.66 $ (3.69)
====== ======= ======= =======
-------------------------------------------------------------------------------------------
</TABLE>
The unaudited pro forma condensed financial information is
not necessarily indicative either of the results of operations that would
have occurred had these transactions been consummated at the beginning of
the period presented or of future operations of the combined companies.
CNA filed a Current Report on Form 8-K/A with the Securities and Exchange
Commission on July 24, 1995. Included in this report is pro forma
consolidated financial information including a discussion of the preliminary
purchase price allocation based on fair values.
NOTE C. 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. At June 30, 1995, the escrow account amounted to $1.03 billion.
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 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.
<PAGE>
<PAGE>
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 Illinois, CNA receives
collateral primarily in the form of bank letters of credit, securing a large
portion of the recoverables.
(8)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
The effects of reinsurance on written premiums and earned premiums are as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Written Premium
(In millions of dollars) Direct Assumed Ceded Net Direct Assumed Ceded Net
-------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 1995 1994
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Duration Contracts $ 332.4 60.5 10.6 382.3 $ 259.9 57.8 11.9 305.8
Short Duration Contracts 5,149.2 620.5 484.3 5,285.4 4,075.8 728.0 314.0 4,489.8
------- ------- ----- ------- ------- ------- ----- -------
Total $5,481.6 681.0 494.9 5,667.7 $4,335.7 785.8 325.9 4,795.6
======= ======= ===== ======= ======= ======= ===== =======
Second Quarter Ended June 30 1995 1994
------------------------------------- -----------------------------------
Long Duration Contracts $ 63.2 28.7 5.4 86.5 $ 139.2 31.0 6.4 163.8
Short Duration Contracts 3,004.6 300.4 339.6 2,965.4 1,968.4 382.8 162.2 2,189.0
------- ------- ----- ------- ------- ------- ----- -------
Total $3,067.8 329.1 345.0 3,051.9 $2,107.6 413.8 168.6 2,352.8
======= ======= ===== ======= ======= ======= ===== =======
-------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Earned Premium
(In millions of dollars) Direct Assumed Ceded Net Direct Assumed Ceded Net
-------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 1995 1994
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Duration Contracts $ 295.0 60.5 10.6 344.9 $ 223.2 57.8 11.9 269.1
Short Duration Contracts 4,892.6 635.9 488.5 5,040.0 3,996.3 709.1 298.7 4,406.7
------- ----- ----- ------- ------- ------- ----- -------
Total $5,187.6 696.4 499.1 5,384.9 $4,219.5 766.9 310.6 4,675.8
======= ===== ===== ======= ======= ======= ===== =======
Second Quarter Ended June 30 1995 1994
------------------------------------- -----------------------------------
Long Duration Contracts $ 139.9 28.7 5.4 163.2 $ 117.9 31.0 6.4 142.5
Short Duration Contracts 2,730.6 304.4 329.3 2,705.7 1,991.7 368.4 135.7 2,224.4
------- ----- ----- ------- ------- ------- ----- -------
Total $2,870.5 333.1 334.7 2,868.9 $2,109.6 399.4 142.1 2,366.9
======= ===== ===== ======= ======= ======= ===== =======
-------------------------------------------------------------------------------------------------------------
</TABLE>
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $330.0 million and $259.8 million for the six months ending
June 30, 1995 and June 30, 1994, respectively, and $256.5 million and $127.0
million for the three months ending June 30, 1995 and June 30, 1994,
respectively.
NOTE E. Legal Proceedings and Contingent Liabilities:
The following information updates legal proceedings and contingent
liabilities reported in Notes J and K of the Notes to the Consolidated
Financial Statements in the 1994 Annual Report to Shareholders.
<PAGE>
<PAGE>
Fibreboard Litigation
CNA's primary property/casualty subsidiary, Continental Casualty Company
("Casualty"), 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, 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. Casualty, Fibreboard and Pacific Indemnity have also
reached an agreement, (the "Trilateral Agreement") which is subject to court
approval, on a settlement to resolve the coverage litigation in the event
the Global Settlement does not obtain final court approval. The
(9)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
implementation of 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. It is expected that one or both of these
decisions will be appealed.
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.
Casualty 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 Casualty 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 Casualty, 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, although the policies had a
$500,000 per person limit and a $1,000,000 per occurrence limit, they
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
Casualty 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 Casualty, 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 Casualty and Pacific
Indemnity. Casualty 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 finally approved, it is
anticipated that Casualty and Pacific Indemnity will resume the appeal
process. Casualty'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:
<PAGE>
<PAGE>
- 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.
Casualty's position is that its policy is triggered under California
law by manifestation of appreciable harm during the policy period. 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, Casualty's position is that if existing
(10)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
California law were applied, there would be no coverage under
Casualty's policy; however, the court has recently adopted a
continuous trigger in litigation over the duty to defend cases involving
bodily injury and property damage due to exposure to DDT.
- 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. Casualty'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, Casualty would only be liable for that proportion
of the bodily injury that occurred during the 22-month period its policy
was in force.
- Casualty 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, Casualty's position is that coverage under the
Casualty 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.
- Casualty's policy had a $1 million per occurrence limit. Casualty
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, Casualty 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.
Even if Casualty were successful on appeal on the dual coverage
requirements or the number of occurrences, if the final decision in the
coverage case affirms the trial court's decision on the existence of the
Pacific Indemnity policy, then Casualty would still have obligations under
the Casualty and Pacific Indemnity Agreement described below.
Under various reinsurance agreements, Casualty has asserted a right to
reimbursement for a portion of its potential exposure to Fibreboard. The
reinsurers have disputed Casualty's right to reimbursement and have taken
the position that any claim by Casualty 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
Casualty will be successful in obtaining a recovery under its reinsurance
agreements.
<PAGE>
<PAGE>
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.
Through June 30, 1995, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 138,100 claims, subject to
resolution of the coverage issues, for an estimated settlement amount of
approximately $1.62 billion plus any applicable interest. If neither the
Global Settlement nor the Trilateral Agreement receives final court
approval, Casualty's obligation to pay under these 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, may total as much as approximately $787
million, of which approximately $540 million was paid through June 30, 1995.
(11)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
Casualty may negotiate other agreements with various classes of claimants
including groups who may have previously reached agreement with Fibreboard.
Casualty will continue to pursue its appeals in the coverage litigation
and all other litigation involving Fibreboard if the Global Settlement or
the Trilateral Agreement cannot be implemented.
Global Settlement
On August 27, 1993, Casualty, 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
Casualty 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
before August 27, 1993. An additional $10 million is to be contributed to
the fund by Fibreboard. The Global Settlement approval is subject to
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, Casualty,
Fibreboard and Pacific Indemnity entered into the Trilateral Agreement which
sets forth the parties' obligations in the event the Global Settlement
approval by the trial court is not upheld on appeal. In such case,
Casualty and Pacific Indemnity 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 for previously settled claims. Casualty'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 for unsettled present
claims and previously settled claims. Casualty has agreed that if either the
Global Settlement or the Trilateral Agreement is finally approved, it will
assume responsibility for the claims that had been settled before August 27,
1993. 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, Casualty would be released
by Fibreboard from any further liability under the comprehensive general
liability policy written for Fibreboard by Casualty, including but not
limited to liability for asbestos-related claims against Fibreboard. The
Trilateral Agreement approval by the trial court is subject to possible
appeal. Casualty 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 trial court's
approval of the Global Settlement is upheld on appeal and also governs
certain obligations between the parties in the event the Global Settlement
is upheld on appeal including the payment of claims which are not included
in the Global Settlement.
<PAGE>
<PAGE>
In addition, Casualty and Pacific Indemnity have entered into an
agreement (the "Casualty-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 finally
approved. Under the Casualty-Pacific Agreement, Casualty and Pacific
Indemnity have agreed to pay 64.71% and 35.29%, respectively, of the $1.525
billion plus expenses and interest accrued in escrow to be used to satisfy
the claims of future claimants. If neither the Global Settlement nor the
Trilateral Agreement is finally approved, Casualty 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 for unsettled
present claims and presently settled claims (regardless of whether either
such insurer would otherwise have any liability therefor). If either the
Trilateral Agreement or the Global Settlement is finally approved, Pacific
Indemnity's share for unsettled present claims and presently settled claims
will be $635 million.
(12)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
Reserves
In the fourth quarter of 1992, Casualty 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, Casualty added $500 million to such claim reserve in the
third quarter of 1993. The Fibreboard litigation represents the major
portion of Casualty'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
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 approved by the trial
court are subject to appeal. 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 Casualty's potential
liability for such future claimants if neither the approval of the Global
Settlement nor the Trilateral Agreement is upheld on appeal, keeping in mind
that Casualty'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 for exposure
starting after 1959. As indicated above, as of June 30, 1995, Casualty,
Fibreboard and plaintiff attorneys have reached settlements with respect to
approximately 138,100 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
Casualty is not a party.
<PAGE>
<PAGE>
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
plaintiffs' counsel in August 1993, the expected settlement for
approximately 49,500 claims for exposure to asbestos both prior to and after
1959 is currently averaging approximately $13,300 per claim for the before
1959 claims processed through June 30, 1995. Based on reports by Fibreboard,
between September 1988 and April 1993, Fibreboard resolved approximately
40,000 claims, 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 Casualty. Casualty intervened and settled these claims for
approximately $77,000 on average, with a portion of the payment contingent
on final approval on appeal of the Global Settlement or the Trilateral
Agreement, and if neither is finally approved, subject to resolution of the
coverage appeal.
Casualty 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 upheld on appeal, in light of
(13)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
the factors discussed herein the range of Casualty'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.
Environmental Pollution and Asbestos
The CNA property/casualty insurance companies have potential exposures
related to environmental pollution, asbestos-related, and other toxic tort
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 "Responsible Parties" ("RP's"). Superfund and the mini-
Superfunds (Environmental Clean-up Laws or "ECLs") establish a mechanism to
pay for clean-up of waste sites if RP's fail to do so, and to assign
liability to RP's. The extent of liability to be allocated to a RP 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
estimates 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 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.
<PAGE>
<PAGE>
A number of proposals to reform Superfund have been made by various
parties, however, no reforms were enacted by Congress in 1994. The Superfund
taxing authority will expire at the end of 1995 and will, therefore, need to
be addressed by the 104th Congress. While Congress may address this issue,
no predictions can be made as to what positions the Congress or the
Administration will take and 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 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 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 later adjustment based
on new data. As of June 30, 1995 and December 31, 1994, CNA carried
(14)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
approximately $939 million and $509 million, respectively, of claim and
claim expense reserves, before reinsurance recoverable, for reported and
unreported environmental pollution claims. Included in the June 30, 1995
reserves are $393 million related to Continental, whose financial results
are included in the accompanying financial statements for the period May 10,
1995 through June 30, 1995. Unfavorable reserve development for the six
months ended June 30, 1995 and the full year 1994 totaled $73 million and
$180 million, respectively. The foregoing reserve information includes
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.
CNA has exposure to asbestos-related claims, including those attributable to
Fibreboard, and other toxic tort claims. Estimation of asbestos-related and
other toxic tort 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, 1995 and December 31, 1994, CNA carried
approximately $2,349 million and $2,049 million, respectively, of claim and
claim expense reserves, before reinsurance recoverable, for reported and
unreported asbestos-related and other toxic tort claims. Included in the June
30, 1995 reserves are $329 million related to Continental, whose financial
results are included in the accompanying financial statements for the period
May 10, 1995 through June 30, 1995. Unfavorable reserve development for the
six months ended June 30, 1995 and the full year 1994 totaled $54 million and
$37 million, respectively.
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.
------------------------------------------------------------------------
RESERVE RECAP JUNE 30 DECEMBER 31
(In millions of dollars) 1995 1994
------------------------------------------------------------------------
Environmental pollution $ 939 $ 509
Asbestos and other toxic tort 2,349 2,049
----- -----
3,288 2,558
Reinsurance recoverable (260) (113)
----- -----
Net reserves $ 3,028 $ 2,445
===== =====
------------------------------------------------------------------------
<PAGE>
<PAGE>
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE F. Debt:
Long and short-term borrowings consisted of the following:
---------------------------------------------------------------------
LONG AND SHORT-TERM DEBT JUNE 30 DECEMBER 31
(In millions of dollars) 1995 1994
---------------------------------------------------------------------
Long-term:
Credit Facility $1,325.0 $ -
Senior Notes 646.9 646.4
Debenture 247.1 247.1
Secured Mortgage Notes 382.1 -
Secured Capital Leases 30.6 -
Other 363.1 18.3
Short-Term 4.7 2.0
-------- --------
$2,999.5 $ 913.8
======== ========
----------------------------------------------------------------------
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 involving 16 banks led by The First
National Bank of Chicago and The Chase Manhattan Bank, N.A.. The interest
rate for the facility is based on the one, two, three, or six month London
Interbank Offered Rate (LIBOR) plus 35 basis points. The May 10 all-in
facility rate was 6.475%. Under the terms of the facility, CNA may prepay
the debt without penalty, giving CNA flexibility to arrange longer-term
financing on more favorable terms.
To offset the variable rate characteristics of the facility, CNA
entered into 5 year interest rate swap agreements with several banks. These
agreements which terminate from May 2000 to July 2000 will convert variable
rate debt based on three month LIBOR into fixed rate debt resulting in fixed
rates on notional amounts totalling $950 million. The all-in weighted
average fixed interest rate at July 14, 1995 was 6.75%.
On August 10, 1995, to take advantage of favorable interest rate spreads,
CNA established a Commercial Paper Program, borrowing $500 million from
investors at an average rate of 5.86%, to replace a like amount of bank
financing. $500 million of the committed bank facility will support the
commercial paper program. Standard and Poor's and Moody's issued short-term
debt ratings of A2 and P2, respectively, for CNA's Commercial Paper Program.
(16)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - concluded
NOTE G. Discontinued Operations:
The financial statements reflect the operating results of the discontinued
insurance operations separately from continuing operations. The discontinued
operations were acquired as part of the Continental merger; therefore, results
of operations for the three-month and six-month periods ended June 30, 1995,
reflect only activity from May 10, 1995 through June 30, 1995. Operating
results of the discontinued operations were as follows:
-----------------------------------------------------------
PERIOD ENDED
(In millions of dollars) JUNE 30, 1995
-----------------------------------------------------------
Revenues $ 10.0
Expenses 10.0
-----
Income Before Income Taxes -
Income Taxes -
-----
Income from Discontinued Operations $ -
=====
-----------------------------------------------------------
Net assets of discontinued insurance operations at June 30, 1995 were
included in "Other Assets", net of intercompany eliminations, and were as
follows:
------------------------------------------------------
JUNE 30
(In millions of dollars) 1995
------------------------------------------------------
ASSETS:
Cash and Investments $ 940.0
Reinsurance Receivables and Other Assets 543.0
--------
1,483.0
--------
LIABILITIES:
Claim and Claim Expenses 1,124.0
Other Liabilities 205.0
--------
1,329.0
--------
Net Assets $ 154.0
========
------------------------------------------------------
(17)<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 17,
which contain additional information helpful in evaluating operating results
and financial condition.
Overview:
Continental Acquisition-
CNA reached an agreement in late 1994 to acquire The Continental
Corporation (Continental) through a cash merger for $1.1 billion or $20 per
Continental share. On May 9, 1995, Continental shareholders approved the
agreement and the merger was completed on May 10. As a result and upon
consummation of the merger, Continental became a wholly owned subsidiary of
CNA Financial Corporation. CNA funded the cash purchase price with
proceeds from a five-year revolving credit facility from a syndicate of
banks. See Liquidity and Capital Resources section for summary description
of financing of acquisition. Continental is an insurance holding company
principally engaged in the business of owning a group of property and
casualty insurance companies and this acquisition makes CNA the largest U.S.
commercial lines insurer, the third largest U.S. property-casualty
organization, and the sixth largest U.S. insurance group, based on 1994
premium volume.
CNA has completed its preliminary purchase accounting analysis and
filed pro forma financial information with the SEC on July 24, 1995 on
Current Report on Form 8-K/A. Evaluation and appraisal of the net assets is
continuing and allocation of the purchase price may be adjusted. The purchase
of Continental reflects preliminary goodwill of approximately $300 million
which will be amortized over twenty years at an annual charge to income of
$15 million.
CNA's top priority is to consolidate the two organizations as
quickly as possible without disruption to its existing businesses. The
merged organization will operate under the name CNA with headquarters in
Chicago. The company will merge most of the Continental and CNA sales and
support offices nationwide. CNA continues to remain committed to strong
relationships with the agents and brokers who distribute its products and
services.
Going forward, the combined organization is expected to be stronger
and more competitive than either company could have been on its own. CNA
will benefit from a stronger market position in nearly all property-casualty
businesses, increased economies of scale and efficiencies, and expanded
distribution of new and existing products. CNA believes that its major
businesses are leaders in their respective fields, or are on their way to
establishing a leadership position.
(18)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Fibreboard-
As described in Note E to the Condensed Consolidated Financial Statements,
CNA's primary property/casualty subsidiary, Continental Casualty Company
(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.
Casualty is party to litigation with Fibreboard involving coverage for
certain asbestos-related claims and defense costs (San Francisco Superior
Court, Judicial Council Coordination Proceeding 1072). 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. Casualty, Fibreboard and Pacific Indemnity have
also reached an agreement, (the "Trilateral Agreement") which is subject to
court approval, 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 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. It is expected that one or both of these
decisions will be appealed.
(19)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Results of Operations:
The following chart summarizes key components of operating results
for the second quarter and six months ended June 30, 1995 and 1994.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS
(In millions of dollars) 1995 1994 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Summary (excluding
realized investment gains/losses):
Revenues:
Premiums:
Property/Casualty $2,162.8 $1,703.0 $3,947.3 $3,327.9
Life 706.1 663.9 1,437.6 1,347.9
------- ------- ------- -------
2,868.9 2,366.9 5,384.9 4,675.8
Net investment income 514.7 384.1 945.6 730.4
Other 69.8 56.3 139.9 111.3
------- ------- ------- -------
3,453.4 2,807.3 6,470.4 5,517.5
Benefits and expenses 3,287.3 2,821.9 6,137.8 5,603.9
------- ------- ------- -------
Operating income (loss)
before income tax 166.1 (14.6) 332.6 (86.4)
Income tax benefit (expense) (38.9) 32.3 (73.8) 87.3
------- ------- ------- -------
Net operating income (loss) $ 127.2 $ 17.7 $ 258.8 $ 0.9
======= ======= ======= =======
Supplemental Financial Data:
Net operating income (loss) by group:
Property/Casualty $ 121.7 $ 7.3 $ 239.6 $ (13.0)
Life 23.5 22.3 48.5 37.4
Other (18.0) (11.9) (29.3) (23.5)
------- ------- ------- -------
127.2 17.7 258.8 0.9
------- ------- ------- -------
Net realized investment gains (losses)
by group:
Property/Casualty 76.7 (40.9) 85.7 (82.9)
Life 52.2 (11.6) 63.7 (30.8)
Other 0.6 (1.4) 1.3 (1.5)
------- ------- ------- -------
129.5 (53.9) 150.7 (115.2)
------- ------- ------- -------
<PAGE>
<PAGE>
Net income (loss) by group:
Property/Casualty 198.4 (33.6) 325.3 (95.9)
Life 75.7 10.7 112.2 6.6
Other (17.4) (13.3) (28.0) (25.0)
------- ------- ------- -------
$ 256.7 $ (36.2) $ 409.5 $ (114.3)
===========================================================================================
</TABLE>
Consolidated Results
As discussed above, the merger of Continental and CNA Financial
Corporation was consummated on May 10, 1995. Thus, the second quarter and
six month 1995 results of operations include Continental subsequent to May
10, 1995.
Consolidated revenues excluding realized gains/losses were $6.47
billion, up $953 million for the first half of 1995, compared to revenues of
$5.52 billion for the same period in 1994. Consolidated revenues, excluding
Continental, were up $406 million or 7.4%. Of that increase, $244 million
was in earned premiums, $150 million in investment income and $12 million
in other income. For Continental, earned premiums during the period from
May 10 through June 30, 1995 were $465 million representing 85% of its
revenues. Investment income was $66 million or 12% of its revenues. Other
income, comprised primarily of claims adjusting fees and insurance inspection
fees, was $16 million, or 3% of revenues.
(20)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Consolidated revenues, excluding realized investment gains
(losses), were up 23.0% in the second quarter to $3.45 billion compared to
$2.81 billion for the second quarter of 1994. Excluding Continental,
premium revenue increased $37 million or 1.5% and investment income
increased $66 million, or 17.1%.
CNA reported increased earnings for the first six months of 1995 as compared
to the similar period of 1994. Net operating income which excludes net
realized investment gains, was $258.8 million, or $4.13 per share, compared
with $0.9 million, or a loss of $0.02 per share, for the first six months of
1994. This improvement was chiefly attributable to improved loss experience,
notably in the workers' compensation line, lower level of catastrophes, and
increased investment income for both the property/casualty and life
operations.
Realized investment gains, net of tax, for the first half of 1995
were $150.7 million, or $2.44 per share, compared to net realized investment
losses for the first half of 1994 of $115.2 million, or $1.87 per share.
Realized investment gains, net of tax, for the second quarter of 1995
amounted to $129.5 million, or $2.09 per share, compared to net realized
investment losses for the second quarter of 1994 of $53.9 million, or $.88
per share.
The components of the net realized investment gains (losses) are as
follows:
--------------------------------------------------------------
Realized Investment Gains (Losses)
Six Months Ended June 30 1995 1994
(In millions of dollars)
--------------------------------------------------------------
Bonds:
U.S. Government $ 97.9 $(145.2)
Tax exempt 17.9 23.1
Asset-backed 33.9 (44.4)
Taxable (4.7) (39.2)
----- -----
Total bonds 145.0 (205.7)
Stocks 51.7 32.7
Derivative securities (7.2) 3.2
Other 52.1 (12.1)
----- -----
Realized investment gains (losses)
reported in revenues 241.6 (181.9)
Participating policyholders' interest (6.9) 10.9
Income tax benefit (expense) (84.0) 55.8
----- -----
Net realized investment
gains (losses) $ 150.7 $(115.2)
==============================================================
<PAGE>
<PAGE>
CNA's total income tax expense for the six months ended June 30,
1995 amounted to $157.8 million compared to a benefit of $143.2 million for
the same period in 1994. CNA's income tax expense excluding tax on realized
investment gains (losses) amounted to $73.8 million for the six months ended
June 30, 1995, compared to a $87.3 million benefit in the first six months
of 1994. The income tax expense on realized investment gains for the six
months ended June 30, 1995, totaled $84.0 million compared with an income
tax benefit of $55.8 million for the same period a year ago.
Net income was $409.5 million, or $6.57 per share, compared to a
net loss of $114.3 million, or $1.89 per share, for the first six months of
1994.
(21)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Property/Casualty Operations
----------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Property/Casualty Group SECOND QUARTER SIX MONTHS
Period Ended June 30 1995 1994 1995 1994
(In millions of dollars)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Summary (excluding realized
investment gains/losses):
Revenues:
Premiums $ 2,162.8 $ 1,703.0 $3,947.3 $3,327.9
Net investment income 423.2 304.2 766.4 581.8
Other 62.7 42.7 116.0 87.5
------- ------- ------- -------
2,648.7 2,049.9 4,829.7 3,997.2
Benefits and expenses 2,491.7 2,080.7 4,527.3 4,105.2
------- ------- ------- -------
Income (loss) before income tax 157.0 (30.8) 302.4 (108.0)
Income tax benefit (expense) (35.3) 38.1 (62.8) 95.0
------- ------- ------- -------
Net operating income (loss) (excluding
realized investment gains/losses) $ 121.7 $ 7.3 $ 239.6 $ (13.0)
==============================================================================================
Property/casualty operating profitability improved significantly in
the first six months of 1995. Pretax operating income (excluding net
realized investment gains/losses) for the property/casualty insurance
subsidiaries was $302.4 million and $157.0 for the six and three months
ended June 30, 1995 compared to pretax operating losses of $108.0 million
and $30.8 million for the same periods a year ago. Operating income for
1995 reflects both improved investment income and underwriting results.
Underwriting losses for the six and three months ended June 30,
1995, were $464.0 million and $266.2 million compared to $689.8 million and
$335.0 million for the same periods in 1994. The statutory combined ratio
for the six and three months ended June 30, 1995 was 109.3% and 109.0%
compared with 117.5% and 115.2 % for the same periods in 1994. Contributing
to the improvement in underwriting results were continued favorable trends
in the workers' compensation line and lower catastrophe losses. Pre-tax
catastrophe losses for the six and three months ended June 30, 1995
were approximately $78 million and $55 million, respectively, compared to
$166 million and $66 million for the respective periods in 1994. The 1994
catastrophe losses related primarily to the Northridge earthquake and severe
winter storms in the Northeast.
<PAGE>
<PAGE>
Investment income increased 31.7% and 39.1% for the six and three
months ended June 30, 1995 to $766.4 million and $423.2 million,
respectively, when compared with the comparable periods a year ago of $581.8
million and $304.2 million, respectively. Investment income increased for
the first half of 1995, when compared to the first half of 1994 primarily
due to the acquisition of Continental ($64.7 million) and higher yielding
investments resulting from a shift late in the 1994 first quarter to longer
term securities. Interest rates on debt securities generally rose
throughout 1994, but have declined since January 1995. The bond segment of
the investment portfolio yielded 6.7% in the first half of 1995 compared
with 5.7% for the same period a year ago.
Property/casualty revenues, excluding net realized investment
gains/losses, increased 20.8% and 29.2% for the six months and three months
ended June 30, 1995, respectively, compared to the same periods a year ago.
For the six months and three months ended June 30, 1995, property/casualty
earned premium increased $619 million, or 18.6% and $460 million, or 27.0%
from the prior year's comparable periods, respectively. The increase was
principally attributable to the inclusion of Continental business ($465
(22)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
million) and increases in other CNA business including medium commercial
accounts, small commercial business, group operations, reinsurance and
specialty lines offset in part by decreases in large account premium
business due to the continued shift to high deductibles and decreases in
involuntary residual markets and treaty reinsurance.
The net income of CNA's property/casualty insurance subsidiaries,
excluding net realized investment gains/losses, was $239.6 million and
$121.7 million for the six and three months ended June 30, 1995, compared to
a loss of $13.0 million and income of $7.3 million for the same periods in
1994. Net realized investment gains for the six and three months ended June
30, 1995 were $85.7 million and $76.7 million compared to net realized
investment losses of $82.9 million and $40.9 million for the same periods in
1994. The property/casualty group had sold approximately $14 billion of
fixed income and equity securities since December 31, 1994, realizing pre-
tax net gains of $196.8 million. Of the $14 billion of securities sold,
approximately $8 billion and $3 billion, respectively, were from the U.S.
Treasury and Government mortgage-backed bond portfolios.
Life Operations
---------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Life Group SECOND QUARTER SIX MONTHS
Period Ended June 30 1995 1994 1995 1994
(In millions of dollars)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Summary (excluding realized
investment gains/losses):
Revenues:
Premiums $ 714.4 $ 668.7 $ 1,451.7 $ 1,356.5
Net investment income 89.6 79.1 177.2 148.5
Other 6.7 14.4 23.9 23.6
------- ------- ------- --------
810.7 762.2 1,652.8 1,528.6
Benefits and expenses 774.2 727.9 1,577.8 1,471.0
------- ------- ------- --------
Income before income tax 36.5 34.3 75.0 57.6
Income tax expense (13.0) (12.0) (26.5) (20.2)
------- ------- ------- --------
Net operating income (excluding
realized investment gains/losses) $ 23.5 $ 22.3 $ 48.5 $ 37.4
================================================================================================
</TABLE>
The improvement in life operations for the first six months of 1995 was
primarily from increased investment income.
<PAGE>
<PAGE>
Life group revenues, excluding realized investment gains, were
$1,652.8 million and $810.7 million for the six and three months ended June
30, 1995, up 8.1% and 6.4%, respectively, when compared to the same period a
year ago. Life group earned premium was $1,451.7 million and $714.4 million
for the six and three months ended June 30, 1995, up 7.0% and 6.8%,
respectively, with the primary growth in annuities, term life and group
business. Investment income increased 19.3% and 13.3% for the six and three
months ended June 30, 1995, compared to the same periods a year ago
primarily due to the same reasons described for property/casualty
operations. The bond segment of the life investment portfolio yielded 6.9%
in the first half of 1995 compared with 6.2% for the same period a year ago.
Pretax operating income for the life insurance subsidiaries,
excluding net realized investment gains/losses, was $75.0 million and $36.5
million for the six and three months ended June 30, 1995, compared to $57.6
million and $34.3 million, respectively, for the same periods in 1994. The
increase in pretax operating income is primarily due to increased investment
income.
(23)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
CNA's life insurance subsidiaries' net income excluding net
realized investment gains/losses was $48.5 million and $23.5 million for the
six and three months ended June 30, 1995 compared to $37.4 million and $22.3
million, respectively, for the same periods in 1994. Net realized
investment gains for the six and three months ended June 30, 1995 were $63.7
million and $52.2 million, respectively, compared to $30.8 million and $11.6
million of net realized investment losses recognized for the same periods in
1994.
INVESTMENTS:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Summary of General Account Investments | |
at Market Value | |
| Change in |
June 30 December 31 | Unrealized | Realized
(In millions of dollars) 1995 1994 | Gains(losses)| Gains(losses)
-----------------------------------------------------------------------------------------------
<S> <C> <C> | <C> <C>
Fixed income securities: | |
U. S. Treasury securities and | |
obligations of government | |
agencies $11,510 $10,782 | $ 767 | $ 98
Asset-backed securities 4,223 2,564 | 179 | 34
Tax exempt securities 3,654 3,770 | 59 | 18
Taxable 6,279 3,712 | 216 | (5)
------ ------ | ------ | ------
Total fixed income securities 25,666 20,828 | 1,221 | 145
Stocks 910 755 | 152 | 52
Short-term investments 8,975 5,036 | - | -
Other 670 323 | 10 | 9
Derivative security investments 3 1 | - | (7)
------ ------ | ------ | ------
Total general account investments $36,224 $26,943 | 1,383 | 199
====== ====== | |
Separate Accounts and discontinued | |
operations | 222 | 43
Participating policyholders' interest | (32) | (7)
Income tax expense | (540) | (84)
| ------ | ------
Net investment gains | $1,033 | $ 151
| ====== | ======
-----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
--------------------------------------------------------------
Short-term investments: JUNE 30 DECEMBER 31
1995 1994
--------------------------------------------------------------
Security repurchase collateral $ 2,780 $ 2,479
Escrow 1,026 1,010
Other 5,169 1,547
------ ------
Total short-term investments $ 8,975 $ 5,036
====== ======
--------------------------------------------------------------
CNA's assets increased approximately $18.3 billion to $62.7 billion
as of June 30, 1995 including $15.5 billion related to the acquisition of
Continental. CNA's investment portfolio increased by $9.3 billion from
December 31, 1994 to $36.2 billion including $7.5 billion related to
Continental.
CNA's general account investment portfolio is managed to maximize
total 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.
CNA holds a small amount of 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
(24)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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 debt securities, approximately 95% of which are rated as
investment grade. At June 30, 1995, short-term investments, excluding
collateral for securities sold under repurchase agreements, comprised
approximately 17% of the general account's total investment portfolio
compared to 9% at December 31, 1994. Historically, CNA has maintained
short-term assets at a level that provided for liquidity to meet its short-
term obligations. In the first half of 1995, short-term investments have
increased well above such levels as positive cash flows, including proceeds
from sales of securities, have not been invested in long-term securities;
currently, short-term interest rates are relatively attractive compared to
longer-term rates. At June 30, 1995, the major components of the short-term
investment portfolio were approximately $5.5 billion of high-grade
commercial paper and $3.5 billion of U.S. Treasury bills. Collateral for
securities sold under repurchase agreements were $2.8 billion and were
invested in high-grade commercial paper.
Debt security carrying values are highly susceptible to changes in
interest rates and were favorably affected as a general decline in interest
rates occurred in the first half of 1995. Interest rates have continued to
decline throughout July resulting in additional unrealized investment gains
in the bond portfolio, primarily relating to government securities.
As of June 30, 1995, the market value of CNA's general account
investments in bonds and redeemable preferred stocks was $25.7 billion and
exceeded amortized cost by approximately $426 million. This compares
to $795 million of net unrealized investment losses at December 31, 1994.
The gross unrealized investment gains and losses for the fixed income
securities portfolio at June 30, 1995, were $661 million and $235 million,
respectively, compared to $194 million and $989 million, respectively, at
December 31, 1994.
Net unrealized investment gains on general account bonds at June
30, 1995 include net unrealized gains on high yield securities of $35
million, compared to net unrealized investment losses of $30 million at
December 31, 1994. 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
$1.4 billion at June 30, 1995, compared to $1.0 billion at December 31,
1994.
<PAGE>
<PAGE>
At June 30, 1995, total separate account cash and investments
amounted to $5.9 billion with taxable debt securities representing
approximately 93% of the separate accounts' portfolio. Approximately 86% 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 $4.8 billion compared
to $4.6 billion at December 31, 1994. At June 30, 1995, fair values
exceeded the amortized costs by approximately $2 million. This compares to
$195 million of net unrealized investment losses at December 31, 1994. The
gross unrealized investment gains and losses for the GIC fixed income
securities portfolio at June 30, 1995, were $94 million and $92 million,
respectively, compared to $34 million and $229 million, respectively, at
December 31, 1994.
(25)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Carrying values of high yield securities in the GIC portfolio were
$1.1 billion at June 30, 1995 and December 31, 1994. Net unrealized
investment losses on high yield securities held in such separate accounts
were $47 million at June 30, 1995, compared to $108 million at December 31,
1994.
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, 1995,
CNA's concentration in high yield bonds including separate accounts was
approximately 4.0% 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 income securities at June 30, 1995 (general
and GIC portfolios) are $6.3 billion of asset-backed securities, consisting
of approximately 40% in collateralized mortgage obligations ("CMO's"), 16%
in corporate asset-backed obligations, and 44% 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. At June 30,
1995, the fair value of asset-backed securities exceeded amortized cost by
approximately $88 million compared to unrealized investment losses of $181
million at December 31, 1994. CNA limits the risks associated with interest
rate fluctuations and 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 June 30, 1995, 59% of the
general account's debt securities portfolio was invested in U.S. Government
securities, 17% in other AAA rated securities and 15% in AA and A rated
securities. CNA's GIC fixed income portfolio is comprised of 30% U.S.
Government securities, 18% in other AAA rated securities and 19% in AA and A
rated securities. These ratings are primarily from Standard & Poor's (91%
of the general account portfolio and 95% of the GIC portfolio).
FINANCIAL CONDITION:
-----------------------------------------------------------------------
Financial Position
(In millions of dollars, June 30 December 31
except per share data) 1995 1994
-----------------------------------------------------------------------
Assets $62,657.4 $44,320.4
Debt 2,999.5 913.8
Stockholders' Equity 6,009.1 4,545.9
Unrealized Net Appreciation (Depreciation)
Included in Stockholders' Equity 526.3 (506.4)
Book Value per Common Share 94.81 71.13
-----------------------------------------------------------------------
<PAGE>
<PAGE>
CNA's assets increased approximately $18.3 billion to $62.7 billion
as of June 30, 1995 including $15.5 billion related to the acquisition of
Continental. CNA's investment portfolio increased by $9.3 billion from
December 31, 1994 to $36.2 billion including $7.5 billion related to
Continental.
During the first six months of 1995, CNA's stockholders' equity
increased by $1.5 billion, or 32.2%, to approximately $6.0 billion. The
major components of this change were $409.5 million from net income and a
$1.0 billion increase 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 favorably
affected as a general decline in interest rates occurred in the first half
(26)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
of 1995. Interest rates have continued to decline throughout July resulting
in additional unrealized investment gains in the bond portfolio, primarily
relating to government securities.
The statutory surplus of the property/casualty subsidiaries amounts
to $5.4 billion, including $1.7 billion for Continental, compared to a pro
forma combined statutory surplus of $4.8 billion at December 31, 1994. The
increase, excluding that caused by the addition of Continental, resulted
primarily from net income. The statutory surplus of the life insurance
subsidiaries is approximately $1.0 billion.
Liquidity and Capital Resources:
The liquidity requirements of CNA, excluding the acquisition of
Continental, 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 six months of 1995, CNA's operating activities
generated net cash flows of $625 million, compared to $330 million for the
same period in 1994. The increase in cash flows is due primarily to both an
increase in investment income along with improved insurance subsidiaries
underwriting cash flows for the first six months of 1995, as compared to the
same period in 1994.
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.
On May 10, 1995, CNA acquired all the outstanding shares of
Continental for approximately $1.1 billion or $20 per Continental share. 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 involving 16 banks led by The First National Bank
of Chicago and The Chase Manhattan Bank, N.A.. The interest rate for the
facility is based on the one, two, three, or six month London Interbank
Offered Rate (LIBOR) plus 35 basis points. The May 10 all-in facility rate
was 6.475%. Under the terms of the facility, CNA may prepay the debt
without penalty, giving CNA flexibility to arrange longer-term financing on
more favorable terms.
<PAGE>
<PAGE>
To offset the variable rate characteristics of the facility, CNA
entered into 5 year interest rate swap agreements with several banks. These
agreements will convert variable rate debt based on three month LIBOR into
fixed rate debt resulting in fixed rates on notional amounts of $950
million. The all-in weighted average fixed interest rate at July 14, 1995
was 6.75%.
On August 10, 1995, to take advantage of favorable interest rate
spreads, CNA established a Commercial Paper Program, borrowing $500 million
from investors at an average rate of 5.86%, to replace a like amount of
bank financing. $500 million of the committed bank facility will back up
the commercial paper program. Standard and Poor's and Moody's issued short-
term debt ratings of A2 and P2, respectively, for CNA's Commercial Paper
Program.
(27)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - concluded
Coincident with the Continental acquisition, A.M. Best, Standard
and Poor's, Moody's and Duff & Phelps issued revised ratings for CNA's
Continental Casualty Company Intercompany Pool, Continental Insurance
Company Intercompany Pool and Continental Assurance Company Intercompany
Pool. Also rated were the senior debt of both CNA and Continental and CNA's
preferred stock.
In some cases the rating agencies affirmed the previous ratings. In
others, the ratings were lowered because of the increased level of debt
associated with the Continental acquisition.
The chart below lists the current ratings.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
| INSURANCE RATINGS | DEBT AND STOCK RATINGS |
|---------------------------------|------------------------------------|----------|
| Financial Strength | | |
|---------------------------------| | |
| CNA | | CNA | CIC |
|---------------------| CIC | -----------------------------------|----------|
| Casualty | Life | | Senior Commercial Preferred | Senior |
| | | | Debt Paper Stock | |
|----------|----------|-----------|------------|-----------|-----------|----------|
<S> <C> <C> <C> <C> <C> | <C> |
A.M. Best | A | A | A- | - | - | - | - |
| | | | | | | |
Moody's | A1 | A1 | A2 | A3 | P2 | a3 | Baa1 |
|---------------------------------| | | | |
| Claims Paying Ability | | | | |
|---------------------------------| | | | |
| | | | | | | |
Standard and Poor's | A+ | AA | A- | A- | A2 | A- | BBB- |
| | | | | | | |
Duff and Phelps | AA- | AA | - | A- | - | A- | - |
----------------------------------------------------------------------------------------------------------
</TABLE>
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 the Condensed Consolidated Financial
Statements for further discussion of environmental pollution exposures.
<PAGE>
<PAGE>
Accounting Standards:
In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used for long-lived assets
and certain identifiable intangibles to be disposed of. This statement
requires that long-lived assets and certain identifiable intangibles to be
held and used by the entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. This Statement will be effective for 1996 financial
statements, although earlier adoption is permissible. This Statement will
not have a significant impact on CNA.
(28)<PAGE>
<PAGE>
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 1995 Annual Meeting of
Shareholders of CNA Financial Corporation.
The annual meeting was called to order at 11:00 A.M., May 3, 1995.
Represented at the meeting, in person or by proxy, were 61,202,084 shares,
approximately 99.0% of the issued and outstanding shares entitled to vote.
The following business was transacted:
Election of Directors
---------------------
Over 99% 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 60,917,934 284,150
Dennis H. Chookaszian 60,918,665 283,419
Philip L. Engel 60,918,626 283,458
Robert P. Gwinn 60,917,950 284,134
Edward J. Noha 60,918,526 283,558
Richard L. Thomas 60,918,828 283,256
James S. Tisch 60,918,359 283,725
Laurence A. Tisch 60,918,173 283,911
Preston R. Tisch 60,918,359 283,725
Marvin Zonis 60,917,985 284,099
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 61,196,741 shares or 99.99% of the
shares voting. 3,766 shares or approximately .006% of the shares voting,
were cast against, and 1,577 shares, or approximately .003% of the shares
voting, abstained.
(29)<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 32
(27) Financial Data Schedule 27 33
(b) REPORTS ON FORM 8-K:
On May 10, 1995, CNA Financial Corporation (CNA) issued a press
release, which stated that today CNA consummated the merger (the "Merger")
of its wholly owned subsidiary, Chicago Acquisition Corp. ("Merger Sub"),
with and into The Continental Corporation ("Continental"), pursuant to the
Merger Agreement dated as of December 6, 1994, by and among CNA, Continental
and Merger Sub, for aggregate consideration of $1,125 million (based on a
conversion price of $20.00 per share of Continental's common stock, par
value $1.00 per share).
The press release also stated that CNA is funding the cash purchase
price with proceeds from a five-year revolving credit facility from a
syndicate of banks led by the First National Bank of Chicago, as
administrative agent, and The Chase Manhattan Bank, N.A., as syndication
agent. As a result and upon the consummation of the Merger, Continental
became a wholly owned subsidiary of CNA. Continental is an insurance
holding company principally engaged in the business of owning a group of
property and casualty insurance companies, which business CNA currently
intends to continue.
(30)<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: August 14, 1995 By: PETER E. JOKIEL
--------------- ---------------------
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
(31)<PAGE>
<PAGE>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Period Ended June 30 SECOND QUARTER SIX MONTHS
1995 1994 1995 1994
(In millions, except per share data)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earning per share:
Net income (loss).................................. $ 256.7 $ (36.2) $ 409.5 $(114.3)
Less preferred stock dividends..................... 1.9 1.4 3.7 2.5
------ ------ ------ ------
Net income (loss) available to
common stockholders........................... $ 254.8 $ (37.6) $ 405.8 $(116.8)
====== ====== ====== ======
Weighted average shares outstanding................ 61.8 61.8 61.8 61.8
====== ====== ====== ======
Net income (loss) per common share.............. $ 4.12 $ (0.61) $ 6.57 $ (1.89)
====== ====== ===== ======
-------------------------------------------------------------------------------------------------
(32)
<PAGE>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<PERIOD-TYPE> 6-MOS
<DEBT-HELD-FOR-SALE> 25,666
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 910
<MORTGAGE> 126
<REAL-ESTATE> 3
<TOTAL-INVEST> 36,224
<CASH> 198
<RECOVER-REINSURE> 7,569
<DEFERRED-ACQUISITION> 1,437
<TOTAL-ASSETS> 62,657
<POLICY-LOSSES> 35,629
<UNEARNED-PREMIUMS> 4,625
<POLICY-OTHER> 614
<POLICY-HOLDER-FUNDS> 130
<NOTES-PAYABLE> 2,995
<COMMON> 155
0
150
<OTHER-SE> 5,705
<TOTAL-LIABILITY-AND-EQUITY> 62,657
5,385
<INVESTMENT-INCOME> 946
<INVESTMENT-GAINS> 242
<OTHER-INCOME> 140
<BENEFITS> 4,574
<UNDERWRITING-AMORTIZATION> 783
<UNDERWRITING-OTHER> 732
<INCOME-PRETAX> 567
<INCOME-TAX> 158
<INCOME-CONTINUING> 410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 410
<EPS-PRIMARY> 6.57
<EPS-DILUTED> 6.57
<RESERVE-OPEN> 24,998
<PROVISION-CURRENT> 2,949
<PROVISION-PRIOR> 163
<PAYMENTS-CURRENT> 614
<PAYMENTS-PRIOR> 2,345
<RESERVE-CLOSE> 25,151
<CUMULATIVE-DEFICIENCY> 163
</TABLE>
