<PAGE>
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 May 1, 1995
----------------------------- ------------------------------
Common Stock, Par value $2.50 61,798,262
===============================================================================
Page (1) of (27)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995 (Unaudited) and DECEMBER 31, 1994 . . . . . . . . . . 3
STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 . . . . . . . . . 4
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 . . . . . . . . . 5
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 . . . . . . . . . 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 15
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
EXHIBIT 11.1 COMPUTATION OF NET INCOME PER COMMON SHARE . . . . . . . . 27
(2)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
March 31 December 31
1995 1994
(In millions of dollars) (Unaudited)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities available for sale (cost: $19,704.0 and $21,623.1) . . . . . . $19,478.0 $20,827.7
Equity securities available for sale (cost: $742.5 and $736.3). . . . . . . . . 802.3 754.8
Mortgage loans and real estate (less accumulated depreciation: $3.5 and $3.4) . 44.1 46.9
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176.5 176.3
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.1 101.1
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,313.3 5,036.1
---------- ----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,925.3 26,942.9
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122.5 147.6
Insurance receivables:
Reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,159.8 3,187.7
Other insurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . 3,997.8 3,861.4
Less allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . . (127.4) (127.5)
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . 1,054.6 1,026.4
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 269.7 407.1
Receivables for securities sold . . . . . . . . . . . . . . . . . . . . . . . . 1,071.2 258.7
Federal income taxes recoverable (includes $98.0 and $85.8 due from Loews). . . 105.8 93.4
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,394.8 1,662.5
Property and equipment at cost (less accumulated depreciation: $260.6 and
$244.9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264.0 263.3
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . 160.7 175.1
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487.7 341.5
Separate Account business . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,004.4 6,080.3
- ------------------------------------------------------------------------------------------------------------
Total assets $45,890.9 $44,320.4
============================================================================================================
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET-continued
Liabilities and Stockholders Equity
Liabilities:
Insurance reserves:
Claim and claim expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,590.1 $22,564.7
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,161.9 3,049.8
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,754.1 2,690.7
Policyholders' funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617.9 632.5
Participating policyholders' equity . . . . . . . . . . . . . . . . . . . . . . 111.9 98.0
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . 2,825.0 2,478.6
Payables for securities purchased . . . . . . . . . . . . . . . . . . . . . . . 532.5 281.4
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 2.0
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 911.2 911.8
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,248.3 984.7
Separate Account business . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,004.4 6,080.3
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,759.3 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,466.5 4,315.5
Net unrealized investment gains (losses). . . . . . . . . . . . . . . . . . . . (71.7) (506.4)
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.5) (2.5)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 5,131.6 4,545.9
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $45,890.9 $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>
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1995 1994
(In millions of dollars, except per share data)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums ........................................................................ $2,516.0 $2,308.9
Net investment income ........................................................... 430.9 346.3
Realized investment gains (losses) .............................................. 35.8 (105.7)
Other............................................................................ 70.1 55.0
---------- ----------
3,052.8 2,604.5
---------- ----------
Benefits and expenses:
Insurance claims and policyholders' benefits .................................... 2,155.7 2,121.2
Amortization of deferred acquisition costs....................................... 361.0 350.8
Other operating expenses......................................................... 316.3 281.1
Interest expense................................................................. 17.7 17.6
---------- ----------
2,850.7 2,770.7
---------- ----------
Income (loss) before income tax............................................... 202.1 (166.2)
Income tax benefit (expense)...................................................... (49.3) 88.1
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 152.8 $ (78.1)
================================================================================================================
EARNINGS PER SHARE
- ------------------
Net Income (loss)................................................................. $ 2.44 $ (1.28)
================================================================================================================
Weighted average outstanding shares of
common stock (in millions of shares)............................................. 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>
- -------------------------------------------------------------------------------------------
Three Months Ended March 31, 1995 and 1994
Net
Unrealized
Additional Investment
Capital Paid-in Retained Gains
(In millions of dollars) Stock Capital Earnings (Losses) Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993..... $302.1 $434.7 $4,284.3 $ 360.0 $5,381.1
Net loss..................... - - (78.1) - (78.1)
Unrealized investment losses. - - - (318.6) (318.6)
Preferred dividends.......... - - (1.1) - (1.1)
- -------------------------------------------------------------------------------------------
Balance, March 31, 1994 $302.1 $434.7 $4,205.1 $ 41.4 $4,983.3
===========================================================================================
Balance, December 31, 1994..... $302.1 $434.7 $4,315.5 $(506.4) $4,545.9
Net income................... - - 152.8 - 152.8
Unrealized investment gains.. - - - 434.7 434.7
Preferred dividends.......... - - (1.8) - (1.8)
- -------------------------------------------------------------------------------------------
Balance, March 31, 1995 $302.1 $434.7 $4,466.5 $ (71.7) $5,131.6
===========================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(5)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Three Months Ended March 31 1995 1994
(In millions of dollars)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 152.8 $ (78.1)
------------ ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Pretax realized (gains) losses....................... (35.8) 105.7
Participating policyholders' interest................ (2.0) (9.2)
Amortization of bond discount........................ (37.0) (14.9)
Depreciation......................................... 18.3 15.0
Changes in:
Other insurance receivables....................... (136.5) (213.7)
Reinsurance receivables........................... 27.9 (43.1)
Prepaid reinsurance premiums...................... 14.5 11.3
Deferred acquisition costs........................ (28.3) (22.9)
Accrued investment income......................... 137.4 (10.0)
Insurance reserves................................ 185.7 507.0
Federal income taxes.............................. (12.4) (40.3)
Deferred income taxes............................. 28.4 (42.3)
Reinsurance payables.............................. 68.8 (24.4)
Other liabilities.................................. 257.4 61.2
Other, net........................................ (78.3) (37.7)
------------ -----------
Total adjustments......................... 408.1 241.7
------------ -----------
Net cash provided by operating activities. 560.9 163.6
------------ -----------
Cash flows from investing activities:
Purchases of fixed maturities.......................... (5,285.9) (17,960.1)
Proceeds from fixed maturities:
Sales................................................ 5,807.2 14,180.2
Maturities, calls and redemptions.................... 1,079.7 455.9
Purchases of equity securities......................... (219.3) (93.8)
Proceeds from sale of equity securities................ 247.7 138.1
Change in short-term investments....................... (2,497.6) (417.1)
Purchases of property and equipment.................... (18.7) (25.1)
Change in securities sold under repurchase agreements.. 346.4 3,533.5
Change in other investments............................ (43.1) (31.6)
Other, net............................................. (0.3) 0.5
------------ ----------
Net cash used in investing activities..... (583.9) (219.5)
------------ ----------
</TABLE>
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS-continued
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Three Months Ended March 31 1995 1994
(In millions of dollars)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to preferred shareholders............... (1.9) (1.1)
Receipts from investment contracts credited to
policyholder account balances........................ 9.9 10.8
Return of policyholder account balances on investment
contracts............................................ (9.3) (7.7)
Principal payments on long-term debt................... (0.8) (0.8)
Proceeds from issuance of long-term debt............... - 0.2
------------ ----------
Net cash (used in) provided by financing
activities............................... (2.1) 1.4
------------ ----------
Net decrease in cash...................... (25.1) (54.5)
Cash at beginning of period ............................. 147.6 129.6
- --------------------------------------------------------------------------------------
Cash at end of period $ 122.5 $ 75.1
======================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense...................................... $ (17.7) $ (17.6)
Federal income taxes.................................. (31.9) 11.6
======================================================================================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(6)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(Unaudited)
NOTE A. Basis of Presentation:
The consolidated financial statements (unaudited) include CNA Financial
Corporation and subsidiaries (CNA) and have been prepared in accordance with
generally accepted accounting principles. In the opinion of management,
these statements include all adjustments (consisting of normal recurring
accruals) which are necessary for a fair presentation of the financial
position, results of operations and cash flows in the accompanying unaudited
consolidated financial statements.
The operating results for the interim periods are not necessarily
indicative of the results to be expected for the full year. These
statements should be read in conjunction with the financial statements and
notes thereto included in CNA's Annual Report to Shareholders (incorporated
by reference in Form 10-K) for the year ended December 31, 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. 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
D below. At March 31, 1995, the escrow account amounted to $1.02 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 C. Reinsurance:
CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of
each product line with CNA's retained amount varying by type of coverage.
Generally, reinsurance coverage for property risks is on an excess of loss,
per risk basis. Liability coverages are generally reinsured on a quota
share basis in excess of CNA's retained risk.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after
careful review of the nature of the contract and a thorough assessment of
the reinsurers' credit quality and claim settlement performance. Further,
for carriers that are not authorized reinsurers in Illinois, CNA receives
collateral primarily in the form of bank letters of credit, securing a large
portion of the recoverables. At March 31, 1995, such collateral totaled
approximately $165 million. CNA's largest recoverable from a single
reinsurer, including prepaid reinsurance premiums, at March 31, 1995, was
approximately $354 million with Lloyd's of London.
(7)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Written Premium
(In millions of dollars) Direct Assumed Ceded Net Direct Assumed Ceded Net
- -------------------------------------------------------------------------------------------------------------
Quarter Ended March 31 1995 1994
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Duration Contracts $ 269.1 31.8 5.1 295.8 120.6 26.9 5.6 141.9
Short Duration Contracts 2,144.6 320.1 144.7 2,320.0 2,107.5 345.1 151.8 2,300.8
------- ------- ----- ------- ------- ------- ----- -------
Total $2,413.7 351.9 149.8 2,615.8 2,228.1 372.0 157.4 2,442.7
======= ======= ===== ======= ======= ======= ===== =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Earned Premium
(In millions of dollars) Direct Assumed Ceded Net Direct Assumed Ceded Net
- -------------------------------------------------------------------------------------------------------------
Quarter Ended March 31 1995 1994
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Duration Contracts $ 155.1 31.8 5.1 181.8 105.2 26.9 5.6 126.5
Short Duration Contracts 2,162.0 331.4 159.2 2,334.2 2,004.7 340.7 163.0 2,182.4
------- ----- ----- ------- ------- ------- ----- -------
Total $2,317.1 363.2 164.3 2,516.0 2,109.9 367.6 168.6 2,308.9
======= ===== ===== ======= ======= ======= ===== =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $73.5 million and $132.8 million for the period ending March
31, 1995 and March 31, 1994, respectively.
NOTE D. Legal Proceedings and Contingent Liabilities:
The following information updates legal proceedings and contingent
liabilities reported in Note J of the Notes to the Consolidated Financial
Statements in the 1994 Annual Report to Shareholders.
<PAGE>
<PAGE>
FIBREBOARD LITIGATION
CNA's primary property/casualty subsidiary, Continental Casualty Company
("Continental"), is party to litigation with Fibreboard Corporation
("Fibreboard") involving coverage for certain asbestos-related claims and
defense costs (San Francisco Superior Court, Judicial Council Coordination
Proceeding 1072). As described below, Continental, Fibreboard, another
insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a
negotiating committee of asbestos claimant attorneys (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. Continental, 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 Continental's litigation with Fibreboard.
On July 29, 1994, the United States District Court for the Eastern
District of Texas preliminarily approved the Global Settlement agreement. A
final fairness hearing to determine whether to finally approve the Global
Settlement agreement commenced on December 12, 1994. During the hearing
various parties presented evidence in opposition to the Global Settlement.
Final arguments concerning the Global Settlement agreement occurred on
February 27, 1995; and on March 30, 1995 the Court issued a Memorandum to
the Parties suggesting that the provisions of the Global Settlement
concerning the Select Counsel for the Beneficiaries (a group of lawyers
chosen to represent the interests of the beneficiaries of the Trust) should
be changed. The Settling Parties have agreed to changes in the Global
Settlement, including provisions designed to address the concerns of the
Court, which will be submitted to the Court for
(8)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
approval. Assuming additional notice is given to the class, then the Court's
final rulings are expected this summer.
Also pending in the United States District Court for the Eastern District
of Texas is litigation over the Trilateral Agreement. Trial on the issues
raised by this agreement occurred on February 13, 1995, with evidence
submitted to the Court in opposition to final court approval of the
Trilateral Agreement. A final hearing occurred on May 9, 1995 and the Court
ordered briefs to be submitted on May 23, 1995; the Court's rulings on the
Trilateral Agreement are also expected in the summer of 1995.
Coverage Litigation
Between 1928 and 1971, Fibreboard manufactured insulation products
containing asbestos. Since the 1970's, thousands of claims have been filed
against Fibreboard by individuals claiming bodily injury as a result of
asbestos exposure.
Continental insured Fibreboard under a comprehensive general liability
policy between May 4, 1957, and March 15, 1959. Fibreboard disputed the
coverage positions taken by its insurers and, in 1979, Fireman's Fund,
another of Fibreboard's insurers, brought suit with respect to coverage for
defense and indemnity costs. In January 1990, the San Francisco Superior
Court (Judicial Council Coordination Proceeding 1072) rendered a decision
against the insurers including Continental and Pacific Indemnity. The court
held that the insurers owed a duty to defend and indemnify Fibreboard for
certain of the asbestos-related bodily injury claims asserted against
Fibreboard (in the case of Continental, for all claims involving exposure to
Fibreboard's asbestos products if there was exposure to asbestos at any time
prior to 1959 including years prior to 1957, regardless of when the claims
were asserted or injuries manifested) and, 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
Continental and Pacific Indemnity pending final court approval of either the
Global Settlement or the Trilateral Agreement described below. On January
27, 1994, the California Supreme Court granted a Petition for Review filed
by several insurers, including Continental, of, among other things, the
trigger and scope of coverage issues. The order granting review has no
effect on the Court of Appeal's order severing the issues unique to
Continental and Pacific Indemnity. Continental cannot predict the time frame
within which the issues before the California Supreme Court may be resolved.
If neither the Global Settlement nor the Trilateral Agreement is approved,
it is anticipated that Continental and Pacific Indemnity will resume the
appeal process. Continental's appeal of the coverage judgment raises many
legal issues. Key issues on appeal under the policy are trigger of coverage,
scope of coverage, dual coverage requirements and number of occurrences:
<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.
(9)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
Continental'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, Continental's position is that if existing
California law were applied, there would be no coverage under
Continental's policy.
. The scope of coverage decision imposed a form of "joint and several"
liability that makes each triggered policy liable in whole for each
covered claim, regardless of the length of the period the policy was in
effect. This decision was affirmed by the Court of Appeal, and is now
on appeal to the California Supreme Court. Continental's position is that
liability for asbestos claims should be shared not jointly, but
severally and on a pro rata basis between the insurers and insured.
Under this theory, Continental would only be liable for that proportion
of the bodily injury that occurred during the 22-month period its policy was
in force.
. Continental maintains that both the occurrence and the injury resulting
therefrom must happen during the policy period for the policy to be
triggered. Consequently, if the court holds that the occurrence is
exposure to asbestos, Continental's position is that coverage under the
Continental policy is restricted to those who actually inhaled Fibreboard
asbestos fibers and suffered injury from May 4, 1957, to March 15,
1959. The Court of Appeal withheld ruling on this issue, as noted
above.
. Continental's policy had a $1 million per occurrence limit. Continental
contends the number of occurrences under California law must be
determined by the general cause of the injuries, not the number of
claimants, and that the cause of the injury was the continuous sale and
manufacture of the product. Because the manufacture and sale proceeded from
two locations, Continental maintains that there were only two
occurrences and thus only $2 million of coverage under the policy.
However, the per occurrence limit was interpreted by the trial court to
mean that each claim submitted by each individual constituted a separate
occurrence. The Court of Appeal withheld ruling on this issue, as noted
above.
Even if Continental 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 Continental would still have obligations
under the Continental and Pacific Indemnity Agreement described below.
Under various reinsurance agreements, Continental has asserted a right to
reimbursement for a portion of its potential exposure to Fibreboard. The
reinsurers have disputed Continental's right to reimbursement and have taken
the position that any claim by Continental is subject to arbitration under
provisions in the reinsurance agreement. A Federal court has ruled that the
dispute must be resolved by arbitration. There can be no assurance that
Continental will be successful in obtaining a recovery under its reinsurance
agreements.
<PAGE>
<PAGE>
On April 9, 1993, Continental and Fibreboard entered into an agreement
pursuant to which, among other things, the parties agreed to use their best
efforts to negotiate and finalize a global class action settlement with
asbestos-related bodily injury and death claimants.
Through March 31, 1995, Continental, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 137,300 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, Continental'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,
(10)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
may total as much as $773.6 million, of which $523.5 million was paid
through March 31, 1995. Continental may negotiate other agreements with
various classes of claimants including groups who may have previously
reached agreement with Fibreboard.
Continental will continue to pursue its appeals in 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, Continental, Pacific Indemnity, Fibreboard and a
negotiating committee of asbestos claimant attorneys reached an agreement in
principle for an omnibus settlement to resolve all future asbestos-related
bodily injury claims involving Fibreboard. The Global Settlement was
executed on December 23, 1993. The agreement calls for contribution by
Continental and Pacific Indemnity of an aggregate of $1.525 billion to a
trust fund for a class of all future asbestos claimants, defined generally
as those persons whose claims against Fibreboard were neither filed nor
settled before August 27, 1993. An additional $10 million is to be
contributed to the fund by Fibreboard. The Global Settlement is subject to
court approval and possible appeals. As noted below, there is limited
precedent with settlements which determine the rights of future claimants to
seek relief.
Subsequent to the announcement of the agreement in principle,
Continental, Fibreboard and Pacific Indemnity entered into the Trilateral
Agreement which sets forth the parties' obligations in the event the Global
Settlement is not approved by the court. In such case, Continental and
Pacific 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. Continental's share of such fund would be $1.44 billion
reduced by a portion of an additional payment of $635 million which Pacific
Indemnity has agreed to pay for unsettled present claims and previously
settled claims. Continental has agreed that if either the Global Settlement
or the Trilateral Agreement is approved, it will assume responsibility for
the claims that had been settled 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, Continental would be released by Fibreboard from any
further liability under the comprehensive general liability policy written
for Fibreboard by Continental, including but not limited to liability for
asbestos-related claims against Fibreboard. The Trilateral Agreement is
subject to court approval and possible appeals. Continental and Fibreboard
have entered into a supplemental agreement (the "Supplemental Agreement")
which governs the interim arrangements and obligations between the parties
until such time as the Global Settlement is either approved or disapproved
by the court and also governs certain obligations between the parties in the
event the Global Settlement is approved, including the payment of claims
which are not included in the Global Settlement.
<PAGE>
<PAGE>
In addition, Continental and Pacific Indemnity have entered into an
agreement (the "Continental-Pacific Agreement") which sets forth the
parties' agreement with respect to the means for allocating among themselves
responsibility for payments arising out of the Fibreboard insurance policies
whether or not the Global Settlement or the Trilateral Agreement is
approved. Under the Continental-Pacific Agreement, Continental and Pacific
Indemnity have agreed to pay 64.71% and 35.29%, respectively, of the $1.525
billion plus 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 approved, Continental and Pacific Indemnity would
share, in the same percentages, most but not all liabilities and costs of
either insurer including, but not limited to, liabilities 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 approved by the court,
Pacific Indemnity's share for unsettled present claims and presently settled
claims will be $635 million.
(11)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
Reserves
In the fourth quarter of 1992, Continental increased its reserve with
respect to potential exposure to asbestos-related bodily injury cases by
$1.5 billion. In connection with the agreement in principle announced on
August 27, 1993, Continental added $500 million to such claim reserve in the
third quarter of 1993. The Fibreboard litigation represents the major
portion of Continental's asbestos-related claim exposure. There are
inherent uncertainties in establishing a reserve for complex litigation of
this type. Courts have tended to impose joint and several liability, and
because the number of manufacturers who remain potentially liable for
asbestos-related injuries has diminished on account of bankruptcies, as has
the potential number of insurers due to operation of policy limits, the
liability of the remaining defendants is difficult to estimate. Further, a
recent trend by courts to consolidate like cases into mass tort trials
limits the discovery ability of insurers, generally does not allow for
individual claim adjudication, restricts the identification of appropriate
allocation methods and thereby results in an increasing likelihood for fraud
and disproportionate and potentially excessive judgments. Additionally,
management believes that recent court decisions would appear to be based on
social or other considerations irrespective of the facts and legal issues
involved.
The Global Settlement and the Trilateral Agreement are subject to court
approval. There is limited precedent with settlements which determine the
rights of future claimants to seek relief. It is extremely difficult to
assess the magnitude of Continental's potential liability for such future
claimants if neither the Global Settlement nor the Trilateral Agreement is
approved and upheld, keeping in mind that Continental's potential liability
is limited to persons exposed to asbestos prior to the termination of the
policy in 1959.
Projections by experts of future trends differ widely, based upon
different assumptions with respect to a host of complex variables. Some
recently published studies, not specifically related to Fibreboard, conclude
that the number of future asbestos-related bodily injury claims against
asbestos manufacturers could be several times the number of claims brought
to date. Such studies include claims asserted against asbestos manufacturers
for all years, including claims filed or projected to be filed for exposure
starting after 1959. As indicated above, as of March 31, 1995, Continental,
Fibreboard and plaintiff attorneys have reached settlements with respect to
approximately 137,300 claims, subject to the resolution of coverage issues.
Such amount does not include presently pending or unsettled claims, claims
previously dismissed or claims settled pursuant to agreements to which
Continental is not a party.
<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 $13,400 per claim for the before
1959 claims processed through March 31, 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 Continental. Continental intervened and
settled these claims for approximately $77,000 on average, with a portion of
the payment contingent on approval of the Global Settlement or the
Trilateral Agreement, and if neither is approved, subject to resolution of
the coverage appeal.
Continental believes that as a result of the Global Settlement and the
Trilateral Agreement it has greatly reduced the uncertainty of its exposure
with respect to the Fibreboard matter. However, if neither the Global
Settlement, nor the Trilateral Agreement is approved and upheld, in light of
the factors discussed herein the range of Continental's potential liability
cannot be meaningfully estimated and there
(12)
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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
Potential exposures exist for claims involving environmental pollution,
including toxic waste clean-up. Environmental pollution clean-up is the
subject of both federal and state regulation. By some estimates, there are
thousands of potential waste sites subject to clean-up. The insurance
industry is involved in extensive litigation regarding coverage issues.
Judicial interpretations in many cases have expanded the scope of coverage
and liability beyond the original intent of the policies. 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") establishes 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 is estimating that there will be 4,500 National Priority List
sites, and other estimates project as many as 30,000 sites that will require
clean-up under ECLs. Very few sites have been subject to clean-up to date.
The extent of clean-up necessary and the assignment of liability has not
been established. CNA and the insurance industry are disputing 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.
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.
<PAGE>
<PAGE>
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. As of
December 31, 1994 and March 31, 1995, CNA carried approximately $506 million
and $503 million, respectively, of claim and claim expense reserves for
reported and unreported environmental pollution claims. CNA has not
attributed any reinsurance to reserves for unreported claims. The reserves
for reported claims reflect reinsurance recoverable of $3 million at both
December 31, 1994 and March 31, 1995. 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
(13)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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.
The number of claims filed with CNA for environmental pollution coverage
continues to increase. Approximately 500 claims were reported in the first
quarter of 1995 and approximately 20,500 claims have been reported to date.
Pending claims totaled approximately 9,900 and 9,800 at December 31, 1994
and March 31, 1995, respectively. Approximately 10,700 claims were closed
through March 31, 1995, of which approximately 9,700 claims were settled
without payment, except for claim expenses of $28 million. Settlements for
the remaining 1,000 claims totaled $154 million, plus claim expenses of $42
million (net of reinsurance recoveries of $35 million and $4 million for
claims and claim expenses, respectively). The foregoing claims statistics
represent 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.
The results of operations in future years may continue to be adversely
affected by environmental pollution claims and claim expenses. Management
will continue to monitor potential liabilities and make further adjustments
as warranted.
OTHER LITIGATION
CNA and its subsidiaries are also parties to other litigation arising in
the ordinary course of business. The outcome of this other litigation will
not, in the opinion of management, materially affect the results of
operations or equity of CNA.
NOTE E. Subsequent Event:
On December 6, 1994, Continental entered into the 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 Shareholders called
to approve the Merger Agreement, holders of 77% of the outstanding shares of
Continental Common Stock voted to approve the Merger Agreement and the Merger.
Final regulatory approvals of the Merger were received on May 9, 1995. The
Merger was consummated on May 10, 1995.
(14)
<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 14,
which contain additional information helpful in evaluating operating results
and financial condition.
RESULTS OF OPERATIONS:
The following chart summarizes key components of operating results
for the three months ended March 31, 1995 and 1994.
- -----------------------------------------------------------------------------
Three Months Ended March 31 1995 1994
(In millions of dollars)
- -----------------------------------------------------------------------------
Operating Summary (excluding
realized investment gains/losses):
Revenues:
Premiums:
Property/Casualty $1,784.5 $1,624.9
Life 731.5 684.0
------- -------
2,516.0 2,308.9
Net investment income 430.9 346.3
Other 70.1 55.0
------- -------
3,017.0 2,710.2
Benefits and expenses 2,850.5 2,782.0
------- -------
Operating income (loss)
before income tax 166.5 (71.8)
Income tax benefit (expense) (34.9) 55.0
------- -------
Net operating income (loss) $ 131.6 $ (16.8)
======= =======
Supplemental Financial Data:
Net operating income (loss) by group:
Property/Casualty $ 117.9 $ (20.3)
Life 25.0 15.1
Other (11.3) (11.6)
------- -------
131.6 (16.8)
------- -------
Net realized investment gains (losses)
by group:
Property/Casualty 9.0 (42.0)
Life 11.5 (19.2)
Other 0.7 (0.1)
------- -------
21.2 (61.3)
------- -------
<PAGE>
<PAGE>
Net income (loss) by group:
Property/Casualty 126.9 (62.3)
Life 36.5 (4.1)
Other (10.6) (11.7)
------- -------
$ 152.8 $ (78.1)
=============================================================================
Consolidated Results
- --------------------
Overview-
Consolidated revenues were $3.1 billion for the first three months of
1995. This compares to revenues of $2.6 billion for the same period in
1994. Consolidated revenues, excluding realized investment gains (losses),
were up 11.3 percent in the first quarter to $3.02 billion compared to $2.71
billion for the first quarter of 1994. For the first quarter, revenues
reflect increases of $207 million (9.0%) in earned premiums, $85 million
(24.4%) in investment income and $15 million (27.6%) in other income.
(15)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
CNA reported increased earnings for the first quarter of 1995. Net
operating income which excludes net realized investment gains, was $131.6
million, or $2.10 per share, compared to a net operating loss of $16.8
million, or $.29 per share, for the first three months of 1994. This
improvement was chiefly attributable to improved loss experience, notably in
the workers' compensation line and progress in expense reduction as well as
increased investment income. CNA's loss in the first quarter of 1994
reflects pretax losses of $100 million related to catastrophe claims; pretax
catastrophe losses in the first quarter of 1995 were $23 million.
Realized investment gains, net of tax, for the first quarter of 1995
were $21.2 million, or $.34 per share, compared to net realized investment
losses for the first quarter of 1994 of $61.3 million, or $.99 per share.
The components of the net realized investment gains (losses) are as
follows:
- ----------------------------------------------------------------------------
Realized Investment Gains (Losses)
Three Months Ended March 31 1995 1994
(In millions of dollars)
- ----------------------------------------------------------------------------
Bonds:
U.S. Government $ 9.9 $(138.5)
Tax exempt 16.7 18.6
Asset-backed 9.9 12.3
Taxable (24.8) (3.4)
----- -----
Total bonds 11.7 (111.0)
Stocks 17.6 12.5
Derivative securities (8.4) 3.5
Other 14.9 (10.7)
----- -----
Realized investment gains (losses)
reported in revenues 35.8 (105.7)
Participating policyholders' interest (0.3) 11.3
Income tax benefit (expense) (14.3) 33.1
----- -----
Net realized investment
gains (losses) $ 21.2 $ (61.3)
============================================================================
CNA's total income tax expense for the three months ended March 31,
1995 amounted to $49.3 million compared to a benefit of $88.1 million for
the same period in 1994. CNA's income tax expense excluding realized
investment gains/losses amounted to $34.9 million for the three months ended
March 31, 1995, compared to a $55.0 million benefit in the first three
months of 1994. The income tax expense on realized investment gains for the
three months ended March 31, 1995, totaled $14.3 million compared with an
income tax benefit of $33.1 million for the same period a year ago.
<PAGE>
<PAGE>
Net income was $152.8 million, or $2.44 per share, compared to a net
loss of $78.1 million, or $1.28 per share, for the first three months of
1994.
Subsequent CIC Acquisition-
As noted in the 1994 annual report, CNA reached an agreement in late
1994 to acquire The Continental Corporation (CIC) 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.
See Liquidity and Capital Resources section for summary description of
financing of acquisition. The acquisition makes CNA the third largest U.S.
property-casualty organization and the largest U.S. commercial lines insurance
group, based on 1993 premium volume.
(16)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The accompanying financial statements do not include the results of
operations of CIC. The revenues and net income of CIC and subsidiaries for the
three months ended March 31, 1995 were $1.1 billion and $48.9 million,
respectively. Total assets were $15.0 billion at March 31, 1995.
Since the acquisition was announced last year, transition planning
teams with representatives from CNA and Continental have developed plans for
a smooth transition process. CNA's top priority is to consolidate the two
organizations within a one-year period, while continuing to run the existing
businesses smoothly. CNA will continue to operate under the name CNA with
headquarters in Chicago. The Company will have approximately the same number
of sales and support offices nationwide but structured somewhat differently
than in the past. CNA will also remain committed to strong relationships
with the agents and brokers who distribute our products and services.
With regard to personnel, CNA anticipates staff reductions of 3,000
to 6,000 from the combined domestic insurance companies full-time work force
of about 21,500 employees at year end. Since year end 1994, attrition had
already eliminated more than 1,500 positions. Top management positions in the
combined organization will include CNA and Continental executives.
Going forward, the combined organization is expected to be stronger and
more competitive than either company could be 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.
Fibreboard-
As described in Note D to CNA's March 31, 1995 Notes to Condensed
Consolidated Financial Statements, 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.
On July 29, 1994, the United States District Court for the Eastern
District of Texas preliminarily approved the Global Settlement agreement. A
final fairness hearing to determine whether to finally approve the Global
Settlement agreement commenced on December 12, 1994. During the hearing
various parties presented evidence in opposition to the Global Settlement.
Final arguments concerning the Global Settlement agreement occurred on
February 27, 1995; and on March 30, 1995 the Court issued a Memorandum to
the Parties suggesting that the provisions of the Global Settlement
concerning the Select Counsel for the Beneficiaries should be changed. The
Settling parties have agreed to changes in the Agreement, including
provisions designed to address the concerns of the Court, which will be
submitted to the Court for approval. Assuming additional notice is given to
the class, then the Court's final rulings are expected this summer.
<PAGE>
<PAGE>
Also pending in the United States District Court for the Eastern
District of Texas is litigation over the Trilateral Agreement. Trial on the
issues raised by this agreement occurred on February 13, 1995, with evidence
submitted to the Court in opposition to final court approval of the
Trilateral Agreement. A final hearing occurred on May 9, 1995 and the Court
ordered briefs to be submitted on May 23, 1995; the Court's rulings on the
Trilateral Agreement are also expected in the summer of 1995.
CNA and the other parties to the Global Settlement agreement and the
Trilateral Agreement undertook a comprehensive court approved notice program
to provide potential claimants information about their rights and possible
benefits under the Global Settlement agreement and Trilateral Agreement.
(17)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Property/Casualty Operations
- ----------------------------
- ----------------------------------------------------------------------------
Property/Casualty Group
Three Months Ended March 31 1995 1994
(In millions of dollars)
- ----------------------------------------------------------------------------
Operating Summary (excluding realized
investment gains/losses):
Revenues:
Premiums: $ 1,784.5 $ 1,624.9
Net investment income 343.2 277.6
Other 53.3 44.8
------- -------
2,181.0 1,947.3
Benefits and expenses 2,035.6 2,024.5
------- -------
Income (loss) before income tax 145.4 (77.2)
Income tax benefit (expense) (27.5) 56.9
------- -------
Net operating income (loss) (excluding
realized investment gains/losses) $ 117.9 $ (20.3)
============================================================================
Property/casualty profitability, as measured by pretax operating
income before realized gains, improved significantly in the first quarter.
Contributing to the improvement in underwriting results were continued
favorable trends in the workers' compensation line, reduced operating
expenses and sharply lower catastrophe costs. CNA incurred pre-tax
catastrophe losses of approximately $23 million in the first quarter of 1995
compared to $100 million in the first quarter of 1994. The 1994 catastrophe
losses related primarily to the Northridge earthquake and severe winter
storms in the Northeast.
Property/casualty revenues, excluding net realized investment
gains/losses, increased 12.0% for the three months ended March 31, 1995 to
$1.785 billion compared to the same period a year ago. Property/casualty
earned premium increased $160 million, or 9.8% from the prior years
comparable period. The increase was principally attributable to increases
in medium commercial accounts ($49 million), small commercial business ($39
million), personal lines ($20 million), specialty lines ($19 million), and
reinsurance ($81 million) offset in part by decreases in large account
premium business due to the continued shift to high deductibles and
decreases in involuntary residual markets.
<PAGE>
<PAGE>
Pretax operating income excluding net realized investment
gains/losses for the property/casualty insurance subsidiaries was $145.4
million for the first three months of 1995 compared to a pretax operating
loss of $77.2 million for the same period a year ago. Investment income
increased 23.6% for the three months ended March 31, 1995 to $343.2 million
compared with $277.6 million a year ago. Investment income increased for
the three months ended March 31, 1995, when compared to the first three
months of 1994 primarily due to higher yielding investments and 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 6.6% in the
first quarter of 1995 compared with 5.4% for the same period a year ago.
Underwriting losses for the three months ended March 31, 1995, were
$197.7 million, compared to $354.8 million for the same period in 1994. The
first quarter 1995 statutory combined ratio was 109.9 compared with 119.9
for the same period in 1994. The expense ratio for the first quarter of
1995 was 27.9 compared to 28.5 for the first three months of 1994.
(18)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
The net income of CNA's property/casualty insurance subsidiaries,
excluding net realized investment gains/losses, was $117.9 million for the
first three months of 1995, compared to a loss of $20.3 million for the same
period in 1994. Net realized investment gains for the first quarter of 1995
were $9.0 million, compared to net realized investment losses of $42.0
million in the first three months of 1994. The property/casualty group had
sold approximately $7 billion of fixed income and equity securities since
December 31, 1994, realizing pre-tax net gains of $24.4 million. Of the $7
billion of securities sold, approximately $3 billion and $2 billion,
respectively, were from the U.S. Treasury and Government mortgage-backed
bond portfolios.
Life Operations
- ---------------
- ---------------------------------------------------------------------------
Life Group
Three Months Ended March 31 1995 1994
(In millions of dollars)
- ---------------------------------------------------------------------------
Operating Summary (excluding realized
investment gains/losses):
Revenues:
Premiums: $ 737.3 $ 687.8
Net investment income 87.6 69.4
Other 17.2 9.2
------- -------
842.1 766.4
Benefits and expenses 803.6 743.1
------- -------
Income before income tax 38.5 23.3
Income tax expense (13.5) (8.2)
------- -------
Net operating income (excluding
realized investment gains/losses) $ 25.0 $ 15.1
===========================================================================
CNA is benefiting from favorable trends in the life/health insurance
industry which reflect expense reductions, and moderation in health care
costs. CNA continues to experience rapid growth which started in the latter
part of 1994, with new individual permanent and term products and annuities.
The rate of applications during the first quarter 1995 was approximately
3,000 per week, putting CNA in the top tier of companies for new business.
<PAGE>
<PAGE>
Life group revenues, excluding realized investment gains, were $842.1
million, up 9.9% for the three months ended March 31, 1995 compared to the
same period a year ago. Life group earned premium was $737.3 million, up
7.2% for the quarter with the primary growth in annuities ($26 million), new
term business ($9 million) and group business ($12 million). Investment
income increased 26.2% compared to the same period a year ago primarily due
to the same reasons described for property/casualty operations. The bond
segment of the life investment portfolio yielded 6.8% in the first quarter
of 1995 compared with 5.7% for the same period a year ago.
Pretax operating income for the life insurance subsidiaries,
excluding net realized investment gains/losses, was $38.5 million for the
first three months of 1995, compared to $23.3 million for the same period in
1994. The increase in pretax operating income is primarily due to increased
investment income.
CNA's life insurance subsidiaries' net income excluding net realized
investment gains/losses was $25.0 million for the first three months of 1995
compared to $15.1 million for the same period in 1994. Net realized
investment gains for the first three months of 1995 were $11.5 million,
compared to $19.2 million of net realized investment losses in the first
three months of 1994.
(19)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
INVESTMENTS:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Summary of General Account Investments | |
at Market Value | |
| Change in |
March 31 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 $10,056 $10,782 | $ 351 | $ 10
Asset-backed securities 2,388 2,564 | 90 | 10
Tax exempt securities 3,372 3,770 | 60 | 17
Taxable 3,662 3,712 | 68 | (25)
------ ------ | ------ | ------
Total fixed income securities 19,478 20,828 | 569 | 12
Stocks 802 755 | 41 | 18
Short-term investments and other 7,643 5,359 | 81 | 14
Derivative security investments 2 1 | - | (8)
------ ------ | ------ | ------
Total investments $27,925 $26,943 | 691 | 36
====== ====== | |
Participating policyholders' interest | (16) | (1)
Income tax expense | (240) | (14)
| ------ | ------
Net investment gains(losses) | $ 435 | $ 21
| ====== | ======
- -----------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------|
Short-term investments: |
- ----------------------------------------------------------------|
Security repurchase collateral $ 2,726 $ 2,479 |
Escrow 1,020 1,010 |
Other 3,567 1,547 |
------ ------ |
Total short-term investments $ 7,313 $ 5,036 |
====== ====== |
- -----------------------------------------------------------------
CNA's general account investment portfolio is managed to maximize
after-tax investment return, while minimizing credit risks with investments
concentrated in high quality securities to support its insurance
underwriting operations.
<PAGE>
<PAGE>
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
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 94% of which are rated as
investment grade. At March 31, 1995, tax-exempt securities and short-term
investments excluding collateral for securities sold under repurchase
agreements, comprised approximately 12% and 16%, respectively, of the
general account's total investment portfolio compared to 14% and 9%,
respectively, at December 31, 1994. Historically, CNA has maintained short-
term assets at a level that provided for liquidity to meet its short-term
obligations, as well as reasonable contingencies and anticipated claim
payout patterns. At March 31, 1995, the major components of the short-term
investment portfolio were approximately $2.4 billion of high-grade
commercial paper and $1.7 billion of U.S. Treasury bills. Collateral for
(20)
<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
securities sold under repurchase agreements increased $247.0 million to $2.7
billion and were invested in high-grade commercial paper.
As of March 31, 1995, the market value of CNA's general account
investments in bonds and redeemable preferred stocks was $19.5 billion and
was less than amortized cost by approximately $226 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 March 31, 1995, were $292 million and $518 million,
respectively, compared to $194 million and $989 million, respectively, at
December 31, 1994.
Net unrealized investment losses on general account bonds at March
31, 1995 include net unrealized losses on high yield securities of $9
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
$1.2 billion at March 31, 1995, compared to $1.0 billion at December 31,
1994.
At March 31, 1995, total separate account cash and investments
amounted to $6.0 billion with taxable debt securities representing
approximately 94% of the separate accounts' portfolio. Approximately 87% of
separate account investments are used to fund guaranteed investment
contracts (GIC's) for which Continental Assurance Company guarantees
principal and a specified return to the contractholders. The fair value of
all fixed income securities in the GIC portfolio was $4.9 billion compared
to $4.6 billion at December 31, 1994. At March 31, 1995, amortized costs
exceeded the fair values by approximately $117 million. This compares to
$195 million at December 31, 1994. The gross unrealized investment gains
and losses for the GIC fixed income securities portfolio at March 31, 1995,
were $47 million and $164 million, respectively.
Carrying values of high yield securities in the GIC portfolio were
$1.1 billion at March 31, 1995 and December 31, 1994. Net unrealized
investment losses on high yield securities held in such separate accounts
were $97 million at March 31, 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 March 31,
1995, CNA's concentration in high yield bonds including separate accounts
was approximately 5.1% of total assets. In addition, CNA's investment in
mortgage loans and investment real estate are substantially below the
industry average, representing less than one quarter of one percent of its
total assets.
<PAGE>
<PAGE>
Included in CNA's fixed income securities at March 31, 1995 (general
and GIC portfolios) are $4.5 billion of asset-backed securities, consisting
of approximately 47% in collateralized mortgage obligations ("CMO's"), 20%
in corporate asset-backed obligations, and 33% in U.S. Government issued
pass-through certificates. The majority of CMO's held are U.S. Government
agency issues, which are actively traded in liquid markets and are priced
monthly by broker-dealers. At March 31, 1995, the fair value of asset-
backed securities was less than amortized cost by approximately $47 million
compared to unrealized investment losses of $181 million at December 31,
(21)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
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 March 31, 1995, 63% of the
general account's debt securities portfolio was invested in U.S. Government
securities, 17% in other AAA rated securities and 11% in AA and A rated
securities. CNA's GIC fixed income portfolio is comprised of 31% U.S.
Government securities, 19% in other AAA rated securities and 18% in AA and A
rated securities. These ratings are primarily from Standard & Poor's (95%
of the general account portfolio and 95% of the GIC portfolio).
FINANCIAL CONDITION:
- -----------------------------------------------------------------------
Financial Position
(In millions of dollars, March 31 December 31
except per share data) 1995 1994
- -----------------------------------------------------------------------
Assets $45,890.9 $44,320.4
Stockholders' Equity 5,131.6 4,545.9
Unrealized Net Appreciation (Depreciation)
Included in Stockholders' Equity (71.7) (506.4)
Book Value per Common Share 80.61 71.13
- -----------------------------------------------------------------------
CNA's assets increased approximately $1.6 billion to $45.9 billion as
of March 31, 1995. CNA's investment portfolio increased by $1.0 billion
from December 31, 1994 to $27.9 billion.
During the first three months of 1995, CNA's stockholders' equity
increased by $585.7 million, or 12.9%, to approximately $5.1 billion. The
major component of this change was a $434.7 million 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 quarter of 1995. Interest rates have
continued to decline throughout April resulting in additional unrealized
investment gains in the bond portfolio, primarily relating to government
securities.
The statutory surplus of the property/casualty subsidiaries increased
2.7% to approximately $3.5 billion. The increase resulted primarily from
improved net income. The statutory surplus of the life insurance
subsidiaries remained at $1.0 billion.
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
The liquidity requirements of CNA, excluding the acquisition of The
Continental Corporation, 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.
On May 10, 1995, CNA acquired all the outstanding shares of The
Continental Corporation (CIC) for approximately $1.1 billion or $20 per CIC
share. CNA has financed the CIC purchase through 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
(22)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
rate for the facility is based on 1, 2, 3, or 6 month LIBOR plus 35 basis
points. The May 10 facility rate was 6.375%. 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. Proceeds from the facility were
used to acquire all of the stock of CIC and to refinance approximately $205
million of existing CIC indebtedness.
In May of 1995, CNA also entered into 5 year interest rate swap
transactions with First Chicago and Chase Manhattan for notional amounts of
$300 million and $200 million, respectively. These agreements will convert
variable rate debt based on 3 month LIBOR into fixed rate debt at 6.6275% and
6.46%, respectively. The parties will exchange payments on a semi-annual
basis.
Recently, 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 Financial and Continental Corporation and CNAF'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.
<PAGE>
<PAGE>
The chart below lists the current and previous ratings.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
| INSURANCE RATINGS | DEBT AND STOCK RATINGS |
|------------------------------------|----------------------------------|----------|
| Financial Strength | | |
|------------------------------------| | |
| CNA | | CNA | CIC |
|-----------------------| CIC | ---------------------------------|----------|
| Casualty | Life | | Senior Debt Preferred | Senior |
| | | | Stock | Debt |
|-----------|-----------|------------|----------------|-----------------|----------|
<S> <C> <C> <C> <C> <C> <C> |
A.M. Best | | | | | | |
New | A | A | A- | - | - | - |
Previous | A | A | A- | - | - | - |
| | | | | | |
Moody's | | | | | | |
New | A1 | A1 | A2 | A3 | a3 | Baa1 |
Previous | Aa2 | Aa3 | Baa1 | A1 | a1 | Baa3 |
|------------------------------------| | | |
| Claims Paying Ability | | | |
|------------------------------------| | | |
Standard and Poor's | | | | | | |
New | A+ | AA | A- | A- | A- | BBB- |
Previous | AA- | AA+ | A- | A+ | A+ | BBB- |
| | | | | | |
Duff and Phelps | | | | | | |
New | AA- | AA | - | A- | A- | - |
Previous | AA | AA+ | - | A+ | A | - |
- --------------------------------------------------------------------------------------------------------------
</TABLE>
For the first three months of 1995, CNA's operating activities
generated net cash flows of $561 million, compared to $164 million for the
same period in 1994. The increase in cash flows is due primarily to an
increase in investment income of $226 million and improved insurance
subsidiaries underwriting cash flow of $107 million for the first three
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.
(23)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
CNA and the insurance industry are exposed to an unknown amount of
liability for environmental pollution, primarily related to toxic waste site
clean-up. Refer to Note E of Notes to Financial Statements for further
discussion of environmental pollution exposures.
ACCOUNTING STANDARDS:
In 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 applies to financial statements for fiscal
years beginning after December 15, 1995. This Statement will not have a
significant impact on CNA.
(24)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS:
Description of Exhibit Exhibit Page
---------------------- Number Number
------- ------
(11) Computation of Net Income per Common Share. 11.1 27
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the three
months ended March 31, 1995.
(25)<PAGE>
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - Concluded
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA FINANCIAL CORPORATION
-------------------------
Date: May 15, 1994 By: PETER E. JOKIEL
------------ ---------------------
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
(26)<PAGE>
<PAGE>
EXHIBIT 11.1
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
- ------------------------------------------------------------------------------
Three Months Ended March 31 1995 1994
(In millions, except per share data)
- ------------------------------------------------------------------------------
Earning per share:
Net income (loss).................................. $ 152.8 $ (78.1)
Less preferred stock dividends..................... 1.8 1.1
------ ------
Net income (loss) available to
common stockholders........................... $ 151.0 $ (79.2)
====== ======
Weighted average shares outstanding................ 61.8 61.8
====== ======
Net income (loss) per common share.............. $ 2.44 $ (1.28)
====== ======
- ------------------------------------------------------------------------------
(27)
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<PERIOD-TYPE> 3-MOS
<DEBT-HELD-FOR-SALE> 19,478
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 802
<MORTGAGE> 41
<REAL-ESTATE> 3
<TOTAL-INVEST> 27,925
<CASH> 123
<RECOVER-REINSURE> 3,160
<DEFERRED-ACQUISITION> 1,055
<TOTAL-ASSETS> 45,891
<POLICY-LOSSES> 25,752
<UNEARNED-PREMIUMS> 2,754
<POLICY-OTHER> 618
<POLICY-HOLDER-FUNDS> 112
<NOTES-PAYABLE> 913
<COMMON> 155
0
150
<OTHER-SE> 4,827
<TOTAL-LIABILITY-AND-EQUITY> 45,891
2,516
<INVESTMENT-INCOME> 431
<INVESTMENT-GAINS> 36
<OTHER-INCOME> 70
<BENEFITS> 2,156
<UNDERWRITING-AMORTIZATION> 361
<UNDERWRITING-OTHER> 316
<INCOME-PRETAX> 202
<INCOME-TAX> 49
<INCOME-CONTINUING> 153
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.44
<RESERVE-OPEN> 18,934
<PROVISION-CURRENT> 1,217
<PROVISION-PRIOR> 183
<PAYMENTS-CURRENT> 133
<PAYMENTS-PRIOR> 1,130
<RESERVE-CLOSE> 19,071
<CUMULATIVE-DEFICIENCY> 183
<PAGE>
</TABLE>
