===============================================================================
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 September 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 November 1, 1995
------------------------------ -------------------------------
Common Stock , Par value $2.50 61,798,262
===============================================================================
Page (1) of (31)
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995 (Unaudited) and DECEMBER 31, 1994. . . . . . . . 3
STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 . . 4
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 . . . . . . . 5
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 . . . . . . . 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . 18
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
EXHIBIT 11. COMPUTATION OF NET INCOME PER COMMON SHARE . . . . . . . . 30
EXHIBIT 27. FINANCIAL DATA SCHEDULE. . . . . . . . . . . . . . . . . . 31
(2)
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
September 30 December 31
1995 1994
(In millions of dollars) (Unaudited)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities available for sale (cost: $26,926.0 and $21,623.1) . . . . . . $27,505.0 $20,827.7
Equity securities available for sale (cost: $601.1 and $736.3). . . . . . . . . 742.7 754.8
Mortgage loans and real estate (less accumulated depreciation: $3.6 and $3.4) . 111.1 46.9
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175.1 176.3
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479.2 101.1
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,676.6 5,036.1
---------- ----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,689.7 26,942.9
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218.3 147.6
Insurance receivables:
Reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,454.0 3,187.7
Other insurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . 5,785.9 3,861.4
Less allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . . (210.9) (127.5)
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . 1,479.5 1,026.4
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 553.9 407.1
Receivables for securities sold . . . . . . . . . . . . . . . . . . . . . . . . 2,590.0 258.7
Federal income taxes recoverable (includes $164.5 and $85.8 due from Loews) . . 127.8 93.4
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,563.2 1,662.5
Property and equipment at cost (less accumulated depreciation: $620.7 and
$244.9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540.2 263.3
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . 567.2 175.1
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,241.1 341.5
Separate Account business . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,995.7 6,080.3
- ------------------------------------------------------------------------------------------------------------
Total assets $64,595.6 $44,320.4
============================================================================================================
<PAGE>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET-continued
- ------------------------------------------------------------------------------------------------------------
September 30 December 31
1995 1994
(In millions of dollars) (Unaudited)
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders Equity
Liabilities:
Insurance reserves:
Claim and claim expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,450.8 $22,564.7
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,397.7 3,049.8
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,665.2 2,690.7
Policyholders' funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622.8 632.5
Participating policyholders' equity . . . . . . . . . . . . . . . . . . . . . . 128.8 98.0
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . 2,504.8 2,478.6
Payables for securities purchased . . . . . . . . . . . . . . . . . . . . . . . 2,855.3 281.4
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 2.0
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,012.0 911.8
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,697.6 984.7
Separate Account business . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,995.7 6,080.3
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,335.4 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,886.2 4,315.5
Net unrealized investment gains (losses). . . . . . . . . . . . . . . . . . . . 610.7 (506.4)
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . 26.5 -
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.5) (2.5)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 6,260.2 4,545.9
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $64,595.6 $44,320.4
============================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
(3)
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30 THIRD QUARTER NINE MONTHS
1995 1994 1995 1994
(In millions of dollars, except per share data)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums ....................................................... $3,196.2 $2,406.4 $ 8,581.1 $7,082.3
Net investment income .......................................... 552.0 394.4 1,497.6 1,124.8
Realized investment gains (losses) ............................. 97.7 (14.3) 339.3 (196.3)
Other........................................................... 155.0 57.8 294.9 169.0
-------- -------- --------- --------
4,000.9 2,844.3 10,712.9 8,179.8
-------- -------- --------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits ................... 2,740.9 2,119.5 7,314.8 6,421.2
Amortization of deferred acquisition costs...................... 480.2 364.4 1,262.9 1.026.0
Other operating expenses........................................ 472.1 319.4 1,204.5 913.7
Interest expense................................................ 64.8 17.6 120.5 52.9
-------- -------- --------- --------
3,758.0 2,820.9 9,902.7 8,413.8
-------- -------- --------- --------
Income (loss) from continuing operations before income tax... 242.9 23.4 810.2 (234.0)
Income tax benefit (expense)..................................... (76.6) 31.5 (234.4) 174.6
-------- -------- --------- --------
Income (loss) from continuing operation...................... 166.3 54.9 575.8 (59.4)
Income from discontinued operations, net of income taxes......... - - - -
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 166.3 $ 54.9 $ 575.8 (59.4)
===================================================================================================================
EARNINGS PER SHARE
- ------------------
Income (loss) from continuing operations.......................... $ 2.66 $ 0.87 $ 9.23 $ (1.02)
Income from discontinued operations, net of income taxes......... - - - -
- -------------------------------------------------------------------------------------------------------------------
Net Income (loss)................................................ $ 2.66 $ 0.87 $ 9.23 $ (1.02)
===================================================================================================================
Weighted average outstanding shares of
common stock (in millions of shares)............................ 61.8 61.8 61.8 61.8
===================================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
(4)
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Nine Months Ended September 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..................... - - (59.4) - - (59.4)
Unrealized investment losses. - - - (676.8) - (676.8)
Preferred dividends.......... - - (3.5) - - (3.5)
- ------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 $302.1 $434.7 $4,221.4 $ (316.8) $ - $4,641.4
======================================================================================================
Balance, December 31, 1994..... $302.1 $434.7 $4,315.5 $ (506.4) $ - $4,545.9
Net income................... - - 575.8 - - 575.8
Unrealized investment gains.. - - - 1,117.1 - 1,117.1
Foreign currency translation
adjustment................. - - - - 26.5 26.5
Preferred dividends.......... - - (5.1) - - (5.1)
- ------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 $302.1 $434.7 $4,886.2 $ 610.7 $ 26.5 $6,260.2
======================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
(5)
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Nine Months Ended September 30 1995 1994
(In millions of dollars)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 575.8 $ (59.4)
----------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Pretax realized (gains) losses....................... (339.3) 196.3
Participating policyholders' interest................ (1.4) (9.9)
Amortization of bond discount........................ (108.3) (64.1)
Amortization of goodwill............................. 12.2 2.5
Depreciation......................................... 65.2 45.0
Changes in:
Other insurance receivables....................... (710.4) (202.7)
Reinsurance receivables........................... (406.9) (138.0)
Prepaid reinsurance premiums...................... 57.9 (5.1)
Deferred acquisition costs........................ (147.1) (45.8)
Accrued investment income......................... (38.8) (13.0)
Insurance reserves................................ 755.6 1,305.3
Federal income taxes.............................. (34.4) (46.5)
Deferred income taxes............................. 190.4 (66.6)
Reinsurance payables.............................. 41.5 (27.8)
Other liabilities.................................. 666.4 (69.4)
Other, net........................................ (169.2) (56.1)
------------ -----------
Total adjustments......................... (166.6) 804.1
------------ -----------
Net cash provided by operating activities. 409.2 744.7
------------ -----------
Cash flows from investing activities:
Purchase of The Continental Corporation................ (1,125.5) -
Cash acquired in connection with the
Continental merger................................... 165.1 -
Purchase of Alexsis.................................... (46.3) -
Purchases of fixed maturities.......................... (25,308.3) (30,339.6)
Proceeds from fixed maturities:
Sales................................................ 23,320.0 21,997.9
Maturities, calls and redemptions.................... 2,306.3 3,837.6
Purchases of equity securities......................... (567.0) (618.1)
Proceeds from sale of equity securities................ 914.4 480.9
Change in short-term investments....................... (1,029.2) 1,218.5
Purchases of property and equipment.................... (72.5) (84.2)
Change in securities sold under repurchase agreements.. 26.2 2,778.1
Change in other investments............................ (18.6) (20.5)
Other, net............................................. (13.0) 1.4
------------ ----------
Net cash used in investing activities..... (1,448.4) (748.0)
------------ ----------
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS-continued
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Nine Months Ended September 30 1995 1994
(In millions of dollars)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to preferred shareholders............... (5.2) (3.4)
Receipts from investment contracts credited to
policyholder account balances........................ 19.4 27.1
Return of policyholder account balances on investment
contracts............................................ (25.9) (19.0)
Principal payments on long-term debt................... (504.5) (2.8)
Retirement of notes payable............................ (205.0) -
Proceeds from issuance of long-term debt............... 1,831.1 0.2
------------ ----------
Net cash provided by financing
activities............................... 1,109.9 2.1
------------ ----------
Net increase (decrease) in cash........... 70.7 (1.2)
Cash at beginning of period ............................. 147.6 129.6
- --------------------------------------------------------------------------------------
Cash at end of period $ 218.3 $ 128.4
======================================================================================
Supplemental disclosures of cash flow information:
Cash received (paid):
Interest expense...................................... $ (113.4) $ (52.5)
Federal income taxes.................................. (122.7) 72.6
======================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine-month periods ended September 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 September 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 currently reflects
goodwill of approximately $366 million (which is included in "Other Assets")
which will be amortized over twenty years at an annual charge to income of $18
million. Evaluation and appraisal of the net assets is continuing and
allocation of the purchase price may be adjusted.
(7)
<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 Third Quarter Nine Months
Period Ended September 30 1995 1994 1995 1994
(In millions of dollars, except per share data)
- ------------------------------------------------------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues ................................................... $ 4,000.9 $ 4,069.3 $ 12,200.5 $ 11,999.5
Realized investment gains (losses) included in revenue . 97.7 (18.3) 459.4 (174.9)
Income (loss) from continuing operations before income tax. 242.9 (579.4) 839.0 (982.1)
Income tax benefit (expense) ................................ (76.6) 286.0 (257.8) 462.9
------ ------ ------- -------
Income (loss) from continuing operations .................... $ 166.3 $ (293.4) $ 581.2 $ (519.2)
===== ======= ===== =======
Net income (loss) per share ................................. $ 2.66 $ (4.73) $ 9.32 $ (8.34)
==== ====== ==== ======
- ------------------------------------------------------------- ----------- -------------- ----------- ----------
</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 September 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.
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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.
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 domiciliary states, CNA receives
collateral primarily in the form of bank letters of credit, securing a large
portion of the recoverables.
(8)
<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
- ---------------------------------------------------------------------- -------------------------------------
Nine Months Ended September 30 . 1995 1994
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Duration Contracts $ 506.2 88.5 16.9 577.8 $ 382.5 85.1 19.0 448.6
Short Duration Contracts 6,823.5 950.1 491.3 7,282.3 6,306.0 1,030.1 457.0 6,879.1
-------- ------- ----- ------- ------- ------- ----- -------
Total $ 7,329.7 1,038.6 508.2 7,860.1 $ 6,688.5 1,115.2 476.0 7,327.7
======= ======= ===== ======= ======= ======= ===== =======
----------------------------------- ------------------------------------
Third Quarter Ended September 30 1995 1994
----------------------------------- ------------------------------------
Long Duration Contracts $ 173.9 28.0 6.4 195.5 $ 122.7 27.2 7.0 142.9
Short Duration Contracts 2,301.1 377.9 190.4 2,488.6 2,121.4 302.2 143.1 2,280.5
------- ----- ----- ------- ------- ----- ----- -------
Total $ 2,475.0 405.9 196.8 2,684.1 $ 2,244.1 329.4 150.1 2,423.4
======= ===== ===== ======= ======= ===== ===== =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Earned Premium
(In millions of dollars) Direct Assumed Ceded Net Direct Assumed Ceded Net
- ------------------------------------------------------------------------- --------------------------------------
Nine Months Ended September 30 1995 1994
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Duration Contracts $ 451.5 88.5 16.9 523.1 $ 315.9 85.1 19.0 382.0
Short Duration Contracts 8,069.4 1,014.2 1,025.6 8,058.0 6,127.0 1,025.2 451.9 6,700.3
------- ------- ------- ------- ------- ------- ----- -------
Total $ 8,520.9 1,102.7 1,042.5 8,581.1 $ 6,442.9 1,110.3 470.9 7,082.3
======= ======= ======= ======= ======= ======= ===== =======
--------------------------------------- ---------------------------------------
Third Quarter Ended September 30 1995 1994
--------------------------------------- ---------------------------------------
Long Duration Contracts $ 156.5 28.0 6.4 178.1 $ 92.7 27.2 7.0 112.9
Short Duration Contracts 3,176.8 378.4 537.1 3,018.1 2,130.7 316.1 153.3 2,293.5
------- ----- ----- ------- ------- ----- ----- -------
Total $ 3,333.3 406.4 543.5 3,196.2 $ 2,223.4 343.3 160.3 2,406.4
======= ===== ===== ======= ======= ===== ===== =======
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $1,112.8 million and $489.7 million for the nine months ending
September 30, 1995 and September 30, 1994, respectively, and $782.8 million and
$229.9 million for the three months ending September 30, 1995 and September 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.
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 implementation of the Global Settlement or the Trilateral
Agreement would have the effect of settling Casualty's litigation with
Fibreboard.
(9)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
On July 27, 1995, the United States District Court for the Eastern District
of Texas entered judgment approving the Global Settlement Agreement and the
Trilateral Agreement. As expected, appeals have been filed as respects both of
these decisions. Briefs will be filed with the United States Fifth Circuit Court
of Appeals in New Orleans this fall. The Court has scheduled oral arguments for
December 6 and 7, 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.
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. On October 19, 1995 the
California Supreme Court transferred the case back to the Court of Appeal with
directions to vacate its decision and reconsider the case in light of the
Supreme Court's decision in Montrose Chemical Corp. v. Admiral Ins. Co. (1995)
10 Cal.4th 645, where the Court adopted a continuous trigger in litigation over
the duty to defend bodily injury and property damage due to exposure to
D.D.T. Additional briefs will be filed in the Court of Appeal by November 20,
1995. Casualty cannot predict the time frame within which the issues before the
California Courts may be resolved. The appeal of issues such as trigger of
coverage and scope of coverage are in process notwithstanding the pending
proceedings to approve the Global and Trilateral Agreements. If neither the
Global Settlement nor the Trilateral Agreement is finally approved, it is
anticipated that Casualty and Pacific Indemnity will resume the coverage appeal
process of the issues discrete to them. 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>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
* 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.
(10)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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 there would be no
under Casualty'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, but is now again before the Court
due to the Supreme Court's transfer order. 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
manufacture and sale 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.
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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 significant recovery under its reinsurance agreements.
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 September 30, 1995, Casualty, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 137,500 claims, subject to
resolution of the coverage issues, for an estimated settlement amount of
approximately $1.63 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
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
litigation, may total as much as approximately $793 million, of which
approximately $556 million was paid through September 30, 1995. 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
would, subject to court approval, settle the coverage case 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
claims settled before August 23, 1993. 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>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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>
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 September 30, 1995, Casualty, Fibreboard and plaintiff
attorneys have reached settlements with respect to approximately 137,500 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>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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
September 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 the factors discussed
(13)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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
(14)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
difficult and subject to later adjustment based on new data. As of September 30,
1995 and December 31, 1994, CNA carried approximately $986 million and $509
million, respectively, of claim and claim expense reserves, before reinsurance
recoverable, for reported and unreported environmental pollution claims.
Included in the September 30, 1995 reserves are $380 million related to
Continental, whose financial results are included in the accompanying financial
statements for the period May 10, 1995 through September 30, 1995. Unfavorable
reserve development for the nine months ended September 30, 1995 and the full
year 1994 totaled $145 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
September 30, 1995 and December 31, 1994, CNA carried approximately $2,305
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 September 30, 1995 reserves are $319
million related to Continental, whose financial results are included in the
accompanying financial statements for the period May 10, 1995 through September
30, 1995. Unfavorable reserve development for the nine months ended September
30, 1995 and the full year 1994 totaled $105 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.
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
- ---------------------------------------------------- ------------ --------------
Reserve Recap September 30 December 31
(In millions of dollars) 1995 1994
- ---------------------------------------------------- ------------ --------------
Environmental pollution 986 509
Asbestos and other toxic tort 2,305 2,049
----- -----
3,291 2,558
Reinsurance recoverable (161) (113)
----- -----
Net reserves $ 3,130 $ 2,445
===== =====
- ---------------------------------------------------- ------------ --------------
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>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE F. Debt:
Long and short-term borrowings consist of the following:
- --------------------------- ------------- --------------
Long and Short-Term Debt September 30 December 31
(In millions of dollars) 1995 1994
- --------------------------- ------------- --------------
Long-term:
Credit Facility ...... $ 825.0 $ --
Commercial Paper ..... 500.0 --
Senior Notes ......... 647.1 646.4
Debenture ............ 247.1 247.1
Secured Mortgage Notes 384.3 --
Secured Capital Leases 46.0 --
Other ................ 362.3 18.3
Short-term .............. 4.7 2.0
------- -----
$ 3,016.7 $ 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), as elected, plus 25 basis points or other negotiated rates.
Additionally, there is a facility fee of 10 basis points. The average interest
rate on the borrowings under the revolver at September 30, 1995 was 6.11%. 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 totaling $950 million. The weighted average fixed swap rate at September
30, 1995 was 6.40%.
On August 10, 1995, to take advantage of favorable interest rate spreads,
CNA established a Commercial Paper Program, borrowing $500 million from
investors to replace a like amount of bank financing. The weighted-average yield
on commercial paper at September 30, 1995 was 5.97%. The commercial paper
borrowings are classified as long-term as $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.
The weighted average interest rate (interest and facility fees) on the
acquisition debt, which includes the revolving credit facility, commercial
paper, and the effect of the interest rate swaps, was 6.48% on September 30,
1995.
(16)
<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 nine-month period ended September 30, 1995, reflects only
activity from May 10, 1995 through September 30, 1995. Operating results of the
discontinued operations were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------- ------------------- -------------------
Three months ended Period ended
(In millions of dollars) September 30, 1995 September 30, 1995
- --------------------------------------------- ------------------- -------------------
<S> <C> <C>
Revenues .................................... $19.8 $29.8
Expenses .................................... 19.8 29.8
---- ----
Income (Loss) Before Income Taxes ........ - -
Income Taxes ................................ - -
---- ----
Income (Loss) from Discontinued Operations $ - $ -
==== ====
- --------------------------------------------- ------------------- -------------------
</TABLE>
Net assets of discontinued insurance operations at September 30, 1995 were
included in "Other Assets", net of intercompany eliminations, and were as
follows:
- ---------------------------------------- ---------------
September 30
(In millions of dollars) 1995
- ---------------------------------------- ---------------
Assets:
Cash and Investments ................... $ 1,001.4
Reinsurance Receivables and Other Assets 975.1
-------
1,976.5
=======
Liabilities:
Claim and Claim Expenses ............... 1,364.8
Other Liabilities ...................... 471.0
-------
1,835.8
-------
Net Assets .......................... $ 140.7
=======
- ---------------------------------------- ---------------
(17)
<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.
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. 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
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 goodwill of approximately $366 million which will be amortized over
twenty years at an annual charge to income of $18 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>
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
third quarter and nine months ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Period Ended September 30 Third Quarter Nine 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 .......................... $ 2,427.8 $ 1,759.6 $ 6,375.1 $ 5,087.5
Life ....................................... 768.4 646.8 2,206.0 1,994.8
-------- --------- --------- --------
3,196.2 2,406.4 8,581.1 7,082.3
Net investment income ........................ 552.0 394.4 1,497.6 1,124.8
Other ........................................ 155.0 57.8 294.9 169.0
-------- --------- --------- --------
3,903.2 2,858.6 10,373.6 8,376.1
Benefits and expenses .......................... 3,757.3 2,821.4 9,895.1 8,425.4
-------- --------- -------- --------
Operating income (loss) before income tax .... 145.9 37.2 478.5 (49.3)
Income tax benefit (expense) ................... (42.8) 26.4 (116.6) 113.8
-------- --------- --------- --------
Net operating income ......................... $ 103.1 $ 63.6 $ 361.9 $ 64.5
======== ========= ========= ========
Supplemental Financial Data:
Net operating income (loss) by group:
Property/Casualty ............................ $ 122.1 $ 52.8 $ 361.7 $ 39.8
Life ......................................... 24.6 23.1 73.1 60.5
Other ........................................ (43.6) (12.3) (72.9) (35.8)
-------- --------- --------- --------
103.1 63.6 361.9 64.5
-------- --------- --------- --------
Net realized investment gains (losses) by group:
Property/Casualty ............................ 52.3 (4.2) 138.0 (87.1)
Life ......................................... 9.2 (6.9) 72.9 (37.7)
Other ........................................ 1.7 2.4 3.0 0.9
-------- --------- --------- --------
63.2 (8.7) 213.9 (123.9)
-------- --------- --------- --------
Net income (loss) by group:
Property/Casualty ............................ 174.4 48.6 499.7 (47.3)
Life ......................................... 33.8 16.2 146.0 22.8
Other ........................................ (41.9) (9.9) (69.9) (34.9)
-------- --------- --------- --------
$ 166.3 $ 54.9 $ 575.8 $ (59.4)
====================================================================================================
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
Consolidated Results
- --------------------
As discussed above, the merger of Continental and CNA Financial Corporation
was consummated on May 10, 1995. Thus, the third quarter and nine month 1995
results of operations include Continental subsequent to May 10, 1995.
Consolidated revenues excluding realized gains/losses were $10.37 billion,
up $2 billion for the first nine months of 1995, compared to revenues of $8.38
billion for the same period in 1994. Consolidated revenues, excluding
Continental, were up $639 million or 7.6%. Of that increase, $362 million was in
earned premiums, $196 million in investment income and $81 million in other
income. For Continental, earned premiums during the period from May 10 through
September 30, 1995 were $1.14 billion, investment income was $171 million, and
other income, comprised primarily of claims adjusting fees and insurance
inspection fees, was $45 million.
(19)
<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 36.5% in the third quarter to $3.90 billion compared to $2.86 billion for the
third quarter of 1994. Excluding Continental, premium revenue increased $118
million or 4.9% and investment income increased $51 million, or 13.0%.
CNA reported increased earnings for the first nine months of 1995 as
compared to the similar period of 1994. Net operating income which excludes net
realized investment gains, was $361.9 million, or $5.77 per share, compared with
income of $64.5 million, or $0.99 per share, for the first nine months of 1994.
Net operating income for the third quarter was $103.2 million, or $1.64 per
share, compared with $63.6 million, or $1.01 per share for the same quarter in
1994. This improvement was chiefly attributable to improved loss experience,
notably in the workers' compensation line, a lower level of catastrophe
losses, and increased investment income for both the property/casualty
and life operations.
Realized investment gains, net of tax, for the first nine months of 1995
were $213.9 million, or $3.46 per share, compared to net realized investment
losses for the first nine months of 1994 of $123.9 million, or $2.01 per share.
Realized investment gains, net of tax, for the third quarter of 1995 amounted to
$63.2 million, or $1.02 per share, compared to net realized investment losses
for the third quarter of 1994 of $8.7 million, or $.14 per share.
The components of the net realized investment gains (losses) are as
follows:
- ----------------------------------------------------------------------
Realized Investment Gains (Losses)
Nine Months Ended September 30 1995 1994
(In millions of dollars)
- ----------------------------------------------------------------------
Bonds:
U.S. Government .............................. $ 99.2 $ (155.1)
Tax exempt ................................... 23.6 21.2
Asset-backed ................................. 35.7 (60.9)
Taxable ...................................... (17.6) (40.9)
------ ------
Total bonds ............................... 140.9 (235.7)
Stocks ......................................... 126.3 37.4
Derivative securities .......................... 0.8 9.8
Other .......................................... 71.3 (7.8)
------ ------
Realized investment gains (losses) reported
in revenues . . . . . . . . . . . . . . . . 339.3 (196.3)
Participating policyholders' interest .......... (7.6) 11.6
Income tax benefit (expense) ................... (117.8) 60.8
------ ------
Net realized investment gains (losses) .... $ 213.9 $ (123.9)
=====================================================================
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
CNA's total income tax expense for the nine months ended September 30, 1995
amounted to $234.4 million compared to a benefit of $174.6 million for the same
period in 1994. CNA's income tax expense excluding tax on realized investment
gains (losses) amounted to $116.6 million for the nine months ended September
30, 1995, compared to a $113.8 million benefit in the first nine months of 1994.
The income tax expense on realized investment gains for the nine months ended
September 30, 1995, totaled $117.8 million compared with an income tax benefit
of $60.8 million for the same period a year ago.
Net income was $575.8 million, or $9.23 per share, compared to a net loss
of $59.4 million, or $1.02 per share, for the first nine months of 1994. Net
income for the third quarter was $166.3 million, or $2.66 per share, compared
with net income of $54.9 million, or $0.87 per share, for the third quarter of
1994.
(20)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
<TABLE>
<CAPTION>
Property/Casualty Operations
- ----------------------------
- -------------------------------------------------------------------------------------------
Property/Casualty Group Third Quarter Nine Months
Period Ended September 30 1995 1994 1995 1994
(In millions of dollars)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Summary (excluding realized investment gains/losses):
Revenues:
Premiums ................................ $ 2,427.8 $ 1,759.6 $ 6,375.1 $ 5,087.5
Net investment income ................... 460.4 312.7 1,226.8 894.5
Other ................................... 136.0 44.2 252.0 131.7
-------- -------- -------- --------
3,024.2 2,116.5 7,853.9 6,113.7
Benefits and expenses ..................... 2,848.9 2,097.1 7,376.2 6,202.3
-------- -------- -------- --------
Income (loss) before income tax ......... 175.3 19.4 477.7 (88.6)
Income tax benefit (expense) .............. (53.2) 33.4 (116.0) 128.4
-------- -------- -------- --------
Net operating income (excluding realized
investment gains/losses) .............. $ 122.1 $ 52.8 $ 361.7 $ 39.8
===========================================================================================
</TABLE>
Property/casualty operating profitability improved significantly in the
first nine months of 1995. Pretax operating income (excluding net realized
investment gains/losses) for the property/casualty insurance subsidiaries was
$477.7 million and $175.3 for the nine and three months ended September 30, 1995
compared to pretax operating loss of $88.6 million and pretax operating income
of $19.4 million for the same periods a year ago. Operating income for 1995
reflects both improved investment income and underwriting results.
Underwriting losses for the nine and three months ended September 30, 1995,
were $737.8 million and $273.8 million compared to $983.1 million and $293.3
million for the same periods in 1994. The statutory combined ratio for the nine
and three months ended September 30, 1995 was 110.3% compared with 115.9% and
112.9 % 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 nine and three months ended September 30, 1995 were approximately $116
million and $38 million, respectively, compared to $213 million and $47 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>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
Property/casualty revenues, excluding net realized investment gains/losses,
increased 28.5% and 42.9% for the nine months and three months ended September
30, 1995, respectively, compared to the same periods a year ago. For the nine
months and three months ended September 30, 1995, property/casualty earned
premium increased $1,287.6 million, or 25.3% and $668.2 million, or 38.0% from
the prior year's comparable periods, respectively. The increase was principally
attributable to the inclusion of Continental business ($1,137 million) and
increases in other CNA business including small and medium commercial accounts,
mass marketing and reinsurance offset in part by decreases in large account
premium business due to the continued shift to high deductibles and decreases in
involuntary residual markets.
Investment income increased 37.1% and 47.2% for the nine and three months
ended September 30, 1995 to $1,226.8 million and $460.4 million, respectively,
when compared with the comparable periods a year ago of $894.5 million and
$312.7 million, respectively. Investment income increased for the first nine
months of 1995, when compared to the first nine months of 1994 primarily due to
the acquisition of Continental ($171.2 million), continued strong positive cash
flow and higher yielding investments resulting from a shift late in the 1994
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
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 7.0% in the first nine months of
1995 compared with 6.3% for the same period a year ago.
The net income of CNA's property/casualty insurance subsidiaries, excluding
net realized investment gains/losses, was $361.7 million and $122.1 million for
the nine and three months ended September 30, 1995, compared to income of $39.8
million and $52.8 million for the same periods in 1994. Net realized investment
gains for the nine and three months ended September 30, 1995 were $138.0 million
and $52.3 million compared to net realized investment losses of $87.1 million
and $4.2 million for the same periods in 1994. The property/casualty group had
sold approximately $25 billion of fixed income and equity securities since
December 31, 1994, realizing pre-tax net gains of $206.5 million. Of the $25
billion of securities sold, approximately $13 billion and $5 billion,
respectively, were from the U.S. Treasury and Government mortgage-backed bond
portfolios.
<TABLE>
<CAPTION>
Life Operations
- ---------------
- -----------------------------------------------------------------------------------------
Life Group Third Quarter Nine Months
Period Ended September 30 1995 1994 1995 1994
(In millions of dollars)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Summary (excluding realized investment gains/losses):
Revenues:
Premiums ............................... $ 775.3 $ 660.1 $ 2,227.0 $ 2,016.6
Net investment income .................. 88.8 79.7 266.0 228.2
Other .................................. 19.1 15.5 43.0 39.1
------ -------- -------- --------
883.2 755.3 2,536.0 2,283.9
Benefits and expenses .................... 845.2 719.9 2,423.0 2,190.9
------ -------- -------- --------
Income before income tax ............... 38.0 35.4 113.0 93.0
Income tax expense ....................... (13.4) (12.3) (39.9) (32.5)
------ -------- -------- --------
Net operating income (excluding realized
investment gains/losses) ............. $ 24.6 $ 23.1 $ 73.1 $ 60.5
=========================================================================================
</TABLE>
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
Life group revenues, excluding realized investment gains, were $2,536.0
million and $883.2 million for the nine and three months ended
September 30, 1995, up 11.0% and 16.9%, respectively, when compared to the same
period a year ago. Life group earned premium was $2,227.0 million and $775.3
million for the nine and three months ended September 30, 1995, up 10.4% and
17.5%, respectively, with the primary growth in annuities and term life products
and group business. The increase was due primarily to new life products
introduced in 1995. Investment income increased 16.6% and 11.3% for the nine and
three months ended September 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 7.0% in the first nine
months of 1995 compared with 6.5% for the same period a year ago.
Pretax operating income for the life insurance subsidiaries, excluding
net realized investment gains/losses, was $113.0 million and $38.0 million for
the nine and three months ended September 30, 1995, compared to $93.0 million
and $35.4 million, respectively, for the same periods in 1994. The increase in
pretax operating income is primarily due to improved mortality experience and
increased interest-rate spreads on interest-sensitive products as well as
improved investment results.
CNA's life insurance subsidiaries' net income excluding net realized
investment gains/losses was $73.1 million and $24.6 million for the nine and
three months ended September 30, 1995 compared to $60.5 million and $23.1
(22)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
million, respectively, for the same periods in 1994. Net realized investment
gains for the nine and three months ended September 30, 1995 were $72.9 million
and $9.2 million, respectively, compared to $37.7 million and $6.9 million of
net realized investment losses recognized for the same periods in 1994.
<TABLE>
<CAPTION>
Investments:
- -------------------------------------------------------------------------------------------------
Summary of General Account Investments Change in
at Market Value September 30 December 31 Unrealized Realized
1995 1994 Gains(losses) Gains(losses)
(In millions of dollars)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income securities:
U. S. Treasury securities and
obligations of government agencies .......... $ 12,501 $ 10,782 $ 839 $ 99
Asset-backed securities ..................... 4,955 2,564 196 36
Tax exempt securities ....................... 3,419 3,770 47 24
Taxable ..................................... 6,630 3,712 293 (18)
-------- -------- -------- --------
Total fixed income securities ............ 27,505 20,828 1,375 141
Stocks ...................................... 743 755 123 126
Short-term investments ...................... 7,677 5,036 -- --
Other ....................................... 749 323 -- 19
Derivative security investments ............. 16 1 -- 1
-------- -------- -------- --------
Total general account investments ........ $ 36,690 $ 26,943 1,498 287
======== ========
Separate Accounts and discontinued operations 238 53
Participating policyholders' interest ....... (32) (8)
Income tax expense .......................... (587) (118)
-------- -------
Net investment gains ..................... $ 1,117 $ 214
===== =====
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------
Short-term investments:
- -------------------------------------------------
Security repurchase collateral $2,508 $2,479
Escrow (Note C) .............. 1,035 1,010
Other ......................... 4,134 1,547
------ ------
Total short-term investments $7,677 $5,036
====== ======
- -------------------------------------------------
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
CNA's assets increased approximately $20.3 billion to $64.6 billion as of
September 30, 1995 including $15.4 billion related to the acquisition of
Continental. CNA's investment portfolio increased by $9.7 billion from December
31, 1994 to $36.7 billion including $7.4 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 gains
and losses. CNA's investment in, and risk in relation to, derivative securities
is not significant.
(23)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
The general account portfolio consists primarily of high quality marketable
debt securities, approximately 94% of which are rated as investment grade. At
September 30, 1995, short-term investments, excluding collateral for securities
sold under repurchase agreements, comprised approximately 14% 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 three quarters 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 September 30, 1995, the major
components of the short-term investment portfolio were approximately $4.5
billion of high-grade commercial paper and $2.0 billion of U.S. Treasury bills.
Collateral for securities sold under repurchase agreements were $2.5 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 October resulting in additional unrealized investment gains in the
bond portfolio, primarily relating to government securities.
As of September 30, 1995, the market value of CNA's general account
investments in bonds and redeemable preferred stocks was $27.5 billion and
exceeded amortized cost by approximately $579 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 September 30, 1995, were $787 million and $208 million, respectively,
compared to $194 million and $989 million, respectively, at December 31, 1994.
Net unrealized investment gains on general account bonds at September 30,
1995 include net unrealized gains on high yield securities of $57 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 $1.7 billion at September 30, 1995,
compared to $1.0 billion at December 31, 1994.
At September 30, 1995, total separate account cash and investments amounted
to $6.0 billion with taxable debt securities representing approximately 92% of
the separate accounts' portfolios. 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 $4.9 billion compared to $4.6 billion at December 31, 1994. At
September 30, 1995, fair values exceeded the amortized costs by approximately
$14 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 September 30, 1995, were $89 million
and $75 million, respectively, compared to $34 million and $229 million,
respectively, at December 31, 1994.
<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 $1.0
billion at September 30, 1995, compared to $1.1 billion at December 31, 1994.
Net unrealized investment losses on high yield securities held in such separate
accounts were $26 million at September 30, 1995, compared to $108 million at
December 31, 1994.
(24)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
High yield securities generally involve a greater degree of risk than that
of investment grade securities. Expected returns should, however, compensate for
the added risk. The risk is also considered in the interest rate assumptions in
the underlying insurance products. As of September 30, 1995, CNA's concentration
in high yield bonds including separate accounts was approximately 4.2% 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
half of one percent of its total assets.
Included in CNA's fixed income securities at September 30, 1995 (general
and GIC portfolios) are $7.4 billion of asset-backed securities, consisting of
approximately 33% in collateralized mortgage obligations ("CMO's"), 27% in
corporate asset-backed obligations, and 40% 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 September 30, 1995, the
fair value of asset-backed securities exceeded amortized cost by approximately
$95 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 September 30, 1995, 61% of the general
account's debt securities portfolio was invested in U.S. Government securities,
15% in other AAA rated securities and 12% in AA and A rated securities. CNA's
GIC fixed income portfolio is comprised of 32% U.S. Government securities, 19%
in other AAA rated securities and 17% in AA and A rated securities. These
ratings are primarily from Standard & Poor's (92% of the general account
portfolio and 95% of the GIC portfolio).
<TABLE>
<CAPTION>
Financial Condition:
- --------------------------------------------------------------------------------------------------
Financial Position September 30 December 31
(In millions of dollars, except per share data) 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets ............................................................. $ 64,595.6 $ 44,320.4
Debt ............................................................... 3,016.7 913.8
Stockholders' Equity ............................................... 6,260.2 4,545.9
Unrealized Net Appreciation (Depreciation) Included in Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610.7 (506.4)
Book Value per Common Share ........................................ 98.87 71.13
- --------------------------------------------------------------------------------------------------
</TABLE>
During the first nine months of 1995, CNA's stockholders' equity increased
by $1.7 billion, or 37.7%, to approximately $6.3 billion. The major components
of this change were $575.8 million from net income and a $1.1 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 nine months of 1995.
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
The statutory surplus of the property/casualty subsidiaries amounts to $5.6
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 $1.1 billion.
(25)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-continued
Liquidity and Capital Resources:
The liquidity requirements of CNA, 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 nine months of 1995, CNA's operating activities generated net
cash flows of $409 million, compared to $745 million for the same period in
1994. The decrease in cash flows is due primarily to Continental activities,
namely the impact in 1995 from the 1994 sale of $408 million in receivables and
increased claim payments.
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), as elected,
plus 25 basis points or other negotiated rates. Additionally, there is a
facility fee of 10 basis points. The average interest rate on the borrowings
under the revolver at September 30, 1995 was 6.11%. 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
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 weighted
average fixed swap rate at September 30, 1995 was 6.40%.
On August 10, 1995, to take advantage of favorable interest rate spreads,
CNA established a Commercial Paper Program, borrowing $500 million from
investors to replace a like amount of bank financing. The weighted-average yield
on commercial paper at September 30, 1995 was 5.97%. The commercial paper
borrowings are classified as long-term as $500 million of the committed bank
facility will back up the commercial paper program (at an undrawn cost of 10
basis points). Standard and Poor's and Moody's issued short-term debt ratings
of A2 and P2, respectively, for CNA's Commercial Paper Program.
The weighted-average interest rate (interest and facility fees) on the
acquisition debt, which includes the revolving credit facility, commercial paper
and the effect of the interest rate swaps, was 6.48% at September 30, 1995.
(26)
<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 (CCC) Intercompany Pool, Continental Insurance Company (CIC)
Intercompany Pool and Continental Assurance Company (CAC) Intercompany Pool.
Also rated were the senior debt of both CNA and The Continental Corporation
(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 |Continental|
| | | | |-----------|----------|---------|-----------|
| | | | |Senior Debt|Commercial|Preferred|Senior Debt|
| | CCC | CAC | CIC | | Paper | Stock | |
| |----------|------|-----|-----------|----------|---------|-----------|
<S> <C> <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 & Poor's | A+ | AA | A- | A- | A2 | A- | BBB- |
| | | | | | | | |
| | | | | | | | |
|Duff & Phelps | AA- | AA | - | A- | - | A- | - |
|------------------|----------|------|-----|-----------|----------|---------|-----------|
</TABLE>
CNA and the insurance industry are exposed to an unknown amount of
liability for environmental pollution, asbestos-related and other toxic tort
claims. Refer to Note E of Notes to the Condensed Consolidated Financial
Statements for further discussion of these exposures.
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-concluded
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.
In October 1995, the FASB issued SFAS 123, "Accounting for
Stock-Based Compensation". This Statement establishes financial accounting
and reporting standards for stock-based employee compensation plans The
requirements of this Statement will generally be effective for 1996
financial statements. This Statement will have no significant impact on CNA.
(27)
<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 30
(27) Financial Data Schedule 27 31
(b) REPORTS ON FORM 8-K:
On May 23, 1995, CNA filed a current report on Form 8-K which stated
that on May 10th, the Company consummated the merger with The Continental
Corporation (CIC) On July 24, 1995 on Form 8-K/A, CNA reported under Items 2 and
7 additional financial information related to the merger including financial
statements of CIC and pro forma financial information.
(28)
<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: November 14, 1995 By PETER E. JOKIEL
-------------------------
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
(29)
<PAGE>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Period Ended September 30 Third Quarter Nine Months
(In millions, except per share data) 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------
Earnings per share:
<S> <C> <C> <C> <C>
Net income (loss)................................. $ 166.3 $ 54.9 $ 575.8 $ (59.4)
Less preferred stock dividends.................... 1.3 1.1 5.1 3.6
----- ----- ----- ------
Net income (loss) available to common stockholders $ 165.0 $ 53.8 $ 570.7 $ (63.0)
======== ====== ====== =======
Weighted average shares outstanding............... 61.8 61.8 61.8 61.8
===== ===== ===== ======
Net income (loss) per common share................ $ 2.66 $ 0.87 $ 9.23 $ (1.02)
====== ====== ===== ======
- --------------------------------------------------------------------------------------------------------
</TABLE>
(30)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 27,505
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 743
<MORTGAGE> 108
<REAL-ESTATE> 6
<TOTAL-INVEST> 36,690
<CASH> 218
<RECOVER-REINSURE> 7,454
<DEFERRED-ACQUISITION> 1,480
<TOTAL-ASSETS> 64,596
<POLICY-LOSSES> 35,849
<UNEARNED-PREMIUMS> 4,665
<POLICY-OTHER> 623
<POLICY-HOLDER-FUNDS> 129
<NOTES-PAYABLE> 3,012
<COMMON> 155
0
150
<OTHER-SE> 5,956
<TOTAL-LIABILITY-AND-EQUITY> 64,596
8,581
<INVESTMENT-INCOME> 1,498
<INVESTMENT-GAINS> 339
<OTHER-INCOME> 295
<BENEFITS> 7,315
<UNDERWRITING-AMORTIZATION> 1,263
<UNDERWRITING-OTHER> 1,205
<INCOME-PRETAX> 810
<INCOME-TAX> 234
<INCOME-CONTINUING> 576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 576
<EPS-PRIMARY> 9.23
<EPS-DILUTED> 9.23
<RESERVE-OPEN> 24,998
<PROVISION-CURRENT> 5,228
<PROVISION-PRIOR> (276)
<PAYMENTS-CURRENT> 1,544
<PAYMENTS-PRIOR> 3,203
<RESERVE-CLOSE> 25,203
<CUMULATIVE-DEFICIENCY> (276)
<PAGE>
</TABLE>
