- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996 Commission File Number 1-5823
--------------------------
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-6169860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CNA Plaza
Chicago, Illinois 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No...
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 1, 1996
- ------------------------------ -----------------------------
Common Stock, Par value $2.50 61,798,262
- --------------------------------------------------------------------------------
Page (1) of (32)
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 (Unaudited) and DECEMBER 31, 1995.................. 3
STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995........ 4
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995.................. 5
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995.................. 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) JUNE 30, 1996............................. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 18
PART II. OTHER INFORMATION
- ---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 29
SIGNATURES............................................................ 30
EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE................ 31
EXHIBIT 27 FINANCIAL DATA SCHEDULE............................... 32
(2)
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------
June 30 December 31
1996 1995
(In millions of dollars) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities available for sale:(cost $28,071.4 and $29,385.4)..............$ 27,937.4 $ 30,444.7
Equity securities available for sale:(cost $806.5 and $736.3) .................. 985.4 917.7
Mortgage loans and real estate:(less accumulated depreciation $3.7 and $3.6 )... 137.2 122.4
Policy loans.................................................................... 175.4 177.2
Other invested assets........................................................... 331.2 499.9
Short-term investments.......................................................... 5,527.9 3,724.5
------------ --------
Total investments.......................................................... 35,094.5 35,886.4
Cash................................................................................. 325.9 221.6
Insurance receivables:
Reinsurance receivables ........................................................ 7,116.4 7,169.1
Other insurance receivables..................................................... 5,646.3 5,302.4
Less allowance for doubtful accounts............................................ (277.6) (288.7)
Deferred acquisition costs........................................................... 1,697.8 1,493.3
Accrued investment income............................................................ 457.6 545.4
Receivables for securities sold...................................................... 329.3 185.2
Federal income taxes recoverable:(includes $49.6 and $153.0 due from Loews) ........ 34.2 132.7
Deferred income taxes................................................................ 1,910.8 1,254.9
Property and equipment at cost:(less accumulated depreciation $402.6 and $313.7) .... 600.2 584.7
Prepaid reinsurance premiums......................................................... 531.2 495.4
Intangibles.......................................................................... 400.5 456.3
Other assets......................................................................... 673.1 595.0
Separate Account business............................................................ 5,566.5 5,868.1
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 60,106.7 $ 59,901.8
====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------
June 30 December 31
1996 1995
(In millions of dollars) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities:
Insurance reserves:
Claim and claim expense....................................................... $ 31,653.0 $ 32,032.4
Unearned premiums............................................................. 4,920.7 4,549.4
Future policy benefits........................................................ 3,830.7 3,515.9
Policyholders' funds.......................................................... 700.6 705.0
Securities sold under repurchase agreements........................................ 909.2 774.1
Payables for securities purchased.................................................. 590.1 163.3
Participating policyholders' equity................................................ 121.1 140.1
Short-term debt.................................................................... 2.9 257.6
Long-term debt..................................................................... 2,777.3 2,767.9
Other liabilities.................................................................. 2,658.2 2,392.5
Separate Account business.......................................................... 5,566.5 5,868.1
------------ -----------
Total liabilities.......................................................... 53,730.3 53,166.3
------------ -----------
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.................................................................. 5,594.1 5,065.6
Net unrealized investment gains ................................................... 45.5 933.1
Treasury stock, at cost............................................................ (2.5) (2.5)
----------- ------------
Total stockholders' equity................................................. 6,376.4 6,735.5
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 60,106.7 $ 59,901.8
======================================================================================================================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</FN>
</TABLE>
(3)
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS
1996 1995* 1996 1995*
(In millions of dollars, except per share data)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums.................................................... $3,320.7 $ 2,868.9 $ 6,613.8 $ 5,384.9
Net investment income..................................... 558.1 514.7 1,135.6 945.6
Realized investment gains ................................ 72.6 205.8 377.8 241.6
Other..................................................... 143.8 69.8 283.3 139.9
-------- --------- -------- --------
4,095.2 3,659.2 8,410.5 6,712.0
-------- --------- -------- --------
Benefits and expenses:
Insurance claims and policyholders' benefits.............. 2,774.4 2,418.2 5,561.4 4,573.9
Amortization of deferred acquisition costs................ 439.4 421.7 967.0 782.7
Other operating expenses.................................. 546.8 416.1 1,005.4 732.4
Interest expense.......................................... 44.7 38.0 104.4 55.7
------- ------- ------- -------
3,805.3 3,294.0 7,638.2 6,144.7
------- ------- ------- -------
Income before income tax................................ 289.9 365.2 772.3 567.3
Income tax expense.......................................... 87.8 108.5 240.9 157.8
------- ------- ------- -------
Net income ............................................. $ 202.1 $ 256.7 $ 531.4 $ 409.5
=============================================================================================================
EARNINGS PER SHARE
Net income ................................................. $ 3.25 $ 4.12 $ 8.55 6.57
======= ======= ======= =======
Weighted average outstanding shares of
common stock (in millions of shares)........................ 61.8 61.8 61.8 61.8
=============================================================================================================
<FN>
* Includes results of The Continental Corporation from May 10, 1995
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)
</FN>
</TABLE>
(4)
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1996 and 1995
Net
Additional Unrealized
Capital Paid in Retained Investment Gains Total
Stock Capital Earnings (Losses)
(In millions of dollars)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 302.1 $ 434.7 $ 4,315.5 $ (506.4) $ 4,545.9
Net income.......................... - - 409.5 - 409.5
Unrealized investment gains......... - - - 1,057.4 1,057.4
Preferred dividends................. - - (3.7) - (3.7)
- ------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $ 302.1 $ 434.7 $ 4,721.3 $ 551.0 $ 6,009.1
============================================================================================================
Balance, December 31, 1995 $ 302.1 $ 434.7 $ 5,065.6 $ 933.1 $ 6,735.5
Net income.......................... - - 531.4 - 531.4
Unrealized investment (losses)...... - - - (887.6) (887.6)
Preferred dividends................... - - (2.9) - (2.9)
- ------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $ 302.1 $ 434.7 $ 5,594.1 $ 45.5 $ 6,376.4
============================================================================================================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</FN>
</TABLE>
(5)
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 1996 1995
(In millions of dollars)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 531.4 $ 409.5
-------- --------
Adjustments to reconcile net income to net cash flows from operating
activities:
Realized investment gains, pre-tax ......................................... (377.8) (241.6)
Participating policyholders' interest....................................... 3.6 (0.2)
Amortization of intangibles................................................. 11.4 7.1
Amortization of bond discount............................................... (85.2) (69.2)
Depreciation................................................................ 79.1 45.8
Changes in:
Reinsurance and other insurance receivables, net......................... (302.3) (753.0)
Prepaid reinsurance premiums............................................. (35.8) 14.7
Deferred acquisition costs............................................... (204.6) (104.6)
Accrued investment income................................................ 87.8 32.9
Insurance reserves....................................................... 311.5 481.8
Federal income taxes..................................................... 98.5 5.2
Deferred income taxes.................................................... 28.3 39.6
Reinsurance payables..................................................... 226.6 113.4
Other, net............................................................... (485.5) 643.5
-------- --------
Total adjustments ............................................... (644.4) 215.4
-------- --------
Net cash flows from operating activities ........................ (113.0) 624.9
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 1996 1995
(In millions of dollars)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from investing activities:
Purchases of fixed maturities................................................ (16,863.6) (12,469.7)
Proceeds from fixed maturities:
Sales...................................................................... 17,127.6 11,857.5
Maturities, calls and redemptions.......................................... 1,311.3 1,657.7
Purchases of equity securities............................................... (602.1) (460.7)
Proceeds from sale of equity securities...................................... 779.0 589.6
Change in short-term investments............................................. (1,600.3) (2,327.2)
Purchases of property and equipment ......................................... (90.8) (38.6)
Change in securities sold under repurchase agreements........................ 135.1 303.3
Change in other investments.................................................. 278.1 172.8
Purchase of The Continental Corporation...................................... - (1,125.5)
Cash acquired in connection with the Continental merger...................... - 165.1
Other, net................................................................... 2.4 1.9
-------- --------
Net cash flows from investing activities ........................ 476.7 (1,673.8)
-------- --------
Cash flows from financing activities:
Dividends paid to preferred shareholders..................................... (3.0) (3.8)
Receipts from investment contracts credited to policyholder account balances. 8.6 15.8
Return of policyholder account balances on investment contracts.............. (17.9) (17.5)
Change in short-term debt.................................................... (254.8) -
Principal payments on long-term debt......................................... (1.4) (23.1)
Reitrement of notes payable.................................................. - (205.0)
Proceeds from issuance of long-term debt..................................... 9.1 1,332.6
-------- --------
Net cash flows from financing activities........................ (259.4) 1,099.0
-------- --------
Net cash flows........................................... 104.3 50.1
Cash at beginning of period..................................................... 221.6 147.6
==========================================================================================================
Cash at end of period $ 325.9 $ 197.7
==========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Interest expense............................................................. $ (111.1) $ (50.4)
Federal income taxes......................................................... (91.8) (73.3)
==========================================================================================================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
</FN>
</TABLE>
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
NOTE A. Basis of Presentation:
The Condensed Consolidated Financial Statements (Unaudited) include CNA
Financial Corporation (CNA or the Company) and its subsidiaries which consist of
property/casualty insurance companies (principally Continental Casualty Company
and Continental Insurance Company) and life insurance companies (principally
Continental Assurance Company and Valley Forge Life Insurance Company). Loews
Corporation (Loews) owns approximately 84% of the outstanding common stock of
CNA.
CNA is a multiple-line insurer underwriting property and casualty
coverages; life, accident and health insurance. CNA serves a wide spectrum of
insureds, including individuals; small, medium and large businesses;
associations; professionals and groups.
CNA acquired The Continental Corporation (Continental) through a cash
merger for approximately $1.1 billion. The merger was completed on May 10, 1995.
Results of operations for the six-month period ended June 30, 1996
include the operations of Continental. Results of operations for the six-months
ended June 30, 1995 reflect the results of Continental subsequent to May 10,
1995 (See Note B).
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, 1995, filed with the Commission on
March 29, 1996.
The accompanying Condensed Consolidated Financial Statements have been
prepared in conformity with generally accepted accounting principles. Certain
amounts applicable to prior periods have been reclassified to conform to
classifications followed in 1996. All significant intercompany amounts have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of CNA's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying condensed consolidated financial statements.
NOTE B. The Continental Corporation:
On December 6, 1994, CNA entered into a merger agreement providing for
the payment of approximately $1.1 billion to holders of Continental common
stock. To finance the acquisition, CNA entered into a five year revolving credit
facility (see Note F). 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 since May 10, 1995. CNA has completed its evaluation and appraisal of
Continental's net assets resulting in goodwill of approximately $315 million.
Goodwill will be amortized over twenty years.
(7)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
The unaudited pro forma condensed results of operations presented below
assume the Continental acquisition had occurred at the beginning of 1995:
|--------------------------------------------------------------------------|
|PRO FORMA SECOND SIX |
| QUARTER MONTHS |
|PERIOD ENDED JUNE 30 1995 1995 |
|(In millions of dollars, except per share data) |
|--------------------------------------------------------------------------|
|Revenues $ 4,079.2 $ 8,199.6 |
| |
|Realized investment gains (losses) included |
| in revenue 233.0 361.7 |
| |
|Income loss before income tax 325.9 596.1 |
|Income tax expense (91.7) (181.2)|
| -------- --------|
|Net Income $ 234.2 $ 414.9 |
| ======== ========|
| |
|Net income loss per share $ 3.87 $ 6.66 |
| ========= ========|
|--------------------------------------------------------------------------|
The unaudited pro forma condensed financial information is not
necessarily indicative either of the results of operations that would have
occurred had this transaction been consummated at the beginning of 1995 or of
future operations of the combined companies.
Certain discontinued operations were acquired as part of the Continental
merger. The components of operating results of the discontinued operations are
shown net in the accompanying financials and are comprised of the following:
|---------------------------------------------------------------------|
|SIX MONTHS ENDED JUNE 30 1996 1995 |
|(In millions of dollars) |
|---------------------------------------------------------------------|
| |
|Revenues $ 50.2 $ 10.0 |
|Expenses 50.2 10.0 |
| ----- ----- |
| Income before income taxes - - |
|Income taxes - - |
| ----- ---- |
| Income from discontinued operations $ - $ - |
| ===== ==== |
| |
|---------------------------------------------------------------------|
<PAGE>
Net assets of discontinued insurance operations at June 30, 1996 and
December 31, 1995 were included in "Other Assets". The table below reflects
assets and liabilities of the discontinued operations net of intercompany
eliminations (excluding intercompany notes) :
|------------------------------------------------------------------------------|
|FOR THE PERIOD ENDED JUNE 30, 1996 DECEMBER 31, 1995 |
|(In millions of dollars) |
|------------------------------------------------------------------------------|
| |
|ASSETS: |
|Cash and investments $ 782.4 $ 825.3 |
|Reinsurance receivables and other assets 616.6 521.9 |
| ------ ------ |
| 1,399.0 1,347.2 |
| ------- ------- |
| |
|LIABILITIES: |
|Claim and claim expenses 850.9 955.7 |
|Other liabilities 436.9 257.6 |
| ------ ------ |
| 1,287.8 1,213.3 |
| ------- ------- |
| Net assets $ 111.2 $ 133.9 |
| ======== ======== |
|------------------------------------------------------------------------------|
(8)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE C. Restricted Investments:
On December 30, 1993, CNA deposited $986.8 million in an escrow
account, pursuant to the Fibreboard Global Settlement Agreement, as discussed in
Note E below. At June 30, 1996, the escrow account amounted to $1.06 billion.
The funds are included in short-term investments and are invested in U. S.
Treasury securities.
NOTE D. Reinsurance:
CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, to provide greater diversification of
risk and to minimize exposures on larger risks. The reinsurance coverages are
tailored to the specific risk characteristics of each product line with CNA's
retained amount varying by type of coverage. Generally, reinsurance coverage for
property risks is on an excess of loss, per risk basis. Liability coverages are
generally reinsured on a quota share basis in excess of CNA's retained risk.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in its states of domicile, CNA
receives collateral primarily in the form of bank letters of credit, securing a
large portion of the recoverables. At June 30, 1996, such collateral totaled
approximately $1.1 billion. CNA's largest recoverable from a single reinsurer,
including prepaid reinsurance premiums, at June 30, 1996, was approximately $435
million with Lloyd's of London.
<TABLE>
<CAPTION>
|----------------------------------------------------------------------------------------------|
|SIX MONTHS ENDED JUNE 30 EARNED PREMIUMS ASSUMED/ |
| ------------------------------------------------- |
| NET |
|(In millions of dollars) DIRECT ASSUMED CEDED NET % |
|--------------------------------------------------------------------------------------------- |
<S> <C> <C> <C> <C> <C>
| |
|1996 |
| Life $ 353.9 $ 57.2 $ 15.2 $ 395.9 14.4 % |
| Accident and health 1,660.7 89.5 33.2 1,717.0 5.2 |
| Property and casualty 4,249.1 1,002.8 751.0 4,500.9 22.3 |
|--------------------------------------------------------------------------------------------- |
| TOTAL PREMIUMS $ 6,263.7 $ 1,149.5 $ 799.4 $ 6,613.8 17.4 |
|============================================================================================= |
| |
|1995 |
| Life $ 298.9 $ 54.9 $ 9.4 $ 344.4 15.9 % |
| Accident and health 1,441.2 68.2 38.2 1,471.2 4.6 |
| Property and casualty 3,447.5 573.3 451.5 3,569.3 16.1 |
|----------------------------------------------------------------------------------------------|
| TOTAL PREMIUMS $ 5,187.6 $ 696.4 $ 499.1 $ 5,384.9 12.9 |
|==============================================================================================|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
|----------------------------------------------------------------------------------------------|
|THREE MONTHS ENDED JUNE 30 EARNED PREMIUMS ASSUMED/ |
| ------------------------------------------------- |
| NET |
|(In millions of dollars) DIRECT ASSUMED CEDED NET % |
|--------------------------------------------------------------------------------------------- |
<S> <C> <C> <C> <C> <C>
| |
|1996 |
| Life $ 209.6 $ 30.3 $ 10.8 $ 229.1 13.2 % |
| Accident and health 828.4 44.7 4.5 868.6 5.1 |
| Property and casualty 2,043.4 588.1 408.5 2,223.0 26.5 |
|--------------------------------------------------------------------------------------------- |
| TOTAL PREMIUMS $ 3,081.4 $ 663.1 $ 423.8 $ 3,320.7 20.0 |
|============================================================================================= |
| |
|1995 |
| Life $ 146.5 $ 27.6 $ 4.8 $ 169.3 16.3 % |
| Accident and health 730.5 30.0 22.5 738.0 4.1 |
| Property and casualty 1,993.5 275.6 307.5 1,961.6 14.0 |
|----------------------------------------------------------------------------------------------|
| TOTAL PREMIUMS $ 2,870.5 $ 333.2 $ 334.8 $ 2,868.9 11.6 |
|==============================================================================================|
</TABLE>
(9)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
In the table above, life earned premium is primarily from long duration
contracts, property/casualty earned premium is from short duration contracts,
and accident and health earned premiums are primarily from short duration
contracts.
Insurance claims and policyholders' benefits are net of reinsurance of $150.3
million and $628.8 million and $256.5 million and $330.0 million for the quarter
and six months ending June 30, 1996 and June 30, 1995, 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 1995 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, which is
subject to court approval. 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 or is subsequently
successfully attacked. The implementation of the Global Settlement or the
Trilateral Agreement would have the effect of settling Casualty's litigation
with Fibreboard.
On July 27, 1995, the United States District Court for the Eastern District of
Texas entered judgment approving the Global Settlement Agreement and the
Trilateral Agreement. As expected, appeals were filed as respects both of these
decisions. On July 26, 1996, a panel of the United States Fifth Circuit Court of
Appeals in New Orleans affirmed the judgment approving the Global Settlement
Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral
Agreement by a 3 to 0 vote. Further review of the judgement approving the Global
Settlement Agreement either to the entire Fifth Circuit Court of Appeals or the
United States Supreme Court will likely be sought. Further review of the
judgement approving the Trilateral Agreement is possible but it is uncertain
whether it will be sought.
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
(10)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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. 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 had 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. On April 30, 1996, the
Court of Appeal issued its revised opinion which essentially reaffirmed its
previous decision. Casualty has filed papers seeking review by the California
Supreme Court concerning the April 30 decision. 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. Casualty cannot predict the time frame within which the issues
before the California Courts will finally be resolved. Review of issues such as
trigger of coverage and scope of coverage is being sought 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 or for which review is
sought under the policy are trigger of coverage, scope of coverage, dual
coverage requirements and number of occurrences:
o 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. Casualty's position is that its 1957-59 policy is not
triggered under California law, since, among other reasons, there were
no findings that health claimants had the actual illnesses for which
they later sued. Moreover, Casualty's position is that placing the
burden on the insurer is contrary to California law.
o 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. 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.
<PAGE>
o 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 courts ultimately hold 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.
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
o 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 and were thereby to limit its
liability, if the final decision in the coverage case affirms the trial court's
decision on the existence of the Pacific Indemnity policy, then Casualty would
still have obligations under the Casualty and Pacific Indemnity Agreement
described below.
Under various reinsurance agreements, Casualty has asserted a right to
reimbursement for a portion of its potential exposure to Fibreboard. Casualty's
principal 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.
Through June 30, 1996, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 134,200 claims, subject to
resolution of the coverage issues, for an estimated settlement amount of
approximately $1.62 billion plus any applicable interest. If neither the Global
Settlement nor the Trilateral Agreement receives final court approval,
Casualty's obligation to pay under these settlements will be partially subject
to the results of the pending appeal in the coverage litigation. Minimum amounts
payable under all such agreements, regardless of the outcome of coverage
litigation, may total as much as approximately $796 million (without interest),
of which approximately $631 million was paid through June 30, 1996. 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 neither the Global Settlement
nor the Trilateral Agreement can be implemented.
Global Settlement
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.
<PAGE>
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 Agreement 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. As
indicated hereinabove, the Global Settlement approval has been affirmed on
appeal, however, it is likely that further review will be sought. 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 subject
(12)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
to court approval which would among other things, settle the coverage case in
the event the Global Settlement approval is not ultimately upheld. 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 claims either filed or settled
before August 27, 1993. 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. A portion of the
additional $635 million to be contributed by Pacific Indemnity would be applied
to the payment of such claims as well. As a part of the Global Settlement and
the Trilateral Agreement, 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. As indicated above, the Trilateral
Agreement approval by the trial court has also been affirmed on appeal, and it
is uncertain whether further review will be sought.
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 coverage case is finally resolved,
either through final court approval of one or both of the Global Settlement
Agreement and Trilateral Agreement or through a final decision in the California
courts. It 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.
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 to be
used to satisfy the claims of future claimants, plus certain expenses. The
$1.525 billion has already been deposited into an escrow for such purpose. 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 (as
defined in the Trilateral Agreement, 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.
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.
<PAGE>
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.
The Global Settlement and the Trilateral Agreement approved by the
trial court have so far been upheld on appeal as noted hereinabove, but are
subject to further potential appeal review. There is limited precedent with
(13)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
settlements which determine the rights of future claimants to seek relief, and
the outcome of any efforts to obtain further appellate review cannot be
predicted. 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 ultimately upheld, keeping in
mind that Casualty's potential liability is limited to persons exposed to
asbestos prior to the termination of the policy in 1959.
Projections by experts of future trends differ widely, based upon
different assumptions with respect to a host of complex variables. Some recently
published studies, not specifically related to Fibreboard, conclude that the
number of future asbestos-related bodily injury claims against asbestos
manufacturers could be several times the number of claims brought to date. Such
studies include claims asserted against asbestos manufacturers for all years,
including claims filed or projected to be filed for exposure starting after
1959. As indicated above, as of June 30, 1996, Casualty, Fibreboard and
plaintiff attorneys have reached settlements with respect to approximately
134,200 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.
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
47,750 claims for exposure to asbestos both prior to and after 1959 is currently
averaging approximately $13,300 per claim for the before 1959 claims processed
through June 30, 1996. 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 $74,000 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 ultimately upheld , in light of the factors
discussed herein the range of Casualty's potential liability cannot be
meaningfully estimated and there can be no assurance that the reserves
established would be sufficient to pay all amounts which ultimately could become
payable in respect of asbestos-related bodily injury liabilities.
While it is possible that the ultimate outcome of this matter could
have a material adverse impact on the equity of the Company, management does not
believe that a further loss material to equity is probable. Management will
continue to monitor the potential liabilities with respect to asbestos-related
bodily injury claims and will make adjustments to the claim reserves if
warranted.
<PAGE>
OTHER LITIGATION
CNA and its subsidiaries are also parties to other litigation arising
in the ordinary course of business. The outcome of this other litigation will
not, in the opinion of management, materially affect the results of operations
or equity of CNA.
(14)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
ENVIRONMENTAL AND ASBESTOS
The CNA property/casualty insurance companies have potential exposures
related to environmental and asbestos-related claims.
Environmental pollution clean-up is the subject of both federal and
state regulation. By some estimates, there are thousands of potential waste
sites subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. Judicial interpretations in many cases
have expanded the scope of coverage and liability beyond the original intent of
the policies.
The Comprehensive Environmental Response Compensation and Liability Act
of 1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern
the clean-up and restoration of abandoned toxic waste sites and formalize the
concept of legal liability for clean-up and restoration by "Potentially
Responsible Parties" ("PRP's"). Superfund and the mini-Superfunds (Environmental
Clean-up Laws or "ECLs") establish a mechanism to pay for clean-up of waste
sites if PRP's fail to do so, and to assign liability to PRP's. The extent of
liability to be allocated to a PRP is dependent on a variety of factors.
Further, the number of waste sites subject to clean-up is unknown. To date,
approximately 1,300 clean-up sites have been identified by the Environmental
Protection Agency on its National Priorities List. On the other hand, the
Congressional Budget Office is estimating that there will be 4,500 National
Priority List sites, and other estimates project as many as 30,000 sites that
will require clean-up under ECLs. Very few sites have been subject to clean-up
to date. The extent of clean-up necessary and the assignment of liability has
not been established.
CNA and the insurance industry are disputing coverage for many such
claims. Key coverage issues include whether Superfund response costs are
considered damages under the policies, trigger of coverage, applicability of
pollution exclusions, the potential for joint and several liability and
definition of an occurrence. Similar coverage issues exist for clean-up of waste
sites not covered under Superfund. To date, courts have been inconsistent in
their rulings on these issues.
A number of proposals to reform Superfund have been made by various
parties. Despite Superfund taxing authority expiring at the end of 1995, no
reforms have been enacted by Congress. While the next Congress may address this
issue, no predictions can be made as to what positions the Congress or the
Administration will take and what legislation, if any, will result. If there is
legislation, and in some circumstances even if there is no legislation, the
federal role in environmental clean-up may be materially reduced in favor of
state action. Substantial changes in the federal statute or the activity of the
EPA may cause states to reconsider their environmental clean-up statutes and
regulations. There can be no meaningful prediction of the pattern of regulation
that would result.
<PAGE>
Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to clean-up, and the
standards for clean-up and liability, the ultimate exposure to CNA for
environmental pollution claims cannot be meaningfully quantified. Claim and
claim expense reserves represent management's estimates of ultimate liabilities
based on currently available facts and case law. However, in addition to the
uncertainties previously discussed, additional issues related to, among other
things, specific policy provisions, multiple insurers and allocation of
liability among insurers, consequences of conduct by the insured, missing
policies and proof of coverage make quantification of liabilities exceptionally
difficult and subject to adjustment based on new data. As of June 30, 1996 and
December 31, 1995, CNA carried approximately $859 million and $1,030 million,
respectively, of claim and claim expense reserves, net of reinsurance
recoverable, for reported and unreported environmental pollution claims. The
decrease in carried reserves is substantially due to claim payments. Adverse
environmental reserve development of $241 million for the year ended December
31, 1995 includes $60 million related to Continental and results from CNA's
on-going monitoring of settlement patterns, current pending cases and potential
(15)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
future claims. The foregoing reserve information relates to claims for accident
years 1988 and prior, which coincides with CNA's adoption of the Simplified
Commercial General Liability coverage form which included an absolute pollution
exclusion.
CNA has exposure to asbestos-related claims, including those
attributable to CNA's on-going litigation with Fibreboard Corporation. A
detailed discussion of CNA's litigation with Fibreboard Corporation regarding
asbestos-related bodily injury claims is discussed at the beginning of this
note. Estimation of asbestos-related claim reserves encounter many of the same
limitations discussed above for environmental pollution claims such as
inconsistency of court decisions, specific policy provisions, multiple insurers
and allocation of liability among insurers, missing policies and proof of
coverage. As of June 30, 1996 and December 31, 1995, CNA carried approximately
$2,101 million and $2,224 million, respectively, of claim and claim expense
reserves, net of reinsurance recoverable, for reported and unreported
asbestos-related claims. Unfavorable reserve development for the six months
ended June 30, 1996 and the year ended December 31, 1995, totaled $26 million
and $258 million, respectively.
The results of operations in future years may continue to be adversely
affected by environmental pollution and asbestos claims and claim expenses.
Management will continue to monitor potential liabilities and make further
adjustments as warranted.
CNA, consistent with sound reserving practices, regularly adjusts its
reserve estimates in subsequent reporting periods as new facts and circumstances
emerge that indicate the previous estimates need to be modified. The following
table provides additional data related to CNA's environmental pollution and
asbestos-related claims reserves.
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------|
| |
|RESERVE SUMMARY JUNE 30, 1996 DECEMBER 31, 1995 |
| -----------------------------------------------------------|
| ENVIRONMENTAL ASBESTOS ENVIRONMENTAL ASBESTOS |
| |
|-----------------------------------------------------------------------------------------|
|(In millions of dollars) |
<S> <C> <C> <C> <C>
| |
|Gross reserves: |
| Reported claims $ 372 $ 1,880 $ 337 $ 1,963 |
| Unreported claims 621 307 839 358 |
| ------ ------ ------ ------ |
| 993 2,187 1,176 2,321 |
|Less reinsurance recoverable (134) (86) (146) (97) |
|-----------------------------------------------------------------------------------------|
|NET RESERVES $ 859 $ 2,101 $ 1,030 $ 2,224 |
|=========================================================================================|
</TABLE>
(16)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - concluded
NOTE F. Debt:
Long and short-term borrowings consisted of the following:
<TABLE>
<CAPTION>
|--------------------------------------------------------------------------------------------------|
|LONG AND SHORT-TERM DEBT June 30 December 31 |
|(In millions of dollars) 1996 1995 |
|--------------------------------------------------------------------------------------------------|
<S> <C> <C>
|Long-term: |
| Acquisition debt: |
| Credit Facility $ 675.0 $ 825.0 |
| Commercial Paper 650.0 500.0 |
| Senior Notes: |
| 8 7/8%, due March 1, 1998 149.4 149.2 |
| 8 1/4%, due April 15, 1999 102.9 102.8 |
| 7 1/4%, due March 1, 2003 146.3 145.4 |
| 6 1/4%, due November 15, 2003 248.3 248.2 |
| 8 3/8%, due August 15, 2012 98.3 97.9 |
| 71/4% Debenture, due November 15, 2023 247.1 247.1 |
| 11% Secured Mortgage Notes, due June 20, 2013 390.8 386.6 |
| 8% - 13.7% Secured Capital Leases, due December 31, 2011 46.6 46.0 |
| Other 22.6 19.7 |
| ---------- --------- |
| Total long-term debt 2,777.3 2,767.9 |
|Short-term 2.9 257.6 |
| ----------- --------- |
| Total debt $ 2,780.2 $ 3,025.5 |
| ======== ======= |
| |
|--------------------------------------------------------------------------------------------------|
</TABLE>
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. The average interest rate on the borrowings under the
revolver at June 30, 1996 was 5.74%. 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.
In 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. In the first half of 1996 CNA increased
commercial paper borrowings by $150 million replacing a like amount of bank
financing. The weighted-average rate on commercial paper at June 30, 1996 was
5.62%. The commercial paper borrowings are classified as long-term as $650
million of the committed bank facility will support the commercial paper
program.
On July 22, 1996 CNA increased its commercial paper borrowings by $25
million replacing a like amount of bank financing. As of August 1, 1996, the
outstanding loans under the revolving credit facility were $650 million. There
was no unused borrowing capacity under the facility after the effects of the
commercial paper program.
CNA entered into interest rate swap agreements with several banks which
terminate from May to December, 2000. The effect of these interest rate swaps
was to increase interest expense by $2.2 million for the six months ended June
30, 1996.
<PAGE>
The weighted average interest rate on the acquisition debt, which
includes the revolving credit facility, commercial paper, and the effect of the
interest rate swaps, was 6.42 % on June 30, 1996.
On March 1, 1996, CNA repaid at the due date $250 million of 8 5/8%
senior notes. These notes were classified as short-term debt in 1995.
(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.
CNA Financial Corporation (CNA) is the parent company of the CNA Insurance
Companies. The CNA Insurance Companies, the largest writer of commercial
property and casualty insurance is comprised of Continental Casualty Company and
its subsidiaries, Continental Assurance Company and its subsidiaries and The
Continental Corporation, acquired on May 10, 1995, and its subsidiaries. The CNA
Insurance Companies provide property and casualty coverages, life, accident and
health insurance.
RESULTS OF OPERATIONS:
The following chart summarizes key components of operating results for
the six months and quarter ended June 30, 1996 and 1995. Results of operations
include The Continental Corporation subsequent to May 10, 1995.
<PAGE>
<TABLE>
<CAPTION>
|--------------------------------------------------------------------------------------------------------|
|PERIOD ENDED JUNE 30 SECOND QUARTER SIX MONTHS |
|(In millions of dollars) 1996 1995 1996 1995 |
|--------------------------------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED INVESTMENT |
|GAINS/LOSSES): |
|Revenues: |
<S> <C> <C> <C> <C>
| Premiums: |
| Property/Casualty $ 2,478.7 $ 2,162.8 $ 4,986.4 $ 3,947.3|
| Life 842.0 706.1 1,627.4 1,437.6|
| -------- -------- ------- --------|
| 3,320.7 2,868.9 6,613.8 5,384.9|
| Net investment income 558.1 514.7 1,135.6 945.6|
| Other 143.8 69.8 283.4 139.9|
| -------- -------- ------- --------|
| 4,022.6 3,453.4 8,032.8 6,470.4|
|Benefits and expenses 3,805.2 3,287.3 7,625.8 6,137.8|
| -------- -------- ------- --------|
| Operating income before income tax 217.4 166.1 407.0 332.6|
|Income tax expense (65.9) (38.9) (110.2) (73.8|
| -------- -------- -------- --------|
| Net operating income $ 151.5 $ 127.2 $ 296.8 $ 258.8|
| ======== ========== ======== ========|
|SUPPLEMENTAL FINANCIAL DATA: |
|Net operating income (loss) by group: |
| Property/Casualty $ 146.2 $ 121.7 $ 297.8 $ 239.6|
| Life 25.7 23.5 54.6 48.5|
| Other (20.4) (18.0) (55.6) (29.3|
| ------ -------- --------- --------|
| 151.5 127.2 296.8 258.8|
| ------ -------- --------- --------|
|Net realized investment gains (losses) by group: |
| Property/Casualty 45.7 76.7 180.2 85.7|
| Life 8.1 52.2 57.0 63.7|
| Other (3.2) 0.6 (2.6) 1.3|
| ------- -------- --------- --------|
| 50.6 129.5 234.6 150.7|
| ------- -------- --------- --------|
|Net income (loss) by group: |
| Property/Casualty 191.9 198.4 477.9 325.3|
| Life 33.8 75.7 111.6 112.2|
| Other (23.6) (17.4) (58.1) (28.0|
| -------- -------- -------- --------|
| $ 202.1 $ 256.7 $ 531.4 $ 409.|
| ======== ======== ======== =======|
|========================================================================================================|
</TABLE>
(18)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Consolidated Results
- --------------------
CNA reported earnings for the first half of 1996 that reflected
improved operating results despite increased weather-related catastrophe losses
from winter storms. Earnings were also boosted by substantial capital gains.
Net operating income which excludes net realized investment gains, was
$296.8 million, or $4.76 per share, for the first six months of 1996 compared to
net operating income of $258.8 million, or $4.13 per share, for the first six
months of 1995. Net operating income for the second quarter was $151.5 million,
or $2.44 per share, compared with $127.2 million, or $2.03 per share, for the
same quarter in 1995. CNA's income in the first half of 1996 is net of pretax
losses of $208.0 million related to catastrophe claims; pretax catastrophe
losses in the first half of 1995 were $78.0 million.
Realized investment gains, net of tax, for the first half of 1996 were
$234.6 million, or $3.79 per share, compared to net realized investment gains
for the first half of 1995 of $150.7 million, or $2.44 per share. The components
of the net realized investment gains (losses) are as follows:
|----------------------------------------------------------------------|
|REALIZED INVESTMENT GAINS(LOSSES) |
|SIX MONTHS ENDED JUNE 30 1996 1995 |
|(In millions of dollars) |
|----------------------------------------------------------------------|
|Bonds: |
| U.S. Government $ 112.4 $ 97.9 |
| Tax exempt 9.5 17.9 |
| Asset-backed 21.3 33.9 |
| Taxable 44.8 (4.7)|
| ---- -------|
| Total bonds 188.0 145.0 |
|Stocks 129.2 51.7 |
|Derivative securities 12.0 (7.2)|
|Separate accounts and other 48.6 52.1 |
| ---- ------ |
| Realized investment gains reported in revenues 377.8 241.6 |
|Participating policyholders' interest (12.5) (6.9)|
|Income tax expense (130.7) (84.0)|
| ------- -------|
| Net realized investment gains $234.6 $ 150.7 |
|======================================================================|
Net income was $531.4 million, or $8.55 per share, compared to $409.5
million, or $6.57 per share, for the first six months of 1995. Net income for
the second quarter was $202.1 million, or $3.25 per share, compared with a net
income of $256.7 million, or $4.12 per share, for the second quarter of 1995.
(19)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Property/Casualty Operations
- ----------------------------
<TABLE>
<CAPTION>
|---------------------------------------------------------------------------------------------------|
|PROPERTY/CASUALTY GROUP SECOND QUARTER SIX MONTHS |
|PERIOD ENDED JUNE 30 1996 1995 1996 1995 |
|(In millions of dollars) |
|---------------------------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED |
| INVESTMENT GAINS/LOSSES): |
<S> <C> <C> <C> <C>
|Revenues: |
| Premiums $ 2,478.7 $ 2,162.8 $ 4,986.4 $ 3,947.3 |
| Net investment income 458.2 423.2 939.7 766.4 |
| Other 126.5 62.7 241.1 116.0 |
| -------- --------- -------- -------- |
| 3,063.4 2,648.7 6,167.2 4,829.7 |
|Benefits and expenses 2,848.2 2,491.7 5,761.5 4,527.3 |
| ------- ------- ------- ------- |
| Income before income tax 215.2 157.0 405.7 302.4 |
|Income tax expense (69.0) (35.3) (107.9) (62.8)|
| ---------- ---------- ---------- ----------|
| Net operating income (excluding realized |
| investment gains/losses) $ 146.2 $ 121.7 $ 297.8 $ 239.6 |
|===================================================================================================|
</TABLE>
Property/casualty revenues, excluding net realized investment
gains/losses, increased 27.7% for the six months ended June 30, 1996 to $6.2
billion compared to the same period a year ago. Property/casualty earned premium
increased $1.0 billion, or 26.3% from the prior years comparable period.
The increase in earned premium is primarily resulting from the
inclusion of Continental business for the full six months offset by a decline in
workers compensation premium.
Property/casualty profitability, as measured by pretax operating income
before realized gains, continued to show improvement in the second quarter.
Operating results include reduced underwriting expenses as a percentage of
premium, as well as continued favorable loss trends in workers compensation
business, partially offset by increased weather related catastrophe costs. CNA
incurred pre-tax catastrophe losses of approximately $208.0 million and $114.5
million in the first half and second quarter of 1996 compared to $78.0 million
and $55.0 million for the respective periods in 1995. The second quarter 1996
catastrophe loss of $114.5 million includes approximately $33 million of adverse
development on first quarter catastrophe losses. The reduction in underwriting
expenses noted above reflect economies of scale achieved by merging the
operations of Continental into CNA.
Pretax operating income excluding net realized investment gains/losses for
the property/casualty insurance subsidiaries was $405.7 million and $215.2
million for the first six months and three months ended June 30, 1996 compared
to $302.4 million and $157.0 million for the same period a year ago. Investment
income increased 22.6% and 8.3% for the six and three months ended June 30, 1996
to $939.7 million and $458.2 million, respectively, when compared with the
comparable periods a year ago of $766.4 million and $423.2 million,
respectively. Underwriting losses for the six and three months ended June 30,
1996, were $534.0 million and $243.0 million, compared to $464.0 million and
$266.2 million for the same period in 1995. These changes were the result of the
inclusion of Continental for the full six months of 1996.
<PAGE>
The net income of CNA's property/casualty insurance subsidiaries,
excluding net realized investment gains/losses, was $297.8 and $146.2 million
for the six and three months ended June 30, 1996, compared to $239.6 million and
$121.7 million for the same periods in 1995. Net realized investment gains for
(20)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
the six and three months ended June 30,1996 were $180.2 million and $45.7
million, compared to $85.7 million and $76.7 million in the comparable periods
of 1995.
LIFE OPERATIONS
<TABLE>
<CAPTION>
|--------------------------------------------------------------------------------------------------|
|LIFE GROUP SECOND SIX MONTHS |
|PERIOD ENDED JUNE 30 QUARTER |
|(In millions of dollars) 1996 1995 1996 1995 |
|--------------------------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED |
| INVESTMENT GAINS/LOSSES): |
|Revenues: |
<S> <C> <C> <C> <C>
| Premiums $ 846.6 $ 714.4 $ 1,639.7 $1,451.7 |
| Net investment income 99.6 89.6 196.5 177.2 |
| Other 17.4 6.7 42.4 23.9 |
| ------- ------- -------- ------- |
| 963.6 810.7 1,878.6 1,652.8 |
|Benefits and expenses 923.4 774.2 1,792.5 1,577.8 |
| ------- ------- -------- ------- |
| Income before income tax 40.2 36.5 86.1 75.0 |
|Income tax expense (14.5) (13.0) (31.5) (26.5) |
| -------- ------- --------- ------- |
| Net operating income (excluding realized |
| investment gains/losses) $ 25.7 $ 23.5 $ 54.6 $ 48.5 |
|==================================================================================================|
</TABLE>
CNA continues to build on the momentum established last year with the
introduction of new individual life and annuities products.
Life revenues, excluding realized investment gains, were $1.9 billion, up
13.7% for the six months ended June 30, 1996 compared to the same period a year
ago. Life premium revenues for the second quarter in 1996 were $1.6 billion, up
13.0% from the same quarter in 1995, with the primary growth in the individual
life business, which markets term, universal life and annuities. Investment
income increased 10.9% compared to the same period a year ago due to a larger
asset base generated from increased cashflows from premium growth. The bond
segment of the life investment portfolio, which is the primary investment
segment, yielded 6.8% in the first half of 1996 compared with 6.9% for the same
period a year ago.
Pretax operating income for the life insurance subsidiaries, excluding net
realized investment gains/losses, was $86.1 million and $40.2 million for the
six and three months ended June 30, 1996, compared to $75.0 million and $36.5
million for the same period in 1995. The increase in pretax operating income is
primarily due to increased investment income.
CNA's life insurance subsidiaries' net income excluding net realized
investment gains/losses was $54.6 million and $25.7 million for the six and
three months ended June 30, 1996 compared to $48.5 million and $23.5 million for
the same period in 1995. Net realized investment gains for the six and three
months ended June 30, 1996 were $57.0 million and $8.1 million, compared to
$63.7 million and $52.2 million for the same periods of 1995.
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
INVESTMENTS:
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------|------------------------------|
|SUMMARY OF GENERAL ACCOUNT INVESTMENTS AT MARKET VALUE |Six months ended June 30, 1996|
| |---------------|--------------|
| | Change in | |
| June 30 December 31|Net Unrealized | Realized |
|(In millions of dollars) 1996 1995 |Gains(losses) | Gains(losses)|
|-----------------------------------------------------------------------------|---------------|--------------|
<S> <C> <C> <C> <C>
|Fixed maturity securities: | | |
|U. S. Treasury securities and | | |
| obligations of government agencies $ 9,991 $ 13,542 | $(599) | $ 112 |
|Asset-backed securities 6,023 6,086 | (227) | 21 |
|Tax exempt securities 4,313 3,603 | (118) | 10 |
|Taxable 7,610 7,214 | (250) | 45 |
| -------- -------- | ----- | ---- |
| Total fixed maturity securities 27,937 30,445 | (1,194) | 188 |
|Stocks 985 918 | (3) | 129 |
|Short-term investments and other 6,169 4,482 | - | (7) |
|Derivative security investments 3 41 | - | 12 |
| -------- -------- | ----- | ---- |
| Total investments $ 35,094 $ 35,886 | (1,197) | 322 |
| ======== ======== | | |
|Separate accounts and discontinued operations | (138) | 56 |
|Participating policyholders' interest | 23 | (12) |
|Income tax benefit (expense ) | 424 | (131) |
| | ---- | ----- |
| Net investment gains (losses) | $(888) | $ 235 |
| | ===== | ==== |
|-----------------------------------------------------------------------------|---------------|--------------|
|--------------------------------------------------------------------------|
|SHORT-TERM INVESTMENTS: |
|--------------------------------------------------------------------------|
|Security repurchase collateral $ 909 $ 776|
|Escrow account 1,063 1,045|
|Other 3,556 1,904|
| ----- -----|
| Total short-term investments $5,528 $ 3,725|
| ===== =====|
|--------------------------------------------------------------------------|
</TABLE>
CNA's general account investment portfolio is managed to maximize
after-tax investment return, while minimizing credit risks, with investments
concentrated in high quality securities to support its insurance underwriting
operations.
CNA has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of CNA's asset/liability strategies or
to take advantage of investment opportunities generated by changing interest
rates, prepayments, tax and credit considerations, or other similar factors.
Accordingly, the fixed maturity securities are classified as available for sale.
CNA 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.
(22)
<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 fixed maturity securities, approximately 92% of which are rated as
investment grade. At June 30, 1996, tax-exempt securities and short-term
investments, excluding collateral for securities sold under repurchase
agreements, comprised approximately 12% and 13%, respectively, of the general
account's total investment portfolio compared to 10% and 8%, respectively, at
December 31, 1995. Historically, CNA has maintained short-term assets at a level
that provided for liquidity to meet its short-term obligations, as well as
reasonable contingencies and anticipated claim payout patterns. At June 30,
1996, the major components of the short-term investment portfolio consist
primarily of high-grade commercial paper and U.S. Treasury bills. Collateral for
securities sold under repurchase agreements increased $127 million to $903
million.
As of June 30, 1996, the market value of CNA's general account
investments in fixed maturities was $27.9 billion and was less than amortized
cost by approximately $134 million. This compares to a market value of $ 30.4
billion and $1,059 million of net unrealized investment gains at December 31,
1995. The gross unrealized investment gains and losses for the fixed maturity
securities portfolio at June 30, 1996, were $357 million and $491 million,
respectively, compared to $1,136 million and $77 million, respectively, at
December 31, 1995. The change in unrealized investment gains on the fixed
maturity portfolio of $1,194 million for the six months ended June 30, 1996 is
attributable, in large part, to increases in interest rates which have an
adverse effect on bond prices.
Net unrealized investment losses on general account fixed maturities at
June 30, 1996 include net unrealized losses on high yield securities of $24
million, compared to net unrealized gains of $67 million at December 31, 1995.
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 $2.3 billion at June 30, 1996, compared
to $1.9 billion at December 31, 1995.
CNA's general account also maintains an equity securities portfolio,
the fair value of which was $985 million at June 30, 1996 compared to cost of
$806 million reflecting unrealized gains of approximately $179 million. The fair
value of the equity securities portfolio in the general account was $918 million
at December 31, 1995 compared to a cost of $736 million, reflecting unrealized
appreciation of approximately $182 million.
At June 30, 1996, total separate account cash and investments amounted
to $5.6 billion with taxable fixed maturity securities representing
approximately 85% of the separate accounts' portfolio. Approximately 82% of
separate account investments are used to fund guaranteed investments for which
Continental Assurance Company guarantees principal and a specified return to the
contractholders. The duration of fixed maturity securities included in the
guaranteed investment portfolio are matched approximately with the corresponding
payout pattern of the liabilities of the guaranteed investment contracts. The
fair value of all fixed maturity securities in the guaranteed investment
portfolio was $4.0 billion compared to $4.8 billion at December 31, 1995. At
June 30, 1996, amortized cost was greater than the fair value by approximately
$23 million. This compares to an unrealized gain of $53 million at December 31,
1995. The gross unrealized investment gains and losses for the guaranteed
investment fixed maturity securities portfolio at June 30, 1996, were $67
million and $90 million, respectively.
(23)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continue
Carrying values of high yield securities in the guaranteed investment
portfolio were $688 million at June 30, 1996 and $944 million December 31, 1995.
Net unrealized investment losses on such high yield securities held were $28
million at June 30, 1996, compared to $14 million at December 31, 1995.
High yield securities generally involve a greater degree of risk than
that of investment grade securities. Expected returns should, however,
compensate for the added risk. The risk is also considered in the interest rate
assumptions in the underlying insurance products. As of June 30, 1996, CNA's
concentration in high yield bonds including separate accounts was approximately
5% of total assets. In addition, CNA's investment in mortgage loans and
investment real estate are substantially below the industry average,
representing less than one quarter of one percent of its total assets.
Included in CNA's fixed maturity securities at June 30, 1996 (general
and guaranteed investment portfolios) are $8.2 billion of asset-backed
securities, consisting of approximately 32% in collateralized mortgage
obligations ("CMO's"), 9% in corporate asset-backed obligations, and 59% in U.S.
Government issued pass-through certificates. The majority of CMO's held are U.S.
Government agency issues, which are actively traded in liquid markets and are
priced monthly by broker-dealers. At June 30, 1996, the fair value of
asset-backed securities was more than amortized cost by approximately $74
million compared to unrealized investment gains of $200 million at December 31,
1995. CNA limits the risks associated with interest rate fluctuations and
prepayment by concentrating its CMO investments in early planned amortization
classes with relatively short principal repayment windows.
Over the last few years, much concern has been raised regarding the
quality of insurance company invested assets. At June 30, 1996, 54% of the
general account's fixed maturity securities portfolio was invested in U.S.
Government securities, 19% in other AAA rated securities and 14% in AA and A
rated securities. CNA's guaranteed investment portfolio includes fixed maturity
securities comprised of 34% U.S. Government securities, 18% in other AAA rated
securities and 18% in AA and A rated securities. These ratings are primarily
from Standard & Poor's.
FINANCIAL CONDITION:
|----------------------------------------------------------------------------|
|FINANCIAL POSITION JUNE 30 DECEMBER 31 |
|(In millions of dollars, except per share data) 1996 1995 |
|----------------------------------------------------------------------------|
| |
|Assets $60,106.7 $59,901.8 |
|Stockholders' Equity 6,376.4 6,735.5 |
|Unrealized Net Appreciation (Depreciation) |
| Included in Stockholders' Equity 45.5 933.1 |
|Book Value per Common Share 100.75 106.56 |
|----------------------------------------------------------------------------|
CNA's assets increased approximately $204.9 million to $60.1 billion as
of June 30, 1996. CNA's investment portfolio decreased by $791.9 million
reflecting a reduction in pretax unrealized gains of $1.2 billion from December
31, 1995 to $35.1 billion as discussed in the investments section above.
<PAGE>
During the first six months of 1996, CNA's stockholders' equity
decreased by $359 million, or 5.3%, to approximately $6.4 billion. The major
component of this change was a $888 million decrease in unrealized appreciation,
net of tax, primarily related to changes in market values of debt securities.
Debt security carrying values are highly susceptible to changes in interest
rates and were unfavorably affected by a general increase in interest rates that
occurred in the latter part of the first quarter of 1996 and continued
throughout the second quarter.
(24)
<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 decreased
2.5% to approximately $5.8 billion. The decrease resulted from the payment of
dividends from the insurance subsidiaries to the parent company. Such dividends
were used, in part, to repay $250 million in senior notes. The statutory surplus
of the life insurance subsidiaries remained at $1.1 billion.
CNA and the insurance industry are exposed to an unknown amount of
liability for environmental pollution, primarily related to toxic waste site
clean-up. Refer to Note E of Notes to the Condensed Consolidated Financial
Statements for further discussion of environmental pollution exposures.
LIQUIDITY AND CAPITAL RESOURCES:
The principal operating cash flow sources of CNA's property/casualty
and life insurance subsidiaries are premiums and investment income. The primary
operating cash flow uses are payments for claims, policy benefits and operating
expenses.
For the first six months of 1996, CNA's operating activities used cash
flows of approximately $113 million, compared with positive cash flow of $625
million in 1995. The decrease is primarily the result of cash flows used by
underwriting activities, higher payment for federal income taxes and increased
interest payments.
Net cash flows from operations are generally 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.
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. The average interest rate on the borrowings under the
revolving credit facility at June 30, 1996 was 5.74%. 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 five-year interest rate swap agreements with several banks. These
agreements convert variable rate debt into fixed rate debt resulting in fixed
rates on notional amounts of $1.2 billion. The effect of these interest rate
swaps was to increase interest expense by $2.2 million and $3.8 million for the
quarter and six months ended June 30, 1996.
In 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. In the first half of 1996 CNA increased
commercial paper borrowings by $150 million replacing a like amount of bank
financing. The weighted-average yield on commercial paper at June 30, 1996 was
5.62%. The commercial paper borrowings are classified as long-term as $650
million of the committed bank facility supports the commercial paper program.
On July 22, 1996 CNA increased its commercial paper borrowings by $25
million replacing a like amount of bank financing. As of August 1, 1996, the
(25)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
outstanding loans under the revolving credit facility were $650 million. There
was no unused borrowing capacity under this facility after the effects of the
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 6.42% at June 30, 1996.
On March 1, 1996, CNA repaid at the due date $250 million of 8 5/8%
senior notes.
The chart below lists the current insurance ratings for CNA's Continental
Casualty Company Intercompany Pool, Continental Insurance Company Intercompany
Pool and Continental Assurance Company. Also shown are the ratings on the senior
debt of both CNA Financial Corporation (CNA) and The Continental Corporation
(Continental) and CNA's commercial paper and preferred stock.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
|-----------------|----------------------------------|------------------------------------------------|
| | INSURANCE RATINGS | DEBT AND STOCK RATINGS |
| |----------------------------------|------------------------------------------------|
| | Financial Strength | |
| |----------|-----------|-----------| |
| | | | | CNA | Continental |
| | | | |-----------|-----------|----------|-------------|
| | | | |Senior Debt|Commercial |Preferred |Senior Debt |
| | CCC | CAC | CIC | | Paper | Stock | |
| |----------|-----------|-----------| | | | |
| | | | |-----------|-----------|----------|-------------|
| | | | | | | | |
|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>
(26)
<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 applies to
financial statements for fiscal years beginning after December 15, 1995. This
Statement did 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 has no impact on the results of operations of CNA as the Company has
no compensation which qualifies.
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This Statement
establishes accounting standards based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognized the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. The statement also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This Statement is effective for transfers and serving of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. This Statement will not have a
significant impact on CNA.
(27)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Set forth below is information relating to the 1996 Annual Meeting of
Shareholders of CNA Financial Corporation.
The annual meeting was called to order at 10:00 A.M., May 1, 1996. Represented
at the meeting, in person or by proxy, were 55,877,082 shares, approximately
90.419% of the issued and outstanding shares entitled to vote.
The following business was transacted:
Election of Directors
- ---------------------
Over 99.0% of the votes cast for directors were votes for the election of the
following directors. The number of votes cast FOR and WITHHELD with respect to
each director were as follows:
Votes For Votes Withheld
---------- --------------
Antoinette Cook Bush 55,638,333 238,749
Dennis H. Chookaszian 55,639,828 237,254
Philip L. Engel 55,639,732 237,350
Robert P. Gwinn 55,636,703 240,379
Edward J. Noha 55,268,528 608,554
Joseph Rosenberg 55,639,732 237,350
Richard L. Thomas 55,268,532 608,550
James S. Tisch 55,639,159 237,923
Laurence A. Tisch 55,638,769 238,313
Preston R. Tisch 55,639,094 237,988
Marvin Zonis 55,638,058 239,024
Ratification of the Appointment of Independent Certified Public Accountants
- ---------------------------------------------------------------------------
The appointment of Deloitte & Touche LLP as independent public auditors for the
Company was ratified by a vote of 55,863,570 shares or 99.976% of the shares
voting. 4,013 shares or approximately 0.007% of the shares voting, were cast
against, and 9,499 shares, or approximately 0.017% of the shares voting,
abstained.
Ratification of the Incentive Compensation Plan
- -----------------------------------------------
The approval of the Incentive Compensation Plan for Certain Executive Officers
was ratified by a vote of 55,674,558 shares of 99.717% of the shares voting.
139,508 shares or approximately 0.226% of the shares voting, were cast against,
and 18,627 shares, or approximately 0.030% of the shares voting, abstained.
(28)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - continued
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Description of Exhibit
Exhibit Page
Number Number
------- --------
(11) Computation of Net Income per Common Share 11 31
(27) Financial Data Schedule 27 32
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the three months ended June 30,
1996.
(29)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - Concluded
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA FINANCIAL CORPORATION
Date: August 14, 1996 By: S/PETER E. JOKIEL
--------------- ---------------
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
(30)
<TABLE>
<CAPTION>
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
- ---------------------------------------------------------------------------------------------------
Period Ended June 30 Second Quarter Six Months
(In millions, except per share data) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings per share:
Net income (loss)................................. $ 202.1 $ 256.7 $ 531.4 $ 409.5
Less preferred stock dividends.................... 1.2 1.9 2.9 3.7
------ ----- ----- ------
Net income (loss) available to common stockholders. $ 200.9 $ 254.8 $ 528.5 $ 405.8
====== ===== ===== ======
Weighted average shares outstanding............... 61.8 61.8 61.8 61.8
====== ===== ===== ======
Net income (loss) per common share................ $ 3.25 $ 4.12 $ 8.55 $ 6.57
====== ===== ===== ======
- ---------------------------------------------------------------------------------------------------
</TABLE>
(31)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
</LEGEND>
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 27,937
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 985
<MORTGAGE> 103
<REAL-ESTATE> 35
<TOTAL-INVEST> 35,095
<CASH> 326
<RECOVER-REINSURE> 7,116
<DEFERRED-ACQUISITION> 1,698
<TOTAL-ASSETS> 60,107
<POLICY-LOSSES> 35,484
<UNEARNED-PREMIUMS> 4,921
<POLICY-OTHER> 121
<POLICY-HOLDER-FUNDS> 701
<NOTES-PAYABLE> 2,780
<COMMON> 155
0
150
<OTHER-SE> 6,072
<TOTAL-LIABILITY-AND-EQUITY> 60,107
6,614
<INVESTMENT-INCOME> 1,136
<INVESTMENT-GAINS> 378
<OTHER-INCOME> 283
<BENEFITS> 5,561
<UNDERWRITING-AMORTIZATION> 967
<UNDERWRITING-OTHER> 1,005
<INCOME-PRETAX> 772
<INCOME-TAX> 241
<INCOME-CONTINUING> 531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 531
<EPS-PRIMARY> 8.55
<EPS-DILUTED> 8.55
<RESERVE-OPEN> 24,955
<PROVISION-CURRENT> 3,278
<PROVISION-PRIOR> (142)
<PAYMENTS-CURRENT> 772
<PAYMENTS-PRIOR> 3,336
<RESERVE-CLOSE> 23,984
<CUMULATIVE-DEFICIENCY> (142)
</TABLE>
