- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 MAY 1, 1996
- - ------------------------------ ---------------------------
Common Stock, Par value $2.50 61,798,262
- - --------------------------------------------------------------------------------
Page (1) of (31)
<PAGE>
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- - ------- --------------------- --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 (Unaudited) and DECEMBER 31, 1995.......... 3
STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995........ 4
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995........ 5
STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995........ 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) MARCH 31, 1996..................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 18
PART II. OTHER INFORMATION
- - -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................ 28
SIGNATURES..................................................... 29
EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE...... 30
EXHIBIT 27 FINANCIAL DATA SCHEDULE......................... 31
(2)
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
- - ----------------------------------------------------------------------------------------------------------------------
MARCH 31 DECEMBER 31
1996 1995
(In millions of dollars) (Unaudited)
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale (cost: $28,745.7 and $29,385.4) ............$ 28,916.2 $ 30,444.7
Equity securities available for sale (cost: $759.9 and $736.3).................. 962.1 917.7
Mortgage loans and real estate (less accumulated depreciation: $3.6 and $3.6)... 116.2 122.4
Policy loans.................................................................... 176.6 177.2
Other invested assets........................................................... 314.2 499.9
Short-term investments.......................................................... 5,858.3 3,724.5
--------- ----------
TOTAL INVESTMENTS.......................................................... 36,343.6 35,886.4
Cash................................................................................. 387.5 221.6
Insurance receivables:
Reinsurance receivables ........................................................ 7,058.0 7,169.1
Other insurance receivables..................................................... 5,950.0 5,302.4
Less allowance for doubtful accounts............................................ (282.1) (288.7)
Deferred acquisition costs........................................................... 1,575.5 1,493.3
Accrued investment income............................................................ 624.3 545.4
Receivables for securities sold...................................................... 642.2 185.2
Federal income taxes recoverable (includes $153.0 due from Loews) ................... - 132.7
Deferred income taxes................................................................ 1,554.6 1,254.9
Property and equipment at cost (less accumulated depreciation: $342.9 and $313.7).... 615.9 584.7
Prepaid reinsurance premiums......................................................... 506.8 495.4
Intangibles.......................................................................... 451.0 456.3
Other assets......................................................................... 842.2 595.0
Separate Account business............................................................ 5,643.7 5,868.1
- - ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 61,913.2 $ 59,901.8
==================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET - cont.
- - ----------------------------------------------------------------------------------------------------------------------
MARCH 31 DECEMBER 31
1996 1995
(In millions of dollars) (Unaudited)
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Claim and claim expense.........................................................$ 31,713.6 $ 32,032.4
Unearned premiums............................................................... 4,823.1 4,549.4
Future policy benefits.......................................................... 3,658.8 3,515.9
Policyholders' funds............................................................ 738.4 705.0
Securities sold under repurchase agreements.......................................... 2,243.5 774.1
Payables for securities purchased.................................................... 772.1 163.3
Participating policyholders' equity.................................................. 124.5 140.1
Short-term debt...................................................................... 5.2 257.6
Long-term debt....................................................................... 2,774.6 2,767.9
Federal income taxes payable (includes $59.6 due to Loews).......................... 80.6 -
Other liabilities.................................................................... 2,870.9 2,392.5
Separate Account business............................................................ 5,643.7 5,868.1
---------- ----------
TOTAL LIABILITIES............................................................ 55,449.0 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.................................................................... 5,393.3 5,065.6
Net unrealized investment gains ..................................................... 334.1 933.1
Treasury stock, at cost.............................................................. (2.5) (2.5)
--------- ----------
TOTAL STOCKHOLDERS' EQUITY................................................... 6,464.2 6,735.5
- - ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,913.2 $ 59,901.8
==================================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements.
(3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited)
- - --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1996 1995 *
(In millions of dollars, except per share data)
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums...................................................................... $ 3,293.1 $ 2,516.0
Net investment income......................................................... 577.5 430.9
Realized investment gains .................................................... 305.2 35.8
Other......................................................................... 139.6 70.1
-------- -------
4,315.4 3,052.8
-------- -------
Benefits and expenses:
Insurance claims and policyholders' benefits.................................. 2,786.9 2,155.7
Amortization of deferred acquisition costs.................................... 527.6 361.0
Other operating expenses...................................................... 458.7 316.3
Interest expense.............................................................. 59.8 17.7
------- -------
3,833.0 2,850.7
------- -------
Income before income tax.................................................... 482.4 202.1
Income tax expense ............................................................. (153.1) (49.3)
------- -------
Net income ................................................................. $ 329.3 $ 152.8
===========================================================================================================
EARNINGS PER SHARE
Net income ..................................................................... $ 5.30 $ 2.44
======= =======
Weighted average outstanding shares of
common stock (in millions of shares)............................................ 61.8 61.8
===========================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements.
* Excludes the results of The Continental Corporation
</TABLE>
(4)
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Unaudited)
- - ------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<S> <C> <C> <C> <C> <C>
NET
ADDITIONAL UNREALIZED
CAPITAL PAID IN RETAINED INVESTMENT GAINS TOTAL
STOCK CAPITAL EARNINGS (LOSSES)
(In millions of dollars)
- - ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 $ 302.1 $ 434.7 $ 4,315.5 $ (506.4) $ 4,545.9
Net income.................. - - 152.8 - 152.8
Unrealized investment gains. - - - 434.7 434.7
Preferred dividends......... - - (1.8) - (1.8)
- - ------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 $ 302.1 $ 434.7 $ 4,466.5 $ (71.7) $ 5,131.6
================================================================================================
BALANCE, DECEMBER 31, 1995 $ 302.1 $ 434.7 $ 5,065.6 $ 933.1 $ 6,735.5
Net income..................... - - 329.3 - 329.3
Unrealized investment (losses). - - - (599.0) (599.0)
Preferred dividends............ - - (1.6) - (1.6)
- - ------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 $ 302.1 $ 434.7 $ 5,393.3 $ 334.1 $ 6,464.2
================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
(5)
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<S> <C> <C>
- - --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1996 1995
(In millions of dollars)
- - -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 329.3 $ 152.8
------------ -------------
Adjustments to reconcile net income to net cash flows from operating activities:
Realized investment gains, pre-tax ......................................... (305.2) (35.8)
Participating policyholders' interest....................................... 3.2 (2.0)
Amortization of intangibles................................................. 6.5 0.7
Amortization of bond discount............................................... (32.0) (37.0)
Depreciation................................................................ 36.6 18.3
Changes in:
Reinsurance and other insurance receivables, net......................... (543.1) (108.6)
Prepaid reinsurance premiums............................................. (11.4) 14.5
Deferred acquisition costs............................................... (82.2) (28.3)
Accrued investment income................................................ (78.9) 137.4
Insurance reserves....................................................... 137.0 185.7
Federal income taxes..................................................... 213.3 (12.4)
Deferred income taxes.................................................... 11.8 28.4
Reinsurance payables..................................................... (9.2) 68.8
Other, net............................................................... 177.8 178.4
---------- ----------
Total adjustments ............................................... (475.8) 408.1
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES ........................ (146.5) 560.9
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities................................................ (10,460.3) (5,285.9)
Proceeds from fixed maturities:
Sales...................................................................... 10,726.2 5,807.2
Maturities, calls and redemptions.......................................... 698.4 1,079.7
Purchases of equity securities............................................... (168.1) (219.3)
Proceeds from sale of equity securities...................................... 213.6 247.7
Change in short-term investments............................................. (2,105.1) (2,497.6)
Purchases of property and equipment ......................................... (43.0) (18.7)
Change in securities sold under repurchase agreements........................ 1,469.4 346.4
Change in other investments.................................................. 260.4 (43.1)
Other, net................................................................... (25.9) (0.3)
---------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES ........................ 565.6 (583.9)
---------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CNA FINANCIAL CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS - cont.
(Unaudited)
- - --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 1996 1995
(In millions of dollars)
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to preferred shareholders..................................... (1.6) (1.9)
Receipts from investment contracts credited to policyholder account balances. 3.0 9.9
Return of policyholder account balances on investment contracts.............. (8.9) (9.3)
Change in short-term debt.................................................... (252.4) -
Principal payments on long-term debt......................................... (0.8) (0.8)
Proceeds from issuance of long-term debt..................................... 7.5 -
---------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES........................ (253.2) (2.1)
---------- -----------
Net cash flows........................................... 165.9 (25.1)
Cash at beginning of period..................................................... 221.6 147.6
==============================================================================================================
CASH AT END OF PERIOD $ 387.5 $ 122.5
==============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Interest expense............................................................. $ (38.2) $ (17.7)
Federal income taxes......................................................... (78.6) (31.9)
==============================================================================================================
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
(6)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
NOTE A. Basis of Presentation:
The Condensed Consolidated Financial Statements (Unaudited) include CNA
Financial Corporation (CNA or the Company) and its operating subsidiaries which
consist of property/casualty insurance companies (principally Continental
Casualty Company and Continental Insurance Company) and life insurance companies
(principally Continental Assurance 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; fidelity and surety products;
excess and surplus lines; reinsurance; and pension and annuity business. CNA
serves a wide spectrum of insureds, including individuals; small, medium and
large businesses; associations; professionals and groups.
CNA reached an agreement in late 1994 to acquire 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 three-month period ended March 31, 1996
include the operations of Continental. Results of operations for the
three-months ended March 31, 1995 reflect historical results of CNA and do not
include earnings related to the acquisition of Continental (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 and the information shown below.
The accompanying Condensed Consolidated Financial Statements have been
prepared in conformity with generally accepted accounting principles. Certain
amounts applicable to prior years 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. Acquisition of Continental:
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.
<PAGE>
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, 1996. The purchase of Continental reflects
goodwill of approximately $366 million before amortization. Goodwill will be
(7)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
amortized over twenty years at an annual charge to income of $18 million.
Evaluation and appraisal of the net assets is continuing and allocation of the
purchase price may be adjusted.
The unaudited pro forma condensed results of operations presented below
assume the Continental acquisition had occurred at the beginning of the period
presented:
|--------------------------------------------------------------|
| PRO FORMA |
| THREE MONTHS ENDED MARCH 31 1995 |
| (In millions of dollars, except per share data) |
|--------------------------------------------------------------|
| Revenues $4,120.4 |
| ======== |
| |
| Realized investment gains included in revenue 128.7 |
| ======== |
| |
| Income before income tax 270.6 |
| Income tax expense (91.0) |
| -------- |
| Net income from continuing operations $ 179.6 |
| ======== |
| |
| Net income per share $ 2.88 |
| ======== |
| |
|--------------------------------------------------------------|
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 the period
presented or of future operations of the combined companies.
Certain discontinued operations were acquired as part of the Continental
merger; and therefore, are included in results of operations for the three-month
period ended March 31, 1996. Operating results of the discontinued operations
were as follows:
|---------------------------------------------------------------------|
|THREE MONTHS ENDED MARCH 31 1996 |
|(In millions of dollars) |
|---------------------------------------------------------------------|
| |
|Revenues $ 16.5 |
|Expenses 16.5 |
| ---- |
| Income before income taxes - |
|Income Taxes - |
| ---- |
| Income from discontinued operations $ - |
| ==== |
| |
|---------------------------------------------------------------------|
<PAGE>
Net assets of discontinued insurance operations at March 31, 1996 were
included in "Other Assets", net of intercompany eliminations, and were as
follows:
|---------------------------------------------------------------------|
|MARCH 31 1996 |
|(In millions of dollars) |
|---------------------------------------------------------------------|
| |
|ASSETS: |
|Cash and investments $ 774.5 |
|Reinsurance receivables and other assets 491.0 |
| ------- |
| 1,265.5 |
| -------- |
|LIABILITIES: |
|Claim and claim expenses 902.6 |
|Other liabilities 236.4 |
| ------- |
| 1,139.0 |
| ------- |
| Net assets $ 126.5 |
| ======= |
| |
|---------------------------------------------------------------------|
(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 March 31, 1996, the escrow account amounted to $1.05 billion.
The funds are included in short-term investments and are invested in U. S.
Treasury securities. The escrow account is the prefunding mechanism to the trust
fund for future claimants.
NOTE D. Reinsurance:
CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, to provide greater diversification of
risk and to minimize exposures on larger risks. The reinsurance coverages are
tailored to the specific risk characteristics of each product line with CNA's
retained amount varying by type of coverage. 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 domiciles, CNA
receives collateral primarily in the form of bank letters of credit, securing a
large portion of the recoverables. At March 31, 1996, such collateral totaled
approximately $1.1 billion. CNA's largest recoverable from a single reinsurer,
including prepaid reinsurance premiums, at March 31, 1996, was approximately
$435 million with Lloyd's of London.
<TABLE>
<CAPTION>
|---------------------------------------------------------------------------------------|
|QUARTER ENDED MARCH 31 EARNED PREMIUMS ASSUMED/|
| ------------------------------------------------ |
| NET |
|(In millions of dollars) DIRECT ASSUMED CEDED NET % |
|---------------------------------------------------------------------------------------|
<S> <C> <C> <C> <C> <C>
| |
|1996 |
| Life $ 144.3 $ 26.9 $ 4.4 $ 166.8 16.1 %|
| Accident and health 832.3 44.8 28.7 848.4 5.3 |
| Property and casualty 2,205.7 414.7 342.5 2,277.9 18.2 |
|---------------------------------------------------------------------------------------|
| TOTAL PREMIUMS $ 3,182.3 $ 486.4 $ 375.6 $ 3,293.1 14.8 |
|=======================================================================================|
| |
|1995 |
| Life $ 152.4 $ 27.3 $ 4.6 $ 175.1 15.6 %|
| Accident and health 710.7 38.2 15.7 733.2 5.2 |
| Property and casualty 1,454.0 297.7 144.0 1,607.7 18.5 |
|---------------------------------------------------------------------------------------|
| TOTAL PREMIUMS $ 2,317.1 $ 363.2 $ 164.3 $ 2,516.0 14.4 |
|=======================================================================================|
</TABLE>
<PAGE>
In the table above, life premium income is from long duration contracts,
property/casualty earned premium is from short duration contracts, and
approximately three quarters of accident and health earned premiums are from
short duration contracts.
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $478.5 million and $73.5 million for the period ending March 31,
1996 and March 31, 1995, respectively.
(9)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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. The last briefs have been filed with the United States Fifth
Circuit Court of Appeals in New Orleans on December 18, 1995, and the Court
heard oral arguments on March 5 and 6, 1996. Decisions regarding these appeals
are possible by the third quarter of 1996.
Coverage Litigation
Between 1928 and 1971, Fibreboard manufactured insulation products
containing asbestos. Since the 1970's, thousands of claims have been filed
against Fibreboard by individuals claiming bodily injury as a result of asbestos
exposure.
Casualty insured Fibreboard under a comprehensive general liability
policy between May 4, 1957 and March 15, 1959. Fibreboard disputed the coverage
positions taken by its insurers and, in 1979, Fireman's Fund, another of
Fibreboard's insurers, brought suit with respect to coverage for defense and
indemnity costs. In January 1990, the San Francisco Superior Court (Judicial
Council Coordination Proceeding 1072) rendered a decision against the insurers
including Casualty and Pacific Indemnity. The court held that the insurers owed
a duty to defend and indemnify Fibreboard for certain of the asbestos-related
bodily injury claims asserted against Fibreboard (in the case of Casualty, for
all claims involving exposure to Fibreboard's asbestos products if there was
exposure to asbestos at any time prior to 1959 including years prior to 1957,
regardless of when the claims were asserted or injuries manifested) and,
although the policies had a $500,000 per person limit and a $1,000,000 per
occurrence limit, they contained no aggregate limit of liability in relation to
such claims. The judgment was appealed.
<PAGE>
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
- - --------------------------------------------
(10)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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 anticipates seeking review of the Court's decision.
A Petition for review to the California Superior Court concerning the April 30
decision is due by June 10, 1996. 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.
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.
<PAGE>
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
(11)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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 March 31, 1996, Casualty, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 138,500 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 $785 million (without interest),
of which approximately $589 million was paid through March 31, 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.
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 appealed and oral
arguments were heard on March 5 and March 6, 1996. As noted below, there is
limited precedent with settlements which determine the rights of future
claimants to seek relief.
<PAGE>
Subsequent to the announcement of the agreement in principle, Casualty,
Fibreboard and Pacific Indemnity entered into the Trilateral Agreement subject
to court approval which would among other things, settle the coverage case in
the event the Global Settlement approval by the trial court is not upheld on
appeal. In such case, Casualty and Pacific Indemnity would contribute to a
settlement fund an aggregate of $2 billion, less certain adjustments. Such fund
would be devoted to the payment of Fibreboard's asbestos liabilities other than
liabilities for claims settled before August 23, 1993. Casualty's share of such
fund would be $1.44 billion reduced by a portion of an additional payment of
$635 million which Pacific Indemnity has agreed to pay for 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
(12)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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 noted above,the
Trilateral Agreement approval by the trial court has also been appealed as noted
hereinabove and oral arguments were heard on March 5 and March 6, 1996.
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.
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 been appealed as noted hereinabove and oral arguments were heard on
March 5 and 6, 1996. There is limited precedent with settlements which determine
the rights of future claimants to seek relief, and the outcome of the appeals
pending in The Fifth Circuit 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
upheld on appeal, keeping in mind that Casualty's potential liability is limited
to persons exposed to asbestos prior to the termination of the policy in 1959.
<PAGE>
Projections by experts of future trends differ widely, based upon
different assumptions with respect to a host of complex variables. Some recently
published studies, not specifically related to Fibreboard, conclude that the
number of future asbestos-related bodily injury claims against asbestos
manufacturers could be several times the number of claims brought to date. Such
studies include claims asserted against asbestos manufacturers for all years,
including claims filed or projected to be filed for exposure starting after
1959. As indicated above, as of March 31, 1996, Casualty, Fibreboard and
(13)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
plaintiff attorneys have reached settlements with respect to approximately
138,500 claims, subject to the resolution of coverage issues. Such amount does
not include presently pending or unsettled claims, claims previously dismissed
or claims settled pursuant to agreements to which Casualty is not a party.
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 March 31, 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 upheld on appeal, 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.
(14)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
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.
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
(15)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
policies and proof of coverage make quantification of liabilities exceptionally
difficult and subject to adjustment based on new data. As of March 31, 1996 and
December 31, 1995, CNA carried approximately $993 million and $1,030 million,
respectively, of claim and claim expense reserves, net of reinsurance
recoverable, for reported and unreported environmental pollution claims. There
was no reserve development during the three months ended March 31, 1996. 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
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 can be found in Note E. 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 March
31, 1996 and December 31, 1995, CNA carried approximately $2,189 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 three months ended March 31, 1996 and
the year ended December 31, 1995, totaled $13 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.
|------------------------------------------------------------------------------|
|RESERVE SUMMARY |
| MARCH 31, 1996 DECEMBER 31, 1995 |
| ----------------------- -----------------------|
| ENVIRONMENTAL ASBESTOS ENVIRONMENTAL ASBESTOS|
|------------------------------------------------------------------------------|
|(In millions of dollars) |
| |
|Gross reserves: |
| Reported claims $ 344 $ 1,968 $ 337 $ 1,963 |
| Unreported claims 764 354 839 358 |
| ------ ------ ------ ------ |
| 1,108 2,322 1,176 2,321 |
|Less reinsurance recoverable (115) (133) (146) (97)|
|------------------------------------------------------------------------------|
|NET RESERVES $ 993 $ 2,189 $ 1,030 $ 2,224 |
|==============================================================================|
(16)
<PAGE>
CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE F. Debt:
Long and short-term borrowings consisted of the following:
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------------------------------|
|LONG AND SHORT-TERM DEBT MARCH 31 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 149.3 149.2 |
| 8 1/4%, due April 15, 1999 102.6 102.8 |
| 7 1/4%, due March 1, 2003 145.5 145.4 |
| 6 1/4%, due November 15, 2003 248.3 248.2 |
| 8 3/8%, due August 15, 2012 97.9 97.9 |
| 71/4% Debenture, due November 15, 2023 247.1 247.1 |
| 11% Secured Mortgage Notes, due June 20, 2013 389.2 386.6 |
| 8% - 13.7% Secured Capital Leases, due December 31, 2011 46.6 46.0 |
| Other 23.1 19.7 |
| ---------- ---------- |
| Total long-term debt 2,774.6 2,767.9 |
|Short-term 5.2 257.6 |
| ---------- ------- |
| Total debt $ 2,779.8 $ 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 involving 16 banks. The interest rate for the facility
is based on the one, two, three, or six month London Interbank Offered Rate
(LIBOR), plus 25 basis points. Additionally, there is a facility fee of 10 basis
points annually. The average interest rate on the borrowings under the revolver
at March 31, 1996 was 5.66%. 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.
On August 10, 1995, to take advantage of favorable interest rate
spreads, CNA established a Commercial Paper Program, borrowing $500 million from
investors to replace a like amount of bank financing. On March 18, 1996 CNA
increased commercial paper borrowings by $150 million replacing a like amount of
bank financing. The weighted-average yield on commercial paper at March 31, 1996
was 5.56%. The commercial paper borrowings are classified as long-term as $650
million of the committed bank facility will support the commercial paper
program. Standard and Poor's and Moody's issued short-term debt ratings of A2
and P2, respectively, for CNA's commercial paper program.
As of May 1, 1996, the outstanding loans under the revolving credit
facility were $675 million. There was no unused borrowing capacity under the
facility after the effects of the commercial paper program.
<PAGE>
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 $1.6 million for the three months ended
March 31, 1996.
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 6.43% on March 31, 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.
Continental Acquisition
CNA reached an agreement in late 1994 to acquire The Continental
Corporation (Continental) through a cash merger for $1.1 billion. On May 9,
1995, Continental shareholders approved the agreement and the merger was
completed on May 10, 1995. As a result, Continental became a wholly owned
subsidiary of CNA Financial Corporation. CNA funded the cash purchase price with
proceeds from a five-year revolving credit facility from a syndicate of banks.
See Liquidity and Capital Resources section for summary description of financing
of acquisition. Continental is an insurance holding company principally engaged
in the business of owning a group of property and casualty insurance companies.
This acquisition makes CNA the largest U.S. commercial lines insurer, the third
largest U.S. property-casualty organization, and the sixth largest U.S.
insurance group, based on 1994 premiums.
The merged organization operates under the name CNA with headquarters in
Chicago. The Company has merged most of the Continental and CNA sales and
support offices nationwide. CNA continues to remain committed to strong
relationships with the agents and brokers who distribute its products and
services.
CNA will benefit from a stronger market position in nearly all
property-casualty businesses, increased economies of scale and efficiencies, and
expanded distribution of new and existing products.
(18)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Results of Operations:
The following chart summarizes key components of operating results for
the three months ended March 31, 1996 and 1995.
|-----------------------------------------------------------------------------|
|Three Months Ended March 31 1996 1995 |
|(In millions of dollars) |
|-----------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED INVESTMENT |
|GAINS/LOSSES): |
|Revenues: |
| Premiums: |
| Property/Casualty $ 2,507.7 $ 1,784.5 |
| Life 785.4 731.5 |
| -------- -------- |
| 3,293.1 2,516.0 |
| Net investment income 577.5 430.9 |
| Other 139.6 70.1 |
| -------- -------- |
| 4,010.2 3,017.0 |
|Benefits and expenses 3,820.6 2,850.5 |
| -------- ---------|
| Operating income before income tax 189.6 166.5 |
|Income tax expense (44.3) (34.9)|
| --------- -------- |
| Net operating income $ 145.3 $ 131.6 |
| ======== ======== |
| |
|SUPPLEMENTAL FINANCIAL DATA: |
|Net operating income (loss) by group: |
| Property/Casualty $ 151.6 $ 117.9 |
| Life 28.9 25.0 |
| Other (35.2) (11.3)|
| --------- ---------|
| 145.3 131.6 |
| --------- ---------|
|Net realized investment gains by group: |
| Property/Casualty 134.5 9.0 |
| Life 48.9 11.5 |
| Other .6 .7 |
| -------- -------- |
| 184.0 21.2 |
| -------- -------- |
|Net income (loss) by group: |
| Property/Casualty 286.1 126.9 |
| Life 77.8 36.5 |
| Other (34.6) (10.6)|
| --------- ---------|
| $ 329.3 $ 152.8 |
|=============================================================================|
<PAGE>
Consolidated Results
- - --------------------
As discussed above, the merger of Continental and CNA Financial
Corporation was consummated on May 10, 1995. Thus, results of operations for the
three-month period ended March 31, 1996 include the operations of Continental.
Results of operations for the three months ended March 31, 1995 reflect
historical results of CNA and do not include earnings related to the acquisition
of Continental.
Consolidated revenues were $4.3 billion for the first three months of
1996, up $1.2 billion from $3.1 billion for the same period in 1995. Of that
increase, $818 million is attributable to Continental. Consolidated revenues
excluding realized investment gains, increased 32.9% to $4.0 billion from $3.0
billion for the first quarter of 1995. Continental accounted for $785 million of
this increase. For the first quarter, revenues reflect increases of $777 million
(30.9%) in earned premiums, $147 million (34.0%) in investment income and $69
million (99.0%) in other income.
CNA reported record earnings for the first quarter of 1996 that
reflected satisfactory operating results in spite of catastrophe losses from
winter storms. Earnings were also boosted by substantial capital gains. Net
(19)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
operating income which excludes net realized investment gains, was $145.3
million, or $2.32 per share, compared to net operating income of $131.6 million,
or $2.10 per share, for the first three months of 1995. This improvement was
attributable to increased investment income and improved loss experience, offset
by increased catastrophe losses. CNA's income in the first quarter of 1996 is
net of pretax losses of $93.5 million related to catastrophe claims; pretax
catastrophe losses in the first quarter of 1995 were $23.0 million.
Realized investment gains, net of tax, for the first quarter of 1996
were $184.0 million, or $2.98 per share, compared to net realized investment
gains for the first quarter of 1995 of $21.2 million, or $.34 per share. The
components of the net realized investment gains (losses) are as follows:
|----------------------------------------------------------------------------|
|REALIZED INVESTMENT GAINS(LOSSES) |
|THREE MONTHS ENDED MARCH 31 1996 1995 |
|(In millions of dollars) |
|----------------------------------------------------------------------------|
|Bonds: |
| U.S. Government $ 134.3 $ 9.9 |
| Tax exempt 20.0 16.7 |
| Asset-backed 17.4 9.9 |
| Taxable 27.8 (24.8) |
| ----- ------- |
| Total bonds 199.5 11.7 |
|Stocks 54.9 17.6 |
|Derivative securities 9.1 (8.4) |
|Separate accounts and other 41.7 14.9 |
| ----- ------- |
| Realized investment gains reported in revenues 305.2 35.8 |
|Participating policyholders' interest (12.3) (0.3) |
|Income tax expense (108.9) (14.3) |
| ------- ------- |
| Net realized investment gains $ 184.0 $ 21.2 |
|============================================================================|
CNA's income tax expense for the three months ended March 31, 1996
amounted to $153.1 million compared to $49.3 million for the same period in
1995. CNA's income tax expense excluding realized investment gains/losses
amounted to $44.2 million for the three months ended March 31, 1996, compared to
$34.9 million in the first three months of 1995. The income tax on realized
investment gains for the three months ended March 31, 1996, totaled $108.9
million compared with $14.3 million for the same period a year ago.
Net income was $329.3 million, or $5.30 per share, compared to $152.8
million, or $2.44 per share, for the first three months of 1995.
(20)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Property/Casualty Operations
|------------------------------------------------------------------------------|
|PROPERTY/CASUALTY GROUP |
|THREE MONTHS ENDED MARCH 31 1996 1995 |
|(In millions of dollars) |
|------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED INVESTMENT |
|GAINS/LOSSES): |
|Revenues: |
| Premiums $ 2,507.7 $1,784.5 |
| Net investment income 481.5 343.2 |
| Other 114.6 53.3 |
| --------- --------- |
| 3,103.8 2,181.0 |
|Benefits and expenses 2,913.3 2,035.6 |
| --------- --------- |
| Income before income tax 190.5 145.4 |
|Income tax expense (38.9) (27.5)|
| --------- --------- |
|Net operating income(excluding realized |
| investment gains/losses) $ 151.6 $ 117.9 |
| ======== ========= |
|==============================================================================|
Property/casualty profitability, as measured by pretax operating income
before realized gains, continued to show improvement in the first quarter.
Contributing to the improvement in underwriting results were reduced recurring
operating expenses which were offset by higher catastrophe costs. CNA incurred
pre-tax catastrophe losses of approximately $93.5 million in the first quarter
of 1996 compared to $23.0 million in the first quarter of 1995. The 1996
catastrophe losses related primarily to severe winter storms in the Northeast.
Property/casualty revenues, excluding net realized investment
gains/losses, increased 42.3% for the three months ended March 31, 1996 to $3.1
billion compared to the same period a year ago. Property/casualty earned premium
increased $723 million, or 40.5% from the prior years comparable period. The
increase was principally attributable to the inclusion of Continental business
of $659 million and increases in mass marketing and international reinsurance
partially offset by a decline in Commercial Lines due to reduced worker's
compensation business.
Pretax operating income excluding net realized investment gains/losses
for the property/casualty insurance subsidiaries was $190.5 million for the
first three months of 1996 compared to $145.4 million for the same period a year
ago. Investment income increased 40.3% for the three months ended March 31, 1996
to $481.5 million compared with $343.2 million for the comparable period a year
ago. Investment income increased for the three months ended March 31, 1996, when
compared to the first three months of 1995 primarily due to the inclusion of the
Continental investment portfolio of $119.7 million, higher yielding investments
and a switch to longer term securities. The bond segment of the investment
portfolio yielded 7.1% in the first quarter of 1996 compared with 6.6% for the
same period a year ago.
<PAGE>
Underwriting losses for the three months ended March 31, 1996, were
$291.0 million, compared to $197.7 million for the same period in 1995.
Continental had $107.4 is underwriting losses for the three months ended March
31, 1996. The first quarter 1996 statutory combined ratio was 107.9 compared
with 109.4 for the same period in 1995. The statutory expense ratio for the
first quarter of 1996 was 28.5 compared to 28.8 for the first three months of
1995.
The net income of CNA's property/casualty insurance subsidiaries,
excluding net realized investment gains/losses, was $151.6 million for the first
three months of 1996, compared to $117.9 million for the same period in 1995.
(21)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
Net realized investment gains for the first quarter of 1996 were $134.5 million,
including $21.5 million for Continental, compared to $9.0 million in the first
three months of 1995.
Life Operations
|---------------------------------------------------------------------------|
|LIFE GROUP |
|THREE MONTHS ENDED MARCH 31 1996 1995 |
|(In millions of dollars) |
|---------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED INVESTMENT |
|GAINS/LOSSES): |
|Revenues: |
| Premiums $ 793.1 $ 737.3 |
| Net investment income 96.9 87.6 |
| Other 25.0 17.2 |
| ------- ------- |
| 915.0 842.1 |
|Benefits and expenses 869.1 803.6 |
| ------- ------- |
| Income before income tax 45.9 38.5 |
|Income tax expense (17.0) (13.5) |
| ------- ------- |
| Net operating income (excluding realized |
| investment gains/losses) $ 28.9 $ 25.0 |
|===========================================================================|
CNA continues to build on the momentum established last year with the
introduction of new individual life and annuities products.
Life group revenues, excluding realized investment gains, were $915.0
million, up 8.7% for the three months ended March 31, 1996 compared to the same
period a year ago. Life group earned premium was $793.1 million, up 7.6% for the
quarter, with the primary growth in new term and universal life business,
annuities, group business and federal markets. Investment income increased 10.6%
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 yielded 6.6% in the first quarter of 1996 compared with 6.8% for the
same period a year ago.
Pretax operating income for the life insurance subsidiaries, excluding
net realized investment gains/losses, was $45.9 million for the first three
months of 1996, compared to $38.5 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 $28.9 million for the first three months of 1996
compared to $25.0 million for the same period in 1995. Net realized investment
gains for the first three months of 1996 were $48.9 million, compared to $11.5
million in the first three months of 1995.
(22)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
|-------------------------------------------------------------------------------|----------------|-----------------|
|SUMMARY OF GENERAL ACCOUNT INVESTMENTS | Change in | |
| AT MARKET VALUE March 31 December 31 | Unrealized | Realized |
| 1996 1995 | Gains(losses) | Gains(losses) |
|(In millions of dollars) | | |
|-------------------------------------------------------------------------------|----------------|-----------------|
| | | |
|FIXED INCOME SECURITIES: | | |
|U. S. Treasury securities and | | |
| obligations of government agencies $ 11,579 $ 13,542 | $(517) | $ 134 |
|Asset-backed securities 6,178 6,086 | (112) | 18 |
|Tax exempt securities 4,008 3,603 | (92) | 20 |
|Taxable 7,151 7,214 | (168) | 28 |
| ------- -------- | ----- | ---- |
| Total fixed income securities 28,916 30,445 | (889) | 200 |
|Stocks 962 918 | 21 | 55 |
|Short-term investments and other 6,462 4,482 | 3 | 6 |
|Derivative security investments 4 41 | - | 9 |
| ------- -------- | ----- | ---- |
| Total investments $ 36,344 $ 35,886 | (865) | 270 |
| ======= ======== | | |
|Separate accounts and discontinued operations | (56) | 35 |
|Participating policyholders' interest | 19 | (12) |
|Income tax benefit (expense ) | 303 | (109) |
| | ---- | ----- |
| Net investment gains(losses) | $(599) | $ 184 |
| | ===== | ===== |
| | | |
|-------------------------------------------------------------------------------|----------------|-----------------|
|-----------------------------------------------------------------------------|
|SHORT-TERM INVESTMENTS: |
|-----------------------------------------------------------------------------|
|Security repurchase collateral $ 2,246 $ 776 |
|Escrow 1,049 1,045 |
|Other 2,563 1,904 |
| ----- ----- |
| Total short-term investments $5,858 $ 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.
<PAGE>
CNA holds a small amount of derivative financial instruments for
purposes of enhancing income and total return. The derivative securities are
marked-to-market with valuation changes reported as realized investment gains
and losses. CNA's investment in, and risk in relation to, derivative securities
is not significant.
The general account portfolio consists primarily of high quality
marketable fixed maturity securities, approximately 92% of which are rated as
investment grade. At March 31, 1996, tax-exempt securities and short-term
investments excluding collateral for securities sold under repurchase
agreements, comprised approximately 11% and 10%, 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 March 31,
1996, the major components of the short-term investment portfolio consists
primarily of high-grade commercial paper and U.S. Treasury bills. Collateral for
securities sold under repurchase agreements increased $1,470 million to $2,246
million.
(23)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
As of March 31, 1996, the market value of CNA's general account
investments in fixed maturities was $28.9 billion and was more than amortized
cost by approximately $170 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 March 31, 1996, were $456 million and $286 million,
respectively, compared to $1,136 million and $77 million, respectively, at
December 31, 1995. The decline in unrealized investment gains 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
March 31, 1996 include net unrealized losses on high yield securities of $60
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 $2.2 billion at March 31, 1996, compared
to $1.9 billion at December 31, 1995.
At March 31, 1996, total separate account cash and investments amounted
to $5.6 billion with taxable fixed maturity securities representing
approximately 94% of the separate accounts' portfolio. Approximately 85% 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 $4.6 billion compared to $4.8 billion at December 31, 1995. At
March 31, 1996, amortized cost was less than the fair value by approximately $20
million. This compares to a gain of $53 million at December 31, 1995. The gross
unrealized investment gains and losses for the fixed maturity securities
portfolio at March 31, 1996, were $89 million and $69 million, respectively.
Carrying values of high yield securities in the guaranteed investment
portfolio were $878 million at March 31, 1996 and $944 million December 31,
1995. Net unrealized investment losses on high yield securities held in such
separate accounts were $20 million at March 31, 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 March 31, 1996, CNA's
concentration in high yield bonds including separate accounts was approximately
5.0% of total assets. In addition, CNA's investment in mortgage loans and
investment real estate are substantially below the industry average,
representing less than one quarter of one percent of its total assets.
Included in CNA's fixed maturity securities at March 31, 1996 (general
and guaranteed investment portfolios) are $8.7 billion of asset-backed
securities, consisting of approximately 33% in collateralized mortgage
obligations ("CMO's"), 12% in corporate asset-backed obligations, and 55% in
U.S. Government issued pass-through certificates. The majority of CMO's held are
U.S. Government agency issues, which are actively traded in liquid markets and
are priced monthly by broker-dealers. At March 31, 1996, the fair value of
asset-backed securities was less than amortized cost by approximately $35
million compared to unrealized investment gains of $200 million at December 31,
1995. CNA limits the risks associated with interest rate fluctuations and
(24)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
prepayment by concentrating its CMO investments in early planned amortization
classes with relatively short principal repayment windows.
Over the last few years, much concern has been raised regarding the
quality of insurance company invested assets. At March 31, 1996, 58% of the
general account's fixed maturity securities portfolio was invested in U.S.
Government securities, 18% in other AAA rated securities and 12% in AA and A
rated securities. CNA's guaranteed investment fixed maturity securities
portfolio is comprised of 33% U.S. Government securities, 18% in other AAA rated
securities and 17% in AA and A rated securities. These ratings are primarily
from Standard & Poor's.
FINANCIAL CONDITION:
|-----------------------------------------------------------------------------|
|FINANCIAL POSITION MARCH 31 DECEMBER 31 |
|(In millions of dollars, except per share data) 1996 1995 |
|-----------------------------------------------------------------------------|
| |
|Assets $61,913.2 $59,901.8|
|Stockholders' Equity 6,464.2 6,735.5|
|Unrealized Net Appreciation (Depreciation) Included 334.1 933.1|
|in Stockholders' Equity |
|Book Value per Common Share 102.17 106.56|
|-----------------------------------------------------------------------------|
CNA's assets increased approximately $2.0 billion to $61.9 billion as
of March 31, 1996, $1.5 billion of this increase is the result of an increase in
securities sold under repurchase agreements. CNA's investment portfolio
increased by $457 million from December 31, 1995 to $36.3 billion. This increase
was the primarily the result of the aforementioned $1.5 billion increase in
securities sold under repurchase agreements offset by a change in unrealized
gains/losses of $926 million before taxes.
During the first three months of 1996, CNA's stockholders' equity
decreased by $271.3 million, or 4.0%, to approximately $6.5 billion. The major
component of this change was a $599.0 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.
The statutory surplus of the property/casualty subsidiaries decreased
1.5% to approximately $5.6 billion. The decrease resulted primarily 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.
LIQUIDITY AND CAPITAL RESOURCES:
The liquidity requirements of CNA have been met primarily by funds
generated from operations. The principal operating cash flow sources of CNA's
property/casualty and life insurance subsidiaries are premiums and investment
income and sales and maturities of investments. The primary operating cash flow
uses are payments for claims, policy benefits and operating expenses.
For the quarter ended March 31, 1996, CNA's operating activities
generated net negative cash flows of approximately $146 million, compared with
positive cash flow of $561 million in 1995. The decrease is primarily the result
of negative cash flows generated by underwriting activities, higher payment for
(25)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - continued
federal income taxes and increased interest payments. CNA believes that future
liquidity needs will be met primarily by cash generated from operations.
Net cash flows from operations are invested in marketable securities.
Investment strategies employed by CNA's insurance subsidiaries consider the cash
flow requirements of the insurance products sold and the tax attributes of the
various types of marketable investments.
On May 10, 1995, CNA acquired all the outstanding shares of Continental
for approximately $1.1 billion . To finance the acquisition of Continental
(including the refinancing of $205 million of Continental debt) CNA entered into
a five-year $1.325 billion revolving credit facility involving 16 banks. The
interest rate for the facility is based on one, two, three, or six month London
Interbank Offered Rate (LIBOR) plus 25 basis points. Additionally, there is a
facility fee of 10 basis points annually. The average interest rate on the
borrowings under the revolving credit facility at March 31, 1996 was 5.66%.
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 $1.6 million for the quarter ended
March 31, 1996.
On August 10, 1995, to take advantage of favorable interest rates
spreads, CNA established a Commercial Paper Program, borrowing $500 million from
investors to replace a like amount of bank financing. On March 18, 1996 CNA
increased commercial paper borrowings by $150 million replacing a like amount of
bank financing. The weighted-average yield on commercial paper at March 31, 1996
was 5.56%. The commercial paper borrowings are classified as long-term as $650
million of the committed bank facility will support the commercial paper
program. Standard and Poor's and Moody's issued short-term debt ratings of A2
and P2, respectively, for CNA's commercial paper program.
As of May 1, 1996, the outstanding loans under the revolving credit
facility were $675 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 6.43% at March 31, 1996.
On March 1, 1996, CNA repaid $250 million of 8 5/8% senior notes which
had come due.
(26)
<PAGE>
CNA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - concluded
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 rated were the senior debt of both
CNA Financial and Continental Corporation and CNAF's 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>
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 Consolidated Financial Statements for
further discussion of environmental pollution exposures.
ACCOUNTING STANDARDS:
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable intangibles
to be disposed of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by the entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This Statement applies to
financial statements for fiscal years beginning after December 15, 1995. This
Statement will not have a significant impact on CNA.
<PAGE>
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The requirements of this
Statement will generally be effective for 1996 financial statements. This
Statement will have no impact on the results of operations of CNA as the Company
has no compensation which qualifies.
(27)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Description of Exhibit
Exhibit Page
Number Number
-------- --------
(11) Computation of Net Income per Common Share 11 30
(27) Financial Data Schedule 27 31
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K for the three months ended
March 31, 1996.
(28)
<PAGE>
CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION - Concluded
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA FINANCIAL CORPORATION
Date: May 15, 1996 By: S/PETER E. JOKIEL
------------ -------------------------
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
(29)
EXHIBIT 11
CNA FINANCIAL CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
- - -------------------------------------------------------------------------------
Three Months Ended March 31 1996 1995
(In millions, except per share data)
- - -------------------------------------------------------------------------------
Earnings per share:
Net income (loss).................................... $ 329.3 $ 152.8
Less preferred stock dividends....................... 1.6 1.8
------- -------
Net income (loss) available to common stockholders... $ 327.7 $ 151.0
====== ======
Weighted average shares outstanding.................. 61.8 61.8
======= =======
Net income (loss) per common share................... $ 5.30 $ 2.44
====== ======
- - ------------------------------------------------------------------------------
(30)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000021175
<NAME> CNA FINANCIAL CORPORATION
<MULTIPLIER> 1,000,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 28,916
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 962
<MORTGAGE> 113
<REAL-ESTATE> 7
<TOTAL-INVEST> 36,344
<CASH> 387
<RECOVER-REINSURE> 7,058
<DEFERRED-ACQUISITION> 1,575
<TOTAL-ASSETS> 61,913
<POLICY-LOSSES> 35,372
<UNEARNED-PREMIUMS> 4,823
<POLICY-OTHER> 124
<POLICY-HOLDER-FUNDS> 738
<NOTES-PAYABLE> 772
0
150
<COMMON> 155
<OTHER-SE> 6,160
<TOTAL-LIABILITY-AND-EQUITY> 61,913
806
<INVESTMENT-INCOME> 578
<INVESTMENT-GAINS> 305
<OTHER-INCOME> 140
<BENEFITS> 1,989
<UNDERWRITING-AMORTIZATION> 528
<UNDERWRITING-OTHER> 179
<INCOME-PRETAX> 482
<INCOME-TAX> 153
<INCOME-CONTINUING> 329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 329
<EPS-PRIMARY> 5.30
<EPS-DILUTED> 5.30
<RESERVE-OPEN> 24,955
<PROVISION-CURRENT> 2,014
<PROVISION-PRIOR> (74)
<PAYMENTS-CURRENT> 882
<PAYMENTS-PRIOR> 1,253
<RESERVE-CLOSE> 24,760
<CUMULATIVE-DEFICIENCY> (74)
</TABLE>
