-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RoliNVRDExikxxpDcAvnwYsB2UZlkBifRAT677QDUkueKSYY4yXBK3GbKcqHrZfU H5bOY5vAGRRE5DHp1sj8sg== 0000021175-96-000011.txt : 19961118 0000021175-96-000011.hdr.sgml : 19961118 ACCESSION NUMBER: 0000021175-96-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNA FINANCIAL CORP CENTRAL INDEX KEY: 0000021175 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 366169860 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05823 FILM NUMBER: 96666139 BUSINESS ADDRESS: STREET 1: CNA PLZ CITY: CHICAGO STATE: IL ZIP: 60685 BUSINESS PHONE: 3128225000 MAIL ADDRESS: STREET 1: CNA PLAZA CITY: CHICAGO STATE: IL ZIP: 60685 10-Q 1 SEPTEMBER 30, 1996 10-Q - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 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 November 1, 1996 - ----------------------------------- ------------------------------- Common Stock, Par value $2.50 61,798,262 - -------------------------------------------------------------------------------- Page (1) of (30) CNA FINANCIAL CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE NO. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1996 (Unaudited) and DECEMBER 31, 1995.............. 3 STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995....................................... 4 STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995............. 5 STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995............. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) SEPTEMBER 30, 1996......................... 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................... 16 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 27 SIGNATURES............................................................. 28 EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE................. 29 EXHIBIT 27 FINANCIAL DATA SCHEDULE.................................... 30 (2)
CNA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------------------------------------------- September 30 December 31 1996 1995 (In millions of dollars) (Unaudited) - ------------------------------------------------------------------------------------------------------------------- Assets Investments: Fixed maturities available for sale:(cost $27,057.2 and $29,385.4)............ $27,037.6 $30,444.7 Equity securities available for sale:(cost $778.4 and $736.3) ................ 975.2 917.7 Mortgage loans and real estate:(less accumulated depreciation $4.2 and $3.6 ) 134.8 122.4 Policy loans.................................................................. 175.9 177.2 Other invested assets......................................................... 383.6 499.9 Short-term investments........................................................ 6,162.2 3,724.5 ---------- --------- Total investments........................................................ 34,869.3 35,886.4 Cash............................................................................... 264.8 221.6 Insurance receivables: Reinsurance receivables ...................................................... 7,273.2 7,169.1 Other insurance receivables................................................... 6,086.2 5,302.4 Less allowance for doubtful accounts.......................................... (279.8) (288.7) Deferred acquisition costs......................................................... 1,777.8 1,493.3 Accrued investment income.......................................................... 493.3 545.4 Receivables for securities sold.................................................... 585.1 185.2 Federal income taxes recoverable:(includes $55.8 and $153.0 due from Loews) ...... 34.2 132.7 Deferred income taxes.............................................................. 1,673.9 1,254.9 Property and equipment at cost:(less accumulated depreciation $429.0 and $313.7) .. 605.2 584.7 Prepaid reinsurance premiums....................................................... 373.3 495.4 Intangibles........................................................................ 426.7 456.3 Other assets....................................................................... 900.4 595.0 Separate Account business.......................................................... 5,711.5 5,868.1 - ----------------------------------------------------------------------------------------------------------------- Total assets $60,795.1 $59,901.8 =================================================================================================================
CNA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET - continued - ------------------------------------------------------------------------------------------------------------------- September 30 December 31 1996 1995 (In millions of dollars) (Unaudited) - ------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Liabilities: Insurance reserves: Claim and claim expense....................................................... $31,589.0 $32,032.4 Unearned premiums............................................................. 4,786.3 4,549.4 Future policy benefits........................................................ 3,990.6 3,515.9 Policyholders' funds.......................................................... 707.4 705.0 Securities sold under repurchase agreements........................................ 602.6 774.1 Payables for securities purchased.................................................. 661.1 163.3 Participating policyholders' equity................................................ 121.5 140.1 Short-term debt.................................................................... 0.0 257.6 Long-term debt..................................................................... 2,774.0 2,767.9 Other liabilities.................................................................. 3,140.3 2,392.5 Separate Account business.......................................................... 5,711.5 5,868.1 -------- -------- Total liabilities.......................................................... 54,084.3 53,166.3 -------- -------- Commitments and contingent liabilities Stockholders' equity: Common stock ($2.50 par value; Authorized - 200,000,000 shares; Issued - 61,841,969 shares).................................................... 154.6 154.6 Preferred stock.................................................................... 150.0 150.0 Additional paid-in capital......................................................... 434.7 434.7 Retained earnings.................................................................. 5,830.9 5,065.6 Net unrealized investment gains ................................................... 143.1 933.1 Treasury stock, at cost............................................................ (2.5) (2.5) ------- ------- Total stockholders' equity................................................. 6,710.8 6,735.5 - ------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $60,795.1 $59,901.8 ================================================================================================================== See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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CNA FINANCIAL CORPORATION STATEMENT OF CONSOLIDATED OPERATIONS (Unaudited) - --------------------------------------------------------------------------------------------------------- PERIOD ENDED SEPTEMBER 30 THIRD QUARTER NINE MONTHS 1996 1995 1996 1995* (In millions of dollars, except per share data) - --------------------------------------------------------------------------------------------------------- Revenues: Premiums.........................................$3,435.3 $3,196.2 $10,049.0 $8,581.1 Net investment income............................ 540.3 552.0 1,675.9 1,497.6 Realized investment gains ....................... 109.3 97.7 487.1 339.3 Other............................................ 170.7 155.0 454.1 294.9 -------- --------- -------- --------- 4,255.6 4,000.9 12,666.1 10,712.9 -------- --------- -------- --------- Benefits and expenses: Insurance claims and policyholders' benefits..... 2,839.5 2,740.9 8,400.9 7,314.8 Amortization of deferred acquisition costs....... 601.5 480.2 1,568.5 1,262.9 Other operating expenses......................... 464.4 472.1 1,469.7 1,204.5 Interest expense................................. 50.9 64.8 155.4 120.5 -------- --------- ---------- --------- 3,956.3 3,758.0 11,594.5 9,902.7 -------- --------- ---------- --------- Income before income tax....................... 299.3 242.9 1,071.6 810.2 Income tax expense................................. 60.8 76.6 301.7 234.4 -------- --------- ---------- --------- Net income $ 238.5 $ 166.3 $ 769.9 $ 575.8 ========================================================================================================= EARNINGS PER SHARE Net income ........................................$ 3.83 $ 2.66 $ 12.38 $ 9.23 ======== ========= =========== ========== Weighted average outstanding shares of common stock (in millions of shares)............... 61.8 61.8 61.8 61.8 ========================================================================================================= * Includes results of The Continental Corporation from May 10, 1995. See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
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CNA FINANCIAL CORPORATION STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (Unaudited) - ----------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 1996 and 1995 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....................... - - 575.8 - 575.8 Unrealized investment gains...... - - - 1,143.6 1,143.6 Preferred dividends.............. - - (5.1) - (5.1) - ----------------------------------------------------------------------------------------------------- Balance, September 30, 1995 $ 302.1 $ 434.7 $ 4,886.2 $ 637.2 $ 6,260.2 ===================================================================================================== Balance, December 31, 1995 $ 302.1 $ 434.7 $ 5,065.6 $ 933.1 $ 6,735.5 Net income....................... - - 769.9 - 769.9 Unrealized investment (losses)... - - - (790.0) (790.0) Preferred dividends.............. - - (4.6) - (4.6) - ----------------------------------------------------------------------------------------------------- Balance, September 30, 1996 $ 302.1 $ 434.7 $ 5,830.9 $ 143.1 $ 6,710.8 =====================================================================================================
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CNA FINANCIAL CORPORATION STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) - ---------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 1996 1995 (In millions of dollars) - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................................................$ 769.9 $ 575.8 --------- ----------- Adjustments to reconcile net income to net cash flows from operating activities: Net realized investment gains, pre-tax ...................................... (487.1) (339.3) Participating policyholders' interest........................................ 1.9 (1.4) Amortization of intangibles.................................................. 18.8 12.2 Amortization of bond discount................................................ (129.6) (108.3) Depreciation................................................................. 118.1 65.2 Changes in: Reinsurance and other insurance receivables, net.......................... (896.9) (1,117.3) Prepaid reinsurance premiums.............................................. 122.1 57.9 Deferred acquisition costs................................................ (284.5) (147.1) Accrued investment income................................................. 52.1 (38.8) Insurance reserves........................................................ 292.6 755.6 Federal income taxes...................................................... 98.5 (34.4) Deferred income taxes..................................................... 139.1 190.4 Reinsurance payables...................................................... 234.7 41.5 Other, net................................................................ (114.7) 497.2 ---------- ----------- Total adjustments ................................................ (834.9) (166.6) ---------- ----------- NET CASH FLOWS FROM OPERATING ACTIVITIES ......................... (65.0) 409.2 ---------- -----------
CNA FINANCIAL CORPORATION STATEMENT OF CONSOLIDATED CASH FLOWS - continued (Unaudited) - ---------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 1996 1995 (In millions of dollars) - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of fixed maturities................................................. (24,783.0) (25,308.3) Proceeds from fixed maturities: Sales....................................................................... 25,758.4 23,320.0 Maturities, calls and redemptions........................................... 1,657.9 2,306.3 Purchases of equity securities................................................ (513.1) (567.0) Proceeds from sale of equity securities....................................... 650.0 914.4 Change in short-term investments.............................................. (2,340.2) (1,029.2) Purchases of property and equipment .......................................... (148.9) (72.5) Change in securities sold under repurchase agreements......................... (171.6) 26.2 Change in other investments................................................... 256.0 (18.6) Purchase of The Continental Corporation....................................... - (1,125.5) Cash acquired in connection with the Continental merger....................... - 165.1 Purchase of Alexsis........................................................... - (46.3) Other, net.................................................................... 21.0 (13.0) ---------- ----------- NET CASH FLOWS FROM INVESTING ACTIVITIES ......................... 386.5 (1,448.4) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to preferred shareholders...................................... (4.7) (5.2) Receipts from investment contracts credited to policyholder account balances.. 11.7 19.4 Return of policyholder account balances on investment contracts............... (33.8) (25.9) Change in short-term debt..................................................... (257.6) - Principal payments on long-term debt.......................................... (3.4) (504.5) Reitrement of notes payable................................................... - (205.0) Proceeds from issuance of long-term debt...................................... 9.5 1,831.1 -------- ----------- NET CASH FLOWS FROM FINANCING ACTIVITIES......................... (278.3) 1,109.9 -------- ----------- Net cash flows............................................ 43.2 70.7 Cash at beginning of period...................................................... 221.6 147.6 =========================================================================================================== CASH AT END OF PERIOD $ 264.8 $ 218.3 =========================================================================================================== Supplemental disclosures of cash flow information: Cash paid: Interest expense..............................................................$ (166.2) $ (113.4) Federal income taxes.......................................................... (42.9) (122.7) =========================================================================================================== See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
(6) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A. Basis of Presentation: The Condensed Consolidated Financial Statements (Unaudited) include CNA Financial Corporation (CNA or the Company) and its subsidiaries which consist of property/casualty insurance companies (principally Continental Casualty Company and Continental Insurance Company) and life insurance companies (principally Continental Assurance Company and Valley Forge Life Insurance Company). Loews Corporation (Loews) owns approximately 84% of the outstanding common stock of CNA. CNA is a multiple-line insurer underwriting property and casualty coverages; life, accident and health insurance. CNA serves a wide spectrum of insureds, including individuals; small, medium and large businesses; associations; professionals and groups. CNA acquired The Continental Corporation (Continental) through a cash merger for approximately $1.1 billion. The merger was completed on May 10, 1995. Results of operations for the nine-month period ended September 30, 1996 include the operations of Continental. Results of operations for the nine-months ended September 30, 1995 reflect the results of Continental subsequent to May 10, 1995 (See Note B). The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the financial statements and notes thereto included in CNA's Annual Report to Shareholders (incorporated by reference in Form 10-K) for the year ended December 31, 1995, filed with the Commission on March 29, 1996. The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles. Certain amounts applicable to prior periods have been reclassified to conform to classifications followed in 1996. All significant intercompany amounts have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of CNA's management, these statements include all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial position, results of operations and cash flows in the accompanying condensed consolidated financial statements. NOTE B. The Continental Corporation: On December 6, 1994, CNA entered into a merger agreement providing for the payment of approximately $1.1 billion to holders of Continental common stock. To finance the acquisition, CNA entered into a five year revolving credit facility (see Note F). The merger was consummated on May 10, 1995. The acquisition of Continental has been accounted for as a purchase; therefore, Continental's operations are included in the Condensed Consolidated Financial Statements since May 10, 1995. CNA has completed its evaluation and appraisal of Continental's net assets resulting in goodwill of approximately $315 million. Goodwill will be amortized over twenty years. (7) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued The unaudited pro forma condensed results of operations presented below assume the Continental acquisition had occurred at the beginning of 1995: |-----------------------------------------------------------------------| |PRO FORMA | |NINE MONTHS ENDED SEPTEMBER 30, 1995 | |(In millions of dollars, except per share data) | |-----------------------------------------------------------------------| |Revenues $12,200.5 | | | |Realized investment gains included in revenue 459.4 | | | |Income before income tax expense 839.0 | |Income tax expense (257.8)| | ---------| |Net income $ 581.2 | | =========| | | |Net income per share $ 9.32 | | =========| | | |-----------------------------------------------------------------------| The unaudited pro forma condensed financial information is not necessarily indicative either of the results of operations that would have occurred had this transaction been consummated at the beginning of 1995 or of future operations of the combined companies. Certain discontinued operations were acquired as part of the Continental merger. The components of operating results of the discontinued operations are shown net in the accompanying financials and are comprised of the following: |---------------------------------------------------------------------| |NINE MONTHS ENDED SEPTEMBER 30 1996 1995 | |(In millions of dollars) | |---------------------------------------------------------------------| | | |Revenues $ 68.8 $29.8 | |Expenses 68.8 29.8 | | ----- ----- | | Income before income taxes - - | |Income taxes - - | | ----- ----- | | Income from discontinued operations $ - $ - | | ===== ===== | | | |---------------------------------------------------------------------| Net assets of discontinued insurance operations at September 30, 1996 and December 31, 1995 were included in "Other Assets". The table below reflects assets and liabilities of the discontinued operations net of intercompany eliminations (excluding intercompany notes): |------------------------------------------------------------------------------| |FOR THE PERIOD ENDED SEPTEMBER 30, 1996 DECEMBER 31, 1995| |(In millions of dollars) | |------------------------------------------------------------------------------| | | |ASSETS: | |Cash and investments $ 785.5 $ 825.3 | |Reinsurance receivables and other assets 791.3 521.9 | | ------- ------- | | 1,576.8 1,347.2 | | ------- ------- | | | |LIABILITIES: | |Claim and claim expenses 1,163.9 955.7 | |Other liabilities 312.8 257.6 | | ------- -------- | | 1,476.7 1,213.3 | | ------- -------- | | Net assets $ 100.1 $ 133.9 | | ======= ======== | | | |------------------------------------------------------------------------------| (8) 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, (see Note E). At September 30, 1996, the escrow account amounted to $1,065.8 million. The funds are included in short-term investments and are invested in U. S. Treasury securities. NOTE D. Reinsurance: CNA assumes and cedes insurance with other insurers and reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, to provide greater diversification of risk and to minimize exposures on larger risks. The reinsurance coverages are tailored to the specific risk characteristics of each product line with CNA's retained amount varying by type of coverage. Generally, reinsurance coverage for property risks is on an excess of loss, per risk basis. Liability coverages are generally reinsured on a quota share basis in excess of CNA's retained risk. The ceding of insurance does not discharge the primary liability of the original insurer. CNA places reinsurance with other carriers only after careful review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claim settlement performance. Further, for carriers that are not authorized reinsurers in its states of domicile, CNA receives collateral primarily in the form of bank letters of credit, securing a large portion of the recoverables. At September 30, 1996, such collateral totaled approximately $1.1 billion. CNA's largest recoverable from a single reinsurer, including prepaid reinsurance premiums, at September 30, 1996, was approximately $435 million with Lloyd's of London.
|---------------------------------------------------------------------------------------------| |NINE MONTHS ENDED SEPTEMBER 30 EARNED PREMIUMS | | ------------------------------------------------ ASSUMED/ | | NET | |(In millions of dollars) DIRECT ASSUMED CEDED NET % | |---------------------------------------------------------------------------------------------| | | |1996 | | Life $ 519.4 $ 87.3 $ 33.1 $ 573.6 15.2 %| | Accident and health 2,580.3 183.0 112.4 2,650.9 6.9 | | Property and casualty 6,702.2 1,177.5 1,055.2 6,824.5 17.3 | |---------------------------------------------------------------------------------------------| | Total premiums $ 9,801.9 $ 1,447.8 $ 1,200.7 $10,049.0 14.4 %| |=============================================================================================| | | |1995 | | Life $ 467.8 $ 81.4 $ 16.1 $ 533.1 15.3 %| | Accident and health 2,289.1 95.9 59.6 2,325.4 4.1 | | Property and casualty 5,764.0 925.5 966.9 5,722.6 16.2 | |---------------------------------------------------------------------------------------------| | Total premiums $ 8,520.9 $ 1,102.8 $ 1,042.6 $ 8,581.1 12.9 %| |=============================================================================================|
|----------------------------------------------------------------------------------------------| |THREE MONTHS ENDED SEPTEMBER 30 EARNED PREMIUMS | | ------------------------------------------------ ASSUMED/ | | NET | |(In millions of dollars) DIRECT ASSUMED CEDED NET % | |--------------------------------------------------------------------------------------------- | | | |1996 | | Life $ 165.5 $ 30.1 $ 17.9 $ 177.7 16.9 % | | Accident and health 919.6 93.5 79.2 933.9 10.0 | | Property and casualty 2,453.2 174.7 304.2 2,323.7 7.5 | |----------------------------------------------------------------------------------------------| | Total premiums $ 3,538.3 $ 298.3 $ 401.3 $ 3,435.3 8.7 % | |----------------------------------------------------------------------------------------------| | | |1995 | | Life $ 168.9 $ 26.5 $ 6.7 $ 188.7 14.0 % | | Accident and health 847.9 27.7 21.4 854.2 3.2 | | Property and casualty 2,316.5 352.2 515.4 2,153.3 16.4 | |----------------------------------------------------------------------------------------------| | Total premiums $ 3,333.3 $ 406.4 $ 543.5 $ 3,196.2 12.7 % | |==============================================================================================|
(9) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued In the table above, life earned premium is primarily from long duration contracts, property/casualty earned premium is from short duration contracts, and accident and health earned premiums are primarily from short duration contracts. Insurance claims and policyholders' benefits are net of reinsurance of $108.5 million and $1,010.3 million and $782.8 million and $1,112.8 million for the quarter and nine months ending September 30, 1996 and September 30, 1995, respectively. NOTE E. Legal Proceedings and Contingent Liabilities: The following information updates legal proceedings and contingent liabilities reported in Notes J and K of the Notes to the Consolidated Financial Statements in the 1995 Annual Report to Shareholders. FIBREBOARD LITIGATION CNA's primary property/casualty subsidiary, Continental Casualty Company ("Casualty"), is party to litigation with Fibreboard Corporation ("Fibreboard") involving coverage for certain asbestos-related claims and defense costs (San Francisco Superior Court, Judicial Council Coordination Proceeding 1072). As described below, Casualty, Fibreboard, another insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a negotiating committee of asbestos claimant attorneys (collectively referred to as Settling Parties) have reached a Global Settlement (the "Global Settlement") to resolve all future asbestos-related bodily injury claims involving Fibreboard, which is subject to court approval. Casualty, Fibreboard and Pacific Indemnity have also reached an agreement (the "Trilateral Agreement"), on a settlement to resolve the coverage litigation in the event the Global Settlement does not obtain final court approval or is subsequently successfully attacked. The implementation of the Global Settlement or the Trilateral Agreement would have the effect of settling Casualty's litigation with Fibreboard. On July 27, 1995, the United States District Court for the Eastern District of Texas entered judgment approving the Global Settlement Agreement and the Trilateral Agreement. As expected, appeals were filed as respects both of these decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of Appeals in New Orleans affirmed the judgment approving the Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral Agreement by a 3 to 0 vote. A petition has been filed for re-hearing by the entire Fifth Circuit Court of Appeals as respects the decision on the Global Settlement Agreement. No further appeal has been filed with respect to the Trilateral Agreement and CNA believes that the time to file any such further appeal has expired, and accordingly, CNA believes that court approval of the Trilateral Agreement has become final. CNA currently expects that Casualty's litigation with Fibreboard will be dismissed during the first quarter of 1997. 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, the Settling Parties 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 (10) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued and Pacific Indemnity of an aggregate of $1.525 billion to a trust fund for a class of all future asbestos claimants, defined generally as those persons whose claims against Fibreboard were neither filed nor settled before August 27, 1993. An additional $10 million is to be contributed to the fund by Fibreboard. As indicated hereinabove, the Global Settlement approval has been affirmed on appeal, however, further review is being sought and there is limited precedent with settlements which determine the rights of future claimants to seek relief. Subsequent to the announcement of the agreement in principle, Casualty, Fibreboard and Pacific Indemnity entered into the Trilateral Agreement which among other things, settles the coverage case in the event the Global Settlement approval is not ultimately upheld. In such case, Casualty and Pacific Indemnity will 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. Based upon receipt of the final approval of the Trilateral Agreement, Casualty will assume responsibility for the claims that were settled before August 27, 1993. A portion of the additional $635 million to be contributed by Pacific Indemnity will be applied to the payment of such claims as well. As a part of the Global Settlement and the Trilateral Agreement, Casualty is to be released by Fibreboard from any further liability under the comprehensive general liability policy written for Fibreboard by Casualty, including but not limited to liability for asbestos-related claims against Fibreboard. As indicated above, CNA believes that court approval of the Trilateral Agreement has become final and non-appealable. 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 the Global Settlement Agreement, or final court disapproval of the Global Settlement Agreement and final court approval of the Trilateral Agreement, or through a final decision in the California courts. It also governs certain obligations between the parties upon the Global Settlement being 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. 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. Based upon the final approval of the Trilateral Agreement, Pacific Indemnity's share for unsettled present claims and presently settled claims will be $635 million. Through September 30, 1996, Casualty, Fibreboard and plaintiff attorneys had reached settlements with respect to approximately 133,700 claims, subject to resolution of the coverage issues, for an estimated settlement amount of approximately $1.62 billion plus any applicable interest. Final court approval of the Trilateral Agreement obligates Casualty to pay under these settlements. Approximately $705 million was paid through September 30, 1996. As described above, such payments are partially recoverable from Pacific Indemnity. Casualty may negotiate other agreements with various classes of claimants including groups who may have previously reached agreement with Fibreboard. (11) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued Reserves In the fourth quarter of 1992, Casualty increased its reserve with respect to potential exposure to asbestos-related bodily injury cases by $1.5 billion. In connection with the agreement in principle announced on August 27, 1993, Casualty added $500 million to such claim reserve in the third quarter of 1993. The Fibreboard claims represent the major portion of Casualty's asbestos-related claim exposure. Casualty believes that final court approval of the Trilateral Agreement and its implementation will eliminate any further material exposure with respect to the Fibreboard matter. 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. 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 (12) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued state action. Substantial changes in the federal statute or the activity of the EPA may cause states to reconsider their environmental clean-up statutes and regulations. There can be no meaningful prediction of the pattern of regulation that would result. Due to the inherent uncertainties described above, including the inconsistency of court decisions, the number of waste sites subject to clean-up, and the standards for clean-up and liability, the ultimate exposure to CNA for environmental pollution claims cannot be meaningfully quantified. Claim and claim expense reserves represent management's estimates of ultimate liabilities based on currently available facts and case law. However, in addition to the uncertainties previously discussed, additional issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct by the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based on new data. As of September 30, 1996 and December 31, 1995, CNA carried approximately $802 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 environmental reserve development for the nine months and quarter ended September 30, 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 is discussed at the beginning of this note. Estimation of asbestos-related claim reserves encounter many of the same limitations discussed above for environmental pollution claims such as inconsistency of court decisions, specific policy provisions, multiple insurers and allocation of liability among insurers, missing policies and proof of coverage. As of September 30, 1996 and December 31, 1995, CNA carried approximately $2,051 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 nine months ended September 30, 1996 and the year ended December 31, 1995, totaled $38 million and $258 million, respectively. The results of operations in future years may continue to be adversely affected by environmental pollution and asbestos aims 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. Beginning the latter part of 1995 and through 1996 to date, CNA has been actively settling many of its larger environmental pollution and asbestos-related claim exposures. This strategy has resulted in a large volume of claim payments during 1996, and corresponding reductions in reserves. In addition, Fibreboard claim payments escalated in 1996 as some scheduled payments came due. Management does not believe that these recent activities have changed facts or circumstances evident at December 31, 1995, therefore, no material modifications to previous reserve estimates have been made in 1996. The following table provides additional data related to CNA's environmental pollution and asbestos-related claims reserves. (13) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
|-----------------------------------------------------------------------------------------------| | | |RESERVE SUMMARY SEPTEMBER 30, 1996 DECEMBER 31, 1995 | | ------------------------------- ---------------------------------| | ENVIRONMENTAL ASBESTOS ENVIRONMENTAL ASBESTOS | | | |------------------------------------------------------------- ---------------------------------| |(In millions of dollars) | | | |Gross reserves: | | Reported claims $ 328 $ 1,877 $ 337 $ 1,963 | | Unreported claims 594 275 840 358 | | ------ ------ ------ ------ | | 922 2,152 1,177 2,321 | |Less reinsurance recoverable (120) (101) (147) (97) | |-----------------------------------------------------------------------------------------------| |Net reserves $ 802 $ 2,051 $ 1,030 $ 2,224 | |===============================================================================================|
OTHER LITIGATION CNA and its subsidiaries are also parties to other litigation arising in the ordinary course of business. The outcome of this other litigation will not, in the opinion of management, materially affect the results of operations or equity of CNA. (14) CNA FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - concluded NOTE F. Debt: Long and short-term borrowings consisted of the following:
|-------------------------------------------------------------------------------------------------| |LONG AND SHORT-TERM DEBT | |(In millions of dollars) SEPTEMBER 30 DECEMBER 31 | | 1996 1995 | |-------------------------------------------------------------------------------------------------| |Long-term: | | Acquisition debt: | | Credit Facility $ 650.0 $ 825.0 | | Commercial Paper 675.0 500.0 | | Senior Notes: | | 8 7/8%, due March 1, 1998 149.4 149.2 | | 8 1/4%, due April 15, 1999 102.2 102.8 | | 7 1/4%, due March 1, 2003 145.8 145.4 | | 6 1/4%, due November 15, 2003 248.4 248.2 | | 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 393.2 386.6 | | 8% - 13.7% Secured Capital Leases, due December 31, 2011 46.6 46.0 | | Other 18.4 19.7 | | ---------- ---------- | | Total long-term debt 2,774.0 2,767.9 | |Short-term - 257.6 | | ---------- ---------- | | Total debt $ 2,774.0 $ 3,025.5 | | ========== ========== | |-------------------------------------------------------------------------------------------------|
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. CNA renegotiated the facility in 1996 extending the maturity by one year. The average interest rate on the borrowings under the revolver at September 30, 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. In 1995, to take advantage of favorable interest rate spreads, CNA established a Commercial Paper Program, borrowing $500 million from investors to replace a like amount of bank financing. In the first nine months of 1996 CNA increased commercial paper borrowings by $175 million replacing a like amount of bank financing. The weighted-average rate on commercial paper at September 30, 1996 was 5.66%. The commercial paper borrowings are classified as long-term as $675 million of the committed credit facility supports the commercial paper program. CNA entered into interest rate swap agreements with several banks which terminate from May to December, 2000. The effect of these interest rate swaps was to increase interest expense by $5.6 million and $1.9 million for the nine months and quarter ended September 30, 1996. Interest expense was increased by $1.1 million in the third quarter of 1995. The weighted average interest rate on the acquisition debt, which includes the revolving credit facility, commercial paper, and the effect of the interest rate swaps, was 6.36% on September 30, 1996. On March 1, 1996, CNA repaid at the due date $250 million of 8 5/8% senior notes. These notes were classified as short-term debt in 1995. (15) 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 15, which contain additional information helpful in evaluating operating results and financial condition. CNA Financial Corporation (CNA) is the parent company of the CNA Insurance Companies. The CNA Insurance Companies, the largest writer of commercial property and casualty insurance, is comprised of Continental Casualty Company and its subsidiaries, Continental Assurance Company and its subsidiaries and The Continental Corporation, acquired on May 10, 1995, and its subsidiaries. The CNA Insurance Companies provide property and casualty coverage, life, accident and health insurance. RESULTS OF OPERATIONS: The following chart summarizes key components of operating results for the nine months and quarters ended September 30, 1996 and 1995. Results of operations include The Continental Corporation subsequent to May 10, 1995.
|-------------------------------------------------------------------------------------------------------------| |PERIOD ENDED SEPTEMBER 30 THIRD QUARTER NINE MONTHS | |(In millions of dollars) 1996 1995 1996 1995 | |-------------------------------------------------------------------------------------------------------------| | | |OPERATING SUMMARY (EXCLUDING NET REALIZED INVESTMENT | |GAINS/LOSSES): | |Revenues: | | Premiums: | | Property/Casualty $ 2,592.8 $ 2,427.8 $ 7,579.2 $ 6,375.1 | | Life 842.5 768.4 2,469.8 2,206.0 | | -------- -------- -------- -------- | | 3,435.3 3,196.2 10,049.0 8,581.1 | | Net investment income 540.3 552.0 1,675.9 1,497.6 | | Other 170.7 155.0 454.1 294.9 | | -------- -------- -------- -------- | | 4,146.3 3,903.3 12,179.0 10,373.6 | |Benefits and expenses 3,957.6 3,757.3 11,583.4 9,895.1 | | -------- ------- -------- -------- | | Operating income before income tax expense 188.7 145.9 595.6 478.5 | |Income tax expense (27.9) (42.8) (138.1) (116.6) | | -------- ------- -------- -------- | | Net operating income $ 160.8 $ 103.1 $ 457.5 $ 361.9 | | ======== ======== ======== ======== | |SUPPLEMENTAL FINANCIAL DATA: | |Net operating income (loss) by group: | | Property/Casualty $ 164.9 $ 122.1 $ 462.6 $ 361.7 | | Life 22.9 24.6 77.5 73.1 | | Other (27.0) (43.6) (82.6) (72.9) | | --------- -------- --------- -------- | | 160.8 103.1 457.5 361.9 | | --------- -------- --------- -------- | |Net realized investment gains by group: | | Property/Casualty 52.2 52.3 232.4 138.0 | | Life 22.0 9.2 79.0 72.9 | | Other 3.5 1.7 1.0 3.0 | | -------- -------- -------- -------- | | 77.7 63.2 312.4 213.9 | | -------- -------- -------- -------- | |Net income (loss) by group: | | Property/Casualty 217.1 174.4 695.0 499.7 | | Life 44.9 33.8 156.5 146.0 | | Other (23.5) (41.9) (81.6) (69.9) | | --------- -------- ------- -------- | | $ 238.5 $ 166.3 $ 769.9 $ 575.8 | |=============================================================================================================|
(16) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Consolidated Results - -------------------- CNA reported earnings for the first nine months of 1996 that continue to reflect improved operating results despite weather-related catastrophe losses. Earnings were also boosted by substantial capital gains. Net operating income, which excludes net realized investment gains, was $457.5 million, or $7.33 per share, for the first nine months of 1996 compared to net operating income of $361.9 million, or $5.77 per share, for the first nine months of 1995. Net operating income for the third quarter was $160.8 million, or $2.57 per share, compared with $103.2 million, or $1.64 per share, for the same quarter in 1995. CNA's income in the first nine months of 1996 is net of pretax losses of $280.2 million related to catastrophe claims; pretax catastrophe losses in the first nine months of 1995 were $115.9 million. Realized investment gains, net of tax, for the first nine months of 1996 were $312.4 million, or $5.05 per share, compared to net realized investment gains for the first nine months of 1995 of $213.9 million, or $3.46 per share. The components of the net realized investment gains (losses) are as follows: |----------------------------------------------------------------------------| |REALIZED INVESTMENT GAINS(LOSSES) | |NINE MONTHS ENDED SEPTEMBER 30 1996 1995 | |(In millions of dollars) | |----------------------------------------------------------------------------| |Fixed maturity securities: | | U.S. Government $ 102.0 $ 99.2 | | Taxable 109.0 (17.6) | | Asset-backed 23.1 35.7 | | Tax exempt 13.5 23.6 | | ------ ------ | | Total fixed maturity securities 247.6 140.9 | |Stocks 148.2 126.3 | |Derivative securities 11.3 0.8 | |Separate accounts and other 80.0 71.3 | | ------ ------ | | Realized investment gains reported in revenues 487.1 339.3 | |Participating policyholders' interest (11.1) (7.6) | |Income tax expense (163.6) (117.8) | | ----- ----- | | Net realized investment gains $ 312.4 $ 213.9 | |============================================================================| Net income was $769.9 million, or $12.38 per share for the first nine months of 1996, compared to $575.8 million, or $9.23 per share, for the first nine months of 1995. Net income for the third quarter of 1996 was $238.5 million, or $3.83 per share, compared with net income of $166.3 million, or $2.66 per share, for the third quarter of 1995. (17) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Property/Casualty Operations - ----------------------------
|--------------------------------------------------------------------------------------------------------------| |PROPERTY/CASUALTY GROUP THIRD QUARTER NINE MONTHS | |PERIOD ENDED SEPTEMBER 30 1996 1995 1996 1995 | |(In millions of dollars) | |--------------------------------------------------------------------------------------------------------------| | | |OPERATING SUMMARY (EXCLUDING NET REALIZED | | INVESTMENT GAINS/LOSSES): | |Revenues: | | Premiums $ 2,592.8 $ 2,427.8 $ 7,579.2 $ 6,375.1 | | Net investment income 444.6 460.4 1,384.3 1,226.8 | | Other 137.0 136.0 378.1 252.0 | | --------- --------- -------- -------- | | 3,174.4 3,024.2 9,341.6 7,853.9 | |Benefits and expenses 2,978.8 2,848.9 8,740.3 7,376.2 | | --------- --------- -------- -------- | | Income before income tax 195.6 175.3 601.3 477.7 | |Income tax expense (30.7) (53.2) (138.7) (116.0)| | --------- ---------- -------- ---------| | Net operating income (excluding net | |realized investment gains/losses) $ 164.9 $ 122.1 $ 462.6 $ 361.7 | |==============================================================================================================|
Property/casualty revenues, excluding net realized investment gains/losses, increased 18.9% for the nine months ended September 30, 1996 to $9.3 billion compared to the same period a year ago. Property/casualty earned premium increased $1.2 billion, or 18.9% from the prior years' comparable period. The increase in earned premium is due primarily to an increase in personal lines premium resulting from cancellation of a quota share agreement, under which Continental was ceding premium, and also an increase in mass marketing business. Additionally, earned premium increased with the inclusion of Continental business for the full nine months of 1996. These increases are partially offset by a decline in workers' compensation premium. Property/casualty profitability, as measured by pretax operating income before realized gains, continued to show improvement in the third quarter. Operating results reflect continued favorable loss trends particularly in workers' compensation business, partially offset by increased weather related catastrophe costs. CNA incurred pre-tax catastrophe losses of approximately $280.2 million and $72.2 million in the first nine months and third quarter of 1996 compared to $115.9 million and $37.9 million for the respective periods in 1995. In addition, underwriting expenses reflect expected economies of scale from merging the operations of Continental into CNA. Pretax operating income excluding net realized investment gains/losses for the property/casualty insurance subsidiaries was $601.3 million and $195.6 million for the first nine months and three months ended September 30, 1996 compared to $477.7 million and $175.3 million for the same period a year ago. Investment income increased 12.8% for the nine months ended September 30, 1996 to $1,384.3 million from $1,226.8 million for the comparable period a year ago. The increase is primarily the result of inclusion of the Continental portfolio for the full nine months of 1996. This increase was offset in part by a lower asset base resulting from operating cash outflows in 1996 and the repayment of $250 million in long-term debt, as discussed in the liquidity and capital resource section. Third quarter 1996 investment income as compared to third quarter 1995 investment income decreased 3.43% to $444.6 million from $460.4 resulting primarily from cash outflows as noted above. The bond segment of the investment portfolio yielded 6.6% in the first nine months of 1996 compared with 7.0% for the same period a year ago. Underwriting losses for the nine and three months ended September 30, 1996, were $783.0 million and $249.0 million, compared to $749.1 million and $285.1 million for the same period in 1995. (18) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued The net income of CNA's property/casualty insurance subsidiaries, excluding net realized investment gains/losses, was $462.6 and $164.9 million for the nine and three months ended September 30, 1996, compared to $361.7 million and $122.1 million for the same periods in 1995. Net realized investment gains for the nine and three months ended September 30,1996 were $232.4 million and $52.2 million, compared to $138.0 million and $52.3 million in the comparable periods of 1995. 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 (see Note E). On July 27, 1995, the United States District Court for the Eastern District of Texas entered judgment approving the Global Settlement Agreement (see Note E for a discussion on the Global Settlement) and the Trilateral Agreement. As expected, appeals were filed as respects both of these decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of Appeals in New Orleans affirmed the judgment approving the Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral Agreement by a 3 to 0 vote. A petition has been filed for re-hearing by the entire Fifth Circuit Court of Appeals as respects the decision on the Global Settlement Agreement. No further appeal has been filed with respect to the Trilateral Agreement and CNA believes that the time to file any such further appeal has expired, and accordingly, CNA believes that court approval of the Trilateral Agreement has become final. The implementation of the Trilateral Agreement has the effect of settling Casualty's litigation with Fibreboard. CNA currently expects that Casualty's litigation with Fibreboard will be dismissed during the first quarter of 1997. Life Operations - ---------------
|---------------------------------------------------------------------------------------------| |LIFE GROUP THIRD QUARTER NINE MONTHS | |PERIOD ENDED SEPTEMBER 30 1996 1995 1996 1995 | |(In millions of dollars) | |---------------------------------------------------------------------------------------------| | | |Operating Summary (excluding net realized | | investment gains/losses): | |Revenues: | | Premiums $ 848.6 $ 775.3 $2,488.3 $2,227.0 | | Net investment income 98.6 88.8 295.1 266.0 | | Other 32.7 19.1 75.1 43.0 | | ------- ------- -------- ------- | | 979.9 883.2 2,858.5 2,536.0 | |Benefits and expenses 944.7 845.2 2,737.2 2,423.0 | | ------- ------- -------- ------- | | Income before income tax 35.2 38.0 121.3 113.0 | |Income tax expense (12.3) (13.4) (43.8) (39.9)| | -------- ------- -------- ------- | | Net operating income (excluding net | |realized investment gains/losses) $ 22.9 $ 24.6 $ 77.5 $ 73.1 | | | |=============================================================================================|
CNA continues to build on the momentum established last year with the introduction of new individual life and annuities products. Life revenues, excluding net realized investment gains, were $2.9 billion, up 12.7% for the nine months ended September 30, 1996 compared to the same period a year ago. Life premium revenues for the third quarter in 1996 were $979.9 million, up 10.9% from the same quarter in 1995, with the primary growth in both group business and individual life business, which markets term, (19) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued universal life and annuities. Investment income increased 10.9% compared to the same period a year ago due to a larger asset base generated from increased cashflows from premium growth. The bond segment of the life investment portfolio, which is the primary investment segment, yielded 6.7% in the first nine months of 1996 compared with 7.0% for the same period a year ago. Pretax operating income for the life insurance subsidiaries, excluding net realized investment gains/losses, was $121.3 million and $35.2 million for the nine and three months ended September 30, 1996, compared to $113.0 million and $38.0 million for the same period in 1995. CNA's life insurance subsidiaries' net income excluding net realized investment gains/losses was $77.5 million and $22.9 million for the nine and three months ended September 30, 1996 compared to $73.1 million and $24.6 million for the same period in 1995. Net realized investment gains for the nine and three months ended September 30, 1996 were $79.0 million and $22.0 million, compared to $72.9 million and $9.2 million for the same periods of 1995. (20) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued INVESTMENTS:
|---------------------------------------------------------------------------------|-------------------------------| |Summary of General Account Investments at Market Value |Nine months ended September 30 | | | 1996 | | |----------------|--------------| | | CHANGE IN | | | SEPTEMBER 30 DECEMBER 31 | NET UNREALIZED| REALIZED | |(In millions of dollars) 1996 1995 | GAINS(LOSSES) | GAINS(LOSSES)| |---------------------------------------------------------------------------------|----------------|--------------| | | | | |Fixed maturity securities: | | | |U. S. Treasury securities and | | | | obligations of government agencies $ 9,948 $ 13,542 | $ (564) | $ 102 | |Asset-backed securities 6,045 6,086 | (218) | 14 | |Tax exempt securities 4,147 3,603 | (90) | 23 | |Taxable 6,898 7,214 | (207) | 109 | | -------- -------- | ------ | ---- | | Total fixed maturity securities 27,038 30,445 | (1,079) | 248 | |Stocks 975 918 | 15 | 148 | |Short-term investments and other 6,855 4,482 | - | (5) | |Derivative security investments 1 41 | - | 11 | | -------- -------- | ------ | ---- | | Total investments $ 34,869 $ 35,886 | (1,064) | 402 | | ======== ======== | | | |Separate accounts and discontinued operations | (116) | 85 | |Participating policyholders' interest | 21 | (11) | |Income tax benefit (expense) | 369 | (164) | | | ------ | ----- | | Net investment (losses) gains | $ (790) | $ 312 | | | ====== | ==== | |---------------------------------------------------------------------------------|----------------|--------------| |---------------------------------------------------------------------------------| |SHORT-TERM INVESTMENTS: | |---------------------------------------------------------------------------------| |Security repurchase collateral $ 603 $ 776 | |Escrow account 1,066 1,045 | |Other 4,493 1,904 | | ----- ----- | | Total short-term investments $6,162 $ 3,725 | | ===== ===== | | | |---------------------------------------------------------------------------------|
CNA's general account investment portfolio is managed to maximize after-tax investment return, while minimizing credit risks, with investments concentrated in high quality securities to support its insurance underwriting operations. CNA has the capacity to hold its fixed maturity portfolio to maturity. However, securities may be sold as part of CNA's asset/liability strategies or to take advantage of investment opportunities generated by changing interest rates, prepayments, tax and credit considerations, or other similar factors. Accordingly, the fixed maturity securities are classified as available for sale. CNA holds a relatively 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. (21) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued The general account portfolio consists primarily of high quality marketable fixed maturity securities, approximately 96% of which are rated as investment grade. At September 30, 1996, tax-exempt securities and short-term investments, excluding collateral for securities sold under repurchase agreements, comprised approximately 12% and 16%, respectively, of the general account's total investment portfolio compared to 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. The current level of short-term investments is anticipated to cover an increased volume of Fibreboard claim payments (see Note E) resulting from the final approval of the Trilateral Agreement, as well as settlement of security transactions. At September 30, 1996, the major components of the short-term investment portfolio consist primarily of high-grade commercial paper and U.S. Treasury bills. Collateral for securities sold under repurchase agreements decreased $173 million to $603 million at September 30, 1996 from $776 million at December 31, 1995. As of September 30, 1996, the market value of CNA's general account investments in fixed maturities was $27.0 billion and was less than amortized cost by approximately $20 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 September 30, 1996, were $351 million and $371 million, respectively, compared to $1,136 million and $77 million, respectively, at December 31, 1995. The change in unrealized investment gains on the fixed maturity portfolio of $1,079 million for the nine months ended September 30, 1996 is attributable, in large part, to increases in interest rates which have an adverse effect on bond prices. Net unrealized investment losses on general account fixed maturities at September 30, 1996 include net unrealized losses on high yield securities of $1 million, compared to net unrealized gains of $67 million at December 31, 1995. The change in unrealized investment gains on high yield securities is attributable to increases in interest rates which have an adverse effect on bond prices. High yield securities are bonds rated as below investment grade by bond rating agencies, plus private placements and other unrated securities which, in the opinion of management, are below investment grade. Fair values of high yield securities in the general account were $1.2 billion at September 30, 1996, compared to $1.9 billion at December 31, 1995. CNA's general account also maintains an equity securities portfolio, the fair value of which was $975 million at September 30, 1996 compared to cost of $778 million reflecting unrealized gains of approximately $197 million. The fair value of the equity securities portfolio in the general account was $918 million at December 31, 1995 compared to a cost of $736 million, reflecting unrealized appreciation of approximately $182 million. At September 30, 1996, total separate account cash and investments amounted to $5.7 billion with taxable fixed maturity securities representing approximately 83% of the separate accounts' portfolio. Approximately 80% of separate account investments are used to fund guaranteed investments for which Continental Assurance Company guarantees principal and a specified return to the contractholders. The duration of fixed maturity securities included in the guaranteed investment portfolio are matched approximately with the corresponding payout pattern of the liabilities of the guaranteed investment contracts. The fair value of all fixed maturity securities in the guaranteed investment portfolio was $4.0 billion compared to $4.8 billion at December 31, 1995. At September 30, 1996, amortized cost was greater than the fair value by approximately $26 million. This compares to an unrealized gain of $53 million at (22) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued December 31, 1995. The gross unrealized investment gains and losses for the guaranteed investment fixed maturity securities portfolio at September 30, 1996, were $56 million and $82 million, respectively. Carrying values of high yield securities in the guaranteed investment portfolio were $603 million at September 30, 1996 and $944 million December 31, 1995. Net unrealized investment losses on such high yield securities held were $34 million at September 30, 1996, compared to $14 million at December 31, 1995. High yield securities generally involve a greater degree of risk than that of investment grade securities. Expected returns should, however, compensate for the added risk. The risk is also considered in the interest rate assumptions in the underlying insurance products. As of September 30, 1996, CNA's concentration in high yield bonds including separate accounts was approximately 3% of total assets. In addition, CNA's investment in mortgage loans and investment real estate are substantially below the industry average, representing less than one half of one percent of its total assets. Included in CNA's fixed maturity securities at September 30, 1996 (general and guaranteed investment portfolios) are $8.3 billion of asset-backed securities, consisting of approximately 36% in collateralized mortgage obligations ("CMO's"), 12% in corporate asset-backed obligations, and 42% 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 September 30, 1996, the fair value of asset-backed securities was more than amortized cost by approximately $69 million compared to unrealized investment gains of $200 million at December 31, 1995. CNA limits the risks associated with interest rate fluctuations and prepayment by concentrating its CMO investments in early planned amortization classes with relatively short principal repayment windows. Over the last few years, much concern has been raised regarding the quality of insurance company invested assets. At September 30, 1996, 56% of the general account's fixed maturity securities portfolio was invested in U.S. Government securities, 25% in other AAA rated securities and 11% in AA and A rated securities. CNA's guaranteed investment portfolio includes fixed maturity securities comprised of 38% U.S. Government securities, 18% in other AAA rated securities and 15% in AA and A rated securities. These ratings are primarily from Standard & Poor's. FINANCIAL CONDITION: |----------------------------------------------------------------------------| |Financial Position September 30 December 31 | |(In millions of dollars, except per share data) 1996 1995 | |----------------------------------------------------------------------------| | | |Assets $60,795.1 $59,901.8| |Stockholders' Equity 6,710.8 6,735.5| |Unrealized Net Appreciation (Depreciation) | | Included in Stockholders' Equity 143.1 933.1| |Book Value per Common Share 106.17 106.56| |----------------------------------------------------------------------------| CNA's assets increased approximately $900 million to $60.8 billion as of September 30, 1996. CNA's investment portfolio decreased by $1.0 billion to $34.9 billion reflecting a reduction in pretax unrealized gains of $1.2 billion from December 31, 1995 as discussed in the investments section above. Debt security carrying values are highly susceptible to changes in interest rates and were unfavorably affected by a general increase in interest (23) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued rates that occurred in the latter part of the first quarter of 1996 and continued throughout the second quarter. Interest rates declined somewhat in the third quarter of 1996 resulting in an increase in net unrealized appreciation of approximately $100 million for the quarter. The statutory surplus of the property/casualty subsidiaries increased 3.1% in the first nine months of 1996 to approximately $5.9 billion. The statutory surplus of the life insurance subsidiaries remained at $1.1 billion. CNA and the insurance industry are exposed to an unknown amount of liability for environmental pollution, primarily related to toxic waste site clean-up. Refer to Note E of Notes to the Condensed Consolidated Financial Statements for further discussion of environmental pollution exposures. LIQUIDITY AND CAPITAL RESOURCES: The principal operating cash flow sources of CNA's property/casualty and life insurance subsidiaries are premiums and investment income. The primary operating cash flow uses are payments for claims, policy benefits and operating expenses. For the first nine months of 1996, CNA's operating activities used cash flows of approximately $65 million, compared with positive cash flow of $409 million in 1995. The decrease is primarily the result of cash flows used by underwriting activities including higher payments for catastrophe related losses and as discussed in Note E, increased settlement of environmental pollution and asbestos related claim exposures resulting in a large volume of claim payments in 1996. Also contributing to the decreased operating cash flow is increased interest payments on acquisition debt for the full nine month period in 1996 compared to approximately five months in 1995. Net cash flows from operations are generally invested in marketable securities. Investment strategies employed by CNA's insurance subsidiaries consider the cash flow requirements of the insurance products sold and the tax attributes of the various types of marketable investments. To finance the acquisition of Continental (including the refinancing of $205 million of Continental debt) CNA entered into a five-year $1.325 billion revolving credit facility. The average interest rate on the borrowings under the revolving credit facility at September 30, 1996 was 5.66%. In 1996, CNA renegotiated the credit facility extending the maturity by one year. 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 $1.9 million and $5.6 million for the quarter and nine months ended September 30, 1996. In 1995, to take advantage of favorable interest rate spreads, CNA established a Commercial Paper Program, borrowing $500 million from investors to replace a like amount of bank financing. In the first nine months of 1996 CNA increased commercial paper borrowings by $175 million replacing a like amount of bank financing. The weighted-average yield on commercial paper at September 30, 1996 was 5.66%. The commercial paper borrowings are classified as long-term as (24) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued $675 million of the committed bank facility supports 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 6.36% at September 30, 1996. On March 1, 1996, CNA repaid at the due date $250 million of 8 5/8% senior notes. The chart below lists the current insurance ratings for CNA's Continental Casualty Company Intercompany Pool, Continental Insurance Company Intercompany Pool and Continental Assurance Company. Also shown are the ratings on the senior debt of both CNA Financial Corporation (CNA) and The Continental Corporation (Continental) and CNA's commercial paper and preferred stock.
|-----------------|----------------------------------|------------------------------------------------| | | 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- | - | |-----------------|----------|-----------|-----------|-----------|-----------|----------|-------------| | | | | | | | | | |-----------------|----------|-----------|-----------|-----------|-----------|----------|-------------|
(25) CNA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - concluded Accounting Standards: In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used for long-lived assets and certain identifiable intangibles to be disposed of. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by the entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This Statement applies to financial statements for fiscal years beginning after December 15, 1995. This Statement did not have a significant impact on CNA. In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. The requirements of this Statement will generally be effective for 1996 financial statements. This Statement has no impact on the results of operations of CNA as the Company has no compensation which qualifies. In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This Statement establishes accounting standards based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognized the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement is effective for transfers and serving of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. This Statement will not have a significant impact on CNA. (26) 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 29 (27) Financial Data Schedule 27 30 (b) REPORTS ON FORM 8-K: There were no reports on Form 8-K for the three months ended September 30, 1996. (27) CNA FINANCIAL CORPORATION PART II OTHER INFORMATION - Concluded SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNA FINANCIAL CORPORATION Date: November 14, 1996 By: S/PETER E. JOKIEL ----------------- -------------------------- Peter E. Jokiel Senior Vice President and Chief Financial Officer (28)
EXHIBIT 11 CNA FINANCIAL CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE - ------------------------------------------------------------------------------------------------------------ Period Ended September 30 Third Quarter Nine Months (In millions, except per share data) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------ Earnings per share: Net income ....................................... $ 238.5 $ 166.3 $ 769.9 $ 575.8 Less preferred stock dividends.................... 1.6 1.3 4.6 5.1 ----- ----- ----- ------ Net income available to common stockholders....... $ 236.9 $ 165.0 $ 765.3 $ 570.7 ====== ====== ====== ====== Weighted average shares outstanding............... 61.8 61.8 61.8 61.8 ====== ====== ====== ====== Net income per common share....................... $ 3.83 $ 2.66 $ 12.38 $ 9.23 ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------
(29) EX-27 2 FDS
7 0000021175 CNA FINANCIAL CORPORATION 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 27,038 0 0 975 105 30 34,869 265 7,273 1,778 60,795 35,580 4,786 122 707 2,774 155 0 150 6,406 60,795 10,049 1,676 487 454 8,401 1,568 1,470 1,072 302 770 0 0 0 770 12.38 12.38 24,955 5,784 (142) 1,585 4,796 24,216 (142)
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