UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002 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 incorporation or organization) |
(I.R.S. Employer 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 ü No...
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at August 1, 2002 | |
|
|
||
| Common Stock, Par value $2.50 | 223,596,861 |
CNA FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION |
PAGE NO. | |||||
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: |
||||||
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 (Unaudited) AND DECEMBER 31, 2001 |
1 | |||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2002 AND 2001 |
2 | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 |
3 | |||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) JUNE 30, 2002 |
4 | |||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |
31 | |||||
PART II. OTHER INFORMATION |
||||||
ITEM 1. LEGAL PROCEEDINGS |
77 | |||||
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
77 | |||||
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K |
77 | |||||
SIGNATURES |
77 | |||||
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| (Unaudited) | ||||||||||||
| June 30, | December 31, | |||||||||||
| 2002 | 2001 | |||||||||||
(In millions, except share data) |
||||||||||||
Assets |
||||||||||||
Investments: |
||||||||||||
Fixed maturity securities available-for-sale (amortized cost of $30,182 and $28,970 ) |
$ | 30,330 | $ | 29,164 | ||||||||
Equity securities available-for-sale (cost of $1,068 and $1,168) |
1,149 | 1,338 | ||||||||||
Mortgage loans and real estate (less accumulated depreciation of $53 and $1) |
59 | 35 | ||||||||||
Policy loans |
186 | 194 | ||||||||||
Other invested assets |
1,423 | 1,355 | ||||||||||
Short-term investments |
4,097 | 3,740 | ||||||||||
Total investments |
37,244 | 35,826 | ||||||||||
Cash and cash equivalents |
145 | 142 | ||||||||||
Receivables: |
||||||||||||
Reinsurance |
13,775 | 13,823 | ||||||||||
Insurance |
4,051 | 4,006 | ||||||||||
Less allowance for doubtful accounts |
(361 | ) | (351 | ) | ||||||||
Accrued investment income |
407 | 385 | ||||||||||
Receivables for securities sold |
880 | 443 | ||||||||||
Deferred acquisition costs |
2,513 | 2,424 | ||||||||||
Prepaid reinsurance premiums |
1,449 | 1,221 | ||||||||||
Federal income taxes recoverable (includes $0 and $617 due from Loews) |
— | 611 | ||||||||||
Deferred income taxes |
840 | 737 | ||||||||||
Property and equipment at cost (less accumulated depreciation of $761 and $797) |
391 | 444 | ||||||||||
Intangibles |
247 | 265 | ||||||||||
Other assets |
2,080 | 2,194 | ||||||||||
Separate account business |
3,387 | 3,798 | ||||||||||
Total assets |
$ | 67,048 | $ | 65,968 | ||||||||
Liabilities and Stockholders’ Equity |
||||||||||||
Liabilities: |
||||||||||||
Insurance reserves: |
||||||||||||
Claim and claim adjustment expense |
$ | 30,386 | $ | 31,266 | ||||||||
Unearned premiums |
4,914 | 4,505 | ||||||||||
Future policy benefits |
7,158 | 7,306 | ||||||||||
Policyholders’ funds |
565 | 546 | ||||||||||
Collateral on loaned securities and derivatives |
2,071 | 923 | ||||||||||
Payables for securities purchased |
1,522 | 606 | ||||||||||
Participating policyholders’ funds |
114 | 118 | ||||||||||
Debt |
2,567 | 2,567 | ||||||||||
Reinsurance balances payable |
2,719 | 2,723 | ||||||||||
Federal income taxes payable (includes $63 and $0 due to Loews) |
69 | — | ||||||||||
Other liabilities |
2,915 | 3,019 | ||||||||||
Separate account business |
3,387 | 3,798 | ||||||||||
Total liabilities |
58,387 | 57,377 | ||||||||||
Commitments and contingencies (Note D, F, G, H, J and N) |
||||||||||||
Minority interest |
234 | 224 | ||||||||||
Stockholders’ equity: |
||||||||||||
Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270 shares issued
at June 30, 2002 and December 31, 2001; and 223,596,861 shares outstanding at June 30,
2002 and December 31, 2001) |
565 | 565 | ||||||||||
Additional paid-in capital |
1,031 | 1,031 | ||||||||||
Retained earnings |
6,796 | 6,683 | ||||||||||
Accumulated other comprehensive income |
175 | 226 | ||||||||||
Treasury stock, at cost |
(70 | ) | (70 | ) | ||||||||
| 8,497 | 8,435 | |||||||||||
Notes receivable for the issuance of common stock |
(70 | ) | (68 | ) | ||||||||
Total stockholders’ equity |
8,427 | 8,367 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 67,048 | $ | 65,968 | ||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
1
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months | Six Months | ||||||||||||||||
| Period ended June 30 | 2002 | 2001 | 2002 | 2001 | |||||||||||||
| (In millions, except per share data) | |||||||||||||||||
Revenues |
|||||||||||||||||
Net earned premiums |
$ | 2,826 | $ | 1,587 | $ | 5,663 | $ | 4,085 | |||||||||
Net investment income |
502 | 402 | 928 | 909 | |||||||||||||
Realized investment (losses) gains, net of participating
policyholders’ and minority interests |
(162 | ) | 567 | (161 | ) | 938 | |||||||||||
Other revenues |
152 | 152 | 336 | 345 | |||||||||||||
Total revenues |
3,318 | 2,708 | 6,766 | 6,277 | |||||||||||||
Claims, Benefits and Expenses |
|||||||||||||||||
Insurance claims and policyholders’ benefits |
2,382 | 4,277 | 4,692 | 6,346 | |||||||||||||
Amortization of deferred acquisition costs |
462 | 450 | 902 | 874 | |||||||||||||
Other operating expenses |
392 | 498 | 884 | 978 | |||||||||||||
Restructuring and other related charges |
— | 56 | — | 62 | |||||||||||||
Interest |
38 | 41 | 75 | 84 | |||||||||||||
Total claims, benefits and expenses |
3,274 | 5,322 | 6,553 | 8,344 | |||||||||||||
Income (loss) from continuing operations before income tax and
minority interest |
44 | (2,614 | ) | 213 | (2,067 | ) | |||||||||||
Income tax (expense) benefit |
(4 | ) | 855 | (55 | ) | 670 | |||||||||||
Minority interest |
(5 | ) | (6 | ) | (10 | ) | (12 | ) | |||||||||
Income (loss) from continuing operations |
35 | (1,765 | ) | 148 | (1,409 | ) | |||||||||||
Income (loss) from discontinued operations, net of tax of $0, $0,
$9, and $0 |
— | 3 | (35 | ) | 3 | ||||||||||||
Income (loss) before cumulative effect of a change in accounting
principle |
35 | (1,762 | ) | 113 | (1,406 | ) | |||||||||||
Cumulative effect of a change in accounting principle, net of tax
of $33 |
— | — | — | (61 | ) | ||||||||||||
Net income (loss) |
$ | 35 | $ | (1,762 | ) | $ | 113 | $ | (1,467 | ) | |||||||
Basic and Diluted Earnings (Loss) Per Share |
|||||||||||||||||
Income (loss) from continuing operations |
$ | 0.16 | $ | (9.62 | ) | $ | 0.67 | $ | (7.67 | ) | |||||||
Income (loss) from discontinued operations, net of tax |
— | 0.01 | (0.16 | ) | 0.01 | ||||||||||||
Income (loss) before cumulative effect of a change in accounting
principle |
0.16 | (9.61 | ) | 0.51 | (7.66 | ) | |||||||||||
Cumulative effect of a change in accounting principle, net of tax |
— | — | — | (0.34 | ) | ||||||||||||
Basic and diluted earnings (loss) per share available to common
stockholders |
$ | 0.16 | $ | (9.61 | ) | $ | 0.51 | $ | (8.00 | ) | |||||||
Weighted average outstanding common stock and common stock
equivalents |
223.6 | 183.3 | 223.6 | 183.3 | |||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
2
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six months ended June 30 | 2002 | 2001 | ||||||||||
| (In millions) | ||||||||||||
Cash Flows from Operating Activities |
||||||||||||
Net income (loss) |
$ | 113 | $ | (1,467 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash flows provided
(used) by operating activities: |
||||||||||||
Cumulative effect of a change in accounting principle, net of tax |
— | 61 | ||||||||||
Loss on disposals of property and equipment |
7 | 63 | ||||||||||
Minority interest |
10 | 12 | ||||||||||
Deferred income tax provision |
(34 | ) | (83 | ) | ||||||||
Net realized investment losses (gains) |
161 | (939 | ) | |||||||||
Realized loss from discontinued operations, net of tax |
37 | — | ||||||||||
Equity method income |
(47 | ) | (37 | ) | ||||||||
Amortization of intangibles |
— | 11 | ||||||||||
Amortization of bond discount |
(65 | ) | (124 | ) | ||||||||
Depreciation |
52 | 72 | ||||||||||
Changes in: |
||||||||||||
Receivables, net |
13 | (996 | ) | |||||||||
Deferred acquisition costs |
(92 | ) | (51 | ) | ||||||||
Accrued investment income |
(24 | ) | 3 | |||||||||
Federal income taxes recoverable/payable |
696 | (801 | ) | |||||||||
Prepaid reinsurance premiums |
(228 | ) | 89 | |||||||||
Reinsurance balances payable |
(4 | ) | 238 | |||||||||
Insurance reserves |
(225 | ) | 2,889 | |||||||||
Other, net |
65 | 234 | ||||||||||
Total adjustments |
322 | 641 | ||||||||||
Net cash flows provided (used) by operating activities |
435 | (826 | ) | |||||||||
Cash Flows from Investing Activities |
||||||||||||
Purchases of fixed maturity securities |
(32,543 | ) | (37,963 | ) | ||||||||
Proceeds from fixed maturity securities: |
||||||||||||
Sales |
30,109 | 30,076 | ||||||||||
Maturities, calls and redemptions |
1,175 | 8,059 | ||||||||||
Purchases of equity securities |
(448 | ) | (752 | ) | ||||||||
Proceeds from sales of equity securities |
516 | 1,652 | ||||||||||
Change in short-term investments |
(317 | ) | (614 | ) | ||||||||
Change in collateral on loaned securities and derivatives |
1,148 | 644 | ||||||||||
Change in other investments |
(63 | ) | (210 | ) | ||||||||
Purchases of property and equipment |
(36 | ) | (70 | ) | ||||||||
Sales of property and equipment |
— | 258 | ||||||||||
Dispositions |
71 | |||||||||||