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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 

Commission File Number 1-5823

CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

(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 period 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). 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.

CNA FINANCIAL CORPORATION
INDEX

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CNA FINANCIAL CORPORATION
INDEX

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CNA FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)

						March 31,				December 31,
(In millions, except share data)						2003				2002
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost of $26,867 and $25,533)						$	27,971			$	26,275
Equity securities available-for-sale, at fair value (cost of $442 and $519)							553				666
Mortgage loans and real estate (less accumulated depreciation of $56 and $55)							56				57
Policy loans							178				180
Limited partnership investments							1,069				1,060
Other invested assets							32				47
Short-term investments, cost approximates fair value							5,354				7,008
Total investments							35,213				35,293
Cash							166				126
Reinsurance receivables (less allowance for doubtful accounts of $199 and $196)							12,732				12,500
Insurance receivables (less allowance for doubtful accounts of $159 and $156)							3,146				3,007
Accrued investment income							347				300
Receivables for securities sold							1,671				455
Deferred acquisition costs							2,597				2,551
Prepaid reinsurance premiums							1,462				1,345
Federal income taxes recoverable (includes $59 and $0 due from Loews Corporation)							47				—
Deferred income taxes							573				723
Property and equipment at cost (less accumulated depreciation of $788 and $771)							363				369
Goodwill and other intangible assets							174				174
Other assets							1,773				1,785
Separate account business							3,240				3,103
Total assets						$	63,504			$	61,731
Liabilities and Stockholders’ Equity
Liabilities:
Insurance reserves:
Claim and claim adjustment expense						$	27,446			$	27,370
Unearned premiums							5,115				4,820
Future policy benefits							7,576				7,409
Policyholders’ funds							568				580
Collateral on loaned securities and derivatives							419				552
Payables for securities purchased							1,590				464
Participating policyholders’ funds							120				119
Short term debt							291				420
Long term debt							1,872				1,872
Reinsurance balances payable							2,791				2,763
Federal income taxes payable (includes $0 and $13 due to Loews Corporation)							—				29
Other liabilities							2,516				2,573
Separate account business							3,240				3,103
Total liabilities							53,544				52,074
Commitments and contingencies (Notes F, G, I, J, N and O)
Minority interest							254				256
Stockholders’ equity:
Preferred stock (Series H, no par value; $100,000 stated value; 12,500,000 shares authorized; 7,500 shares issued and outstanding, held by Loews Corporation)							750				750
Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270 shares issued; and 223,608,868 shares outstanding)							565				565
Additional paid-in capital							1,031				1,031
Retained earnings							6,676				6,593
Accumulated other comprehensive income							827				604
Treasury stock (2,241,402 shares), at cost							(70	)			(70	)
							9,779				9,473
Notes receivable for the issuance of common stock							(73	)			(72	)
Total stockholders’ equity							9,706				9,401
Total liabilities and stockholders’ equity						$	63,504			$	61,731

The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements (Unaudited).

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CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three months ended March 31
(In millions, except per share data)			2003				2002
							Restated (a)
Revenues
Net earned premiums			$	2,381			$	2,837
Net investment income				432				426
Realized investment (losses) gains, net of participating policyholders’ and minority interests				(76	)			1
Other revenues				108				182
Total revenues				2,845				3,446
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits				1,870				2,310
Amortization of deferred acquisition costs				458				440
Other operating expenses				379				491
Interest				34				37
Total claims, benefits and expenses				2,741				3,278
Income from continuing operations before income tax and minority interest				104				168
Income tax expense				(18	)			(51	)
Minority interest				(3	)			(5	)
Income from continuing operations				83				112
Loss from discontinued operations, net of tax of $9				—				(35	)
Income before cumulative effect of a change in accounting principle				83				77
Cumulative effect of a change in accounting principle, net of tax of $7				—				(57	)
Net income			$	83			$	20
Basic and Diluted Earnings Per Share
Income from continuing operations			$	0.30			$	0.51
Loss from discontinued operations, net of tax				—				(0.16	)
Income before cumulative effect of a change in accounting principle				0.30				0.35
Cumulative effect of a change in accounting principle, net of tax				—				(0.26	)
Basic and diluted earnings per share available to common stockholders			$	0.30			$	0.09
Weighted average outstanding common stock and common stock equivalents				223.6				223.6

(a)

See Note Q.

The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements (Unaudited).

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CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Three months ended March 31
(In millions)						2003				2002
										Restated (a)
Cash Flows from Operating Activities
	Net income					$	83			$	20
	Adjustments to reconcile net income to net cash flows provided (used) by operating activities:
		Cumulative effect of a change in accounting principle, net of tax					—				57
		Minority interest					3				5
		Loss on disposal of property and equipment					12				7
		Deferred income tax provision					12				22
		Realized investment losses (gains), net of participating policyholders’ and minority interest					76				(1	)
		Realized loss on disposition of discontinued operations, net of tax					—				37
		Equity method income					(26	)			(8	)
		Amortization of bond discount					(21	)			(18	)
		Depreciation					24				24
		Changes in:
			Receivables, net				(371	)			(153	)
			Deferred acquisition costs				(57	)			(39	)
			Accrued investment income				(47	)			15
			Federal income taxes (recoverable) payable				(75	)			115
			Prepaid reinsurance premiums				(117	)			(326	)
			Reinsurance balances payable				28				159
			Insurance reserves				528				181
			Other, net				(7	)			(175	)
				Total adjustments			(38	)			(98	)
Net cash flows provided (used) by operating activities						$	45			$	(78	)
Cash Flows from Investing Activities
	Purchases of fixed maturity securities						(17,802	)			(14,303	)
	Proceeds from fixed maturity securities:
		Sales					15,492				13,064
		Maturities, calls and redemptions					958				636
	Purchases of equity securities						(71	)			(233	)
	Proceeds from sales of equity securities						61				285
	Change in short-term investments						1,668				532
	Change in collateral on loaned securities and derivatives						(133	)			48
	Change in other investments						4				(33	)
	Purchases of property and equipment						(31	)			(25	)
	Dispositions						—				71
	Other, net						(14	)			(7	)
Net cash flows provided by investing activities						$	132			$	35
Net Cash Flows from Financing Activities
	Principal payments on debt						(129	)			—
	Return of policyholder account balances on investment contracts						(7	)			(13	)
	Other						(1	)			8
Net cash flows used by financing activities							(137	)			(5	)
Net change in cash and cash equivalents							40				(48	)
Cash and cash equivalents, beginning of period							126				142
Cash and cash equivalents, end of period						$	166			$	94
Supplemental Disclosures of Cash Flow Information:
	Cash paid:
		Interest				$	19			$	22
		Federal income taxes					63				90
	Non-cash transactions:
		Notes receivable for the issuance of common stock					1				1

(a)

See Note Q.

The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements (Unaudited).

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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries, which include property and casualty insurance companies (principally Continental Casualty Company (CCC) and The Continental Insurance Company (CIC)) and life and group insurance companies (principally Continental Assurance Company (CAC), Valley Forge Life Insurance Company (VFL) and CNA Group Life Assurance Company (CNAGLA)), collectively CNA or the Company. As of March 31, 2003, Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF.

The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in CNAF’s Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2002.

The interim financial data as of March 31, 2003 and for the three months ended March 31, 2003 and 2002 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the Company’s results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated.

As a result of a routine review of the Company’s periodic filings by the Division of Corporation Finance of the SEC, the Company has restated its results of operations for the three months ended March 31, 2002. The restated financial statements reflect an adjustment to the Company’s historical accounting for its investment in life settlement contracts and the related revenue recognition. See Note Q for further discussion.

Certain amounts applicable to prior periods have been reclassified to conform to the current period presentation.

Note B. Accounting Pronouncements

CNA adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) on January 1, 2002. SFAS 142 changed the accounting for goodwill and indefinite-lived intangible assets from an amortization method to an impairment-only approach. Amortization of goodwill and indefinite-lived intangible assets recorded in past business combinations ceased upon adoption of SFAS 142.

During 2002, the Company completed its initial goodwill impairment testing and recorded a $64 million pretax, or $57 million after-tax, impairment charge. In accordance with SFAS 142, the impairment charge, which primarily consisted of a $51 million pretax, or $48 million after-tax, charge in Specialty Lines, a $12 million pretax, or $8 million after-tax, charge in Life Operations,

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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

and a $1 million pretax, or $1 million after-tax, charge in Corporate and Other, was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. Goodwill and indefinite-lived intangible assets are tested for impairment annually or when certain triggering events require such tests.

Any future impairment losses incurred will be reported in results of operations. Goodwill of $154 million as of March 31, 2003 and December 31, 2002 represents the excess of purchase price over fair value of the net assets of acquired entities. Other intangible assets were $20 million as of March 31, 2003 and December 31, 2002.

In November of 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements of Financial Accounting Standards No. 5, 57, and 107 and rescission of FASB Interpretation No. 34) (FIN 45). FIN 45 clarifies the requirements of FASB Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS 5) relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 provides for additional disclosure requirements related to guarantees, which were effective for financial periods ending after December 15, 2002. The Company adopted the disclosure requirements of FIN 45 during the fourth quarter of 2002. Additionally, FIN 45 outlines provisions for initial recognition and measurement of the liability incurred in providing a guarantee. The Company adopted the initial recognition and measurement requirements for all guarantees as of January 1, 2003. The initial adoption for the recognition and measurement requirements of FIN 45 did not have a significant impact on the results of operations or equity of the Company.

In December of 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure (SFAS 148). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123, Accounting for Stock-Based Compensation (SFAS 123), to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. CNA has adopted the disclosure provisions of this standard for all annual and interim financial statements. The Company has determined that it will not adopt the fair value based method of accounting for stock-based employee compensation in 2003.

The Company applies Accounting Policy Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, in accounting for its stock-based compensation plan. Under the recognition and measurement principles of APB 25, no stock-based compensation cost has been recognized, as the exercise price of the granted options equaled the market price of the underlying stock at the grant date.

The effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation under the Company’s stock-based compensation plans is illustrated in Note C.

In April of 2003 the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain

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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

derivative instruments embedded in other contracts, and for hedging activities under Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company is currently in the process of evaluating the impact SFAS 149 may have on its Condensed Consolidated Financial Statements.

Note C. Earnings Per Share

The computation of earnings per share was as follows.

Earnings Per Share

Three Months Ended March 31
(In millions, except per share amounts)		2003				2002
Income from continuing operations		$	83			$	112
Less: preferred stock dividend (accumulated but undeclared)			(15	)			—
Income from continuing operations available to common stockholders			68				112
Loss from discontinued operations, net of tax			—				(35	)
Cumulative effect of a change in accounting principle, net of tax		</