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 June 30, 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)
| Delaware (State or other jurisdiction of incorporation or organization) |
36-6169860 (I.R.S. Employer Identification No.) |
| CNA Plaza Chicago, Illinois (Address of principal executive offices) |
60685 (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 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.
| Class | Outstanding at August 1, 2003 | |
Common Stock, Par value $2.50 |
223,613,811 |
CNA FINANCIAL CORPORATION
INDEX
| Item | Page | |||
| Number | Number | |||
| PART I. Financial Information | ||||
| 1. |
Condensed Consolidated Financial Statements (Unaudited): |
|||
Condensed Consolidated Balance Sheets at June 30, 2003
and at December 31,
2002
|
3 | |||
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2003 and 2002
(Restated)
|
4 | |||
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002
(Restated)
|
5 | |||
Notes to Condensed Consolidated Financial Statements
|
6 | |||
| 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 38 | ||
| 3. | Quantitative and Qualitative Disclosures about Market Risk | 88 | ||
| 4. | Disclosure Controls and Procedures | 93 | ||
| PART II. Other Information | ||||
| 1. | Legal Proceedings | 94 | ||
| 4. | Submission of Matters to a Vote of Security Holders | 94 | ||
| 6. | Exhibits and Reports on Form 8-K | 95 | ||
| Signatures | 96 |
CNA FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| June 30, | December 31, | |||||||||||
| (In millions, except share data) | 2003 | 2002 | ||||||||||
Assets |
||||||||||||
Investments: |
||||||||||||
Fixed maturity securities available-for-sale, at fair value (amortized cost of $28,691 and $25,533) |
$ | 30,487 | $ | 26,275 | ||||||||
Equity securities available-for-sale, at fair value (cost of $426 and $519) |
647 | 666 | ||||||||||
Mortgage loans and real estate (less accumulated depreciation of $10 and $55) |
35 | 57 | ||||||||||
Policy loans |
179 | 180 | ||||||||||
Limited partnership investments |
1,146 | 1,060 | ||||||||||
Other invested assets |
17 | 47 | ||||||||||
Short-term investments, cost approximates fair value |
5,335 | 7,008 | ||||||||||
Total investments |
37,846 | 35,293 | ||||||||||
Cash |
140 | 126 | ||||||||||
Reinsurance receivables (less allowance for doubtful accounts of $239 and $196) |
13,114 | 12,500 | ||||||||||
Insurance receivables (less allowance for doubtful accounts of $203 and $156) |
3,198 | 3,007 | ||||||||||
Accrued investment income |
363 | 300 | ||||||||||
Receivables for securities sold |
521 | 455 | ||||||||||
Deferred acquisition costs |
2,620 | 2,551 | ||||||||||
Prepaid reinsurance premiums |
1,461 | 1,345 | ||||||||||
Federal income taxes recoverable (includes $185 and $0 due from Loews Corporation) |
179 | — | ||||||||||
Deferred income taxes |
179 | 723 | ||||||||||
Property and equipment at cost (less accumulated depreciation of $780 and $771) |
358 | 369 | ||||||||||
Goodwill and other intangible assets |
172 | 174 | ||||||||||
Other assets |
1,744 | 1,785 | ||||||||||
Separate account business |
3,429 | 3,103 | ||||||||||
Total assets |
$ | 65,324 | $ | 61,731 | ||||||||
Liabilities and Stockholders’ Equity |
||||||||||||
Liabilities: |
||||||||||||
Insurance reserves: |
||||||||||||
Claim and claim adjustment expense |
$ | 27,944 | $ | 27,370 | ||||||||
Unearned premiums |
5,198 | 4,820 | ||||||||||
Future policy benefits |
7,759 | 7,409 | ||||||||||
Policyholders’ funds |
550 | 580 | ||||||||||
Collateral on loaned securities and derivatives |
985 | 552 | ||||||||||
Payables for securities purchased |
1,155 | 464 | ||||||||||
Participating policyholders’ funds |
128 | 119 | ||||||||||
Short term debt |
292 | 420 | ||||||||||
Long term debt |
1,866 | 1,872 | ||||||||||
Reinsurance balances payable |
2,840 | 2,763 | ||||||||||
Federal income taxes payable (includes $0 and $13 due to Loews Corporation) |
— | 29 | ||||||||||
Other liabilities |
2,595 | 2,573 | ||||||||||
Separate account business |
3,429 | 3,103 | ||||||||||
Total liabilities |
54,741 | 52,074 | ||||||||||
Commitments and contingencies (Notes F, G, I, L and M) |
||||||||||||
Minority interest |
265 | 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 |
6,746 | 6,593 | ||||||||||
Accumulated other comprehensive income |
1,370 | 604 | ||||||||||
Treasury stock (2,241,402 shares), at cost |
(70 | ) | (70 | ) | ||||||||
| 10,392 | 9,473 | |||||||||||
Notes receivable for the issuance of common stock |
(74 | ) | (72 | ) | ||||||||
Total stockholders’ equity |
10,318 | 9,401 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 65,324 | $ | 61,731 | ||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
3
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three months | Six months | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
| Period ended June 30 | |||||||||||||||||
| (In millions, except per share data) | Restated (a) | Restated (a) | |||||||||||||||
Revenues |
|||||||||||||||||
Net earned premiums |
$ | 2,197 | $ | 2,826 | $ | 4,578 | $ | 5,663 | |||||||||
Net investment income |
427 | 502 | 859 | 928 | |||||||||||||
Realized investment gains (losses), net of participating
policyholders’ and minority interests |
378 | (162 | ) | 302 | (161 | ) | |||||||||||
Other revenues |
97 | 146 | 205 | 328 | |||||||||||||
Total revenues |
3,099 | 3,312 | 5,944 | 6,758 | |||||||||||||
Claims, Benefits and Expenses |
|||||||||||||||||
Insurance claims and policyholders’ benefits |
2,067 | 2,382 | 3,937 | 4,692 | |||||||||||||
Amortization of deferred acquisition costs |
481 | 462 | 939 | 902 | |||||||||||||
Other operating expenses |
441 | 392 | 820 | 883 | |||||||||||||
Interest |
33 | 38 | 67 | 75 | |||||||||||||
Total claims, benefits and expenses |
3,022 | 3,274 | 5,763 | 6,552 | |||||||||||||
Income from continuing operations before income tax and minority
interest |
77 | 38 | 181 | 206 | |||||||||||||
Income tax expense |
(5 | ) | (2 | ) | (23 | ) | (53 | ) | |||||||||
Minority interest |
(2 | ) | (5 | ) | (5 | ) | (10 | ) | |||||||||
Income from continuing operations |
70 | 31 | 153 | 143 | |||||||||||||
Loss from discontinued operations, net of tax of $9 |
— | — | — | (35 | ) | ||||||||||||
Income before cumulative effect of a change in accounting principle |
70 | 31 | 153 | 108 | |||||||||||||
Cumulative effect of a change in accounting principle, net of tax
of $7 |
— | — | — | (57 | ) | ||||||||||||
Net income |
$ | 70 | $ | 31 | $ | 153 | $ | 51 | |||||||||
Basic and Diluted Earnings Per Share |
|||||||||||||||||
Income from continuing operations |
$ | 0.25 | $ | 0.14 | $ | 0.55 | $ | 0.65 | |||||||||
Loss from discontinued operations, net of tax |
— | — | — | (0.16 | ) | ||||||||||||
Income before cumulative effect of a change in accounting
principle |
0.25 | 0.14 | 0.55 | 0.49 | |||||||||||||
Cumulative effect of a change in accounting principle, net of tax |
— | — | — | (0.26 | ) | ||||||||||||
Basic and diluted earnings per share available to common
stockholders |
$ | 0.25 | $ | 0.14 | $ | 0.55 | $ | 0.23 | |||||||||
Weighted average outstanding common stock and common stock
equivalents |
223.6 | 223.6 | 223.6 | 223.6 | |||||||||||||
(a) See Note O.
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
4
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| 2003 | 2002 | |||||||||||
| Six months ended June 30 | ||||||||||||
| (In millions) | Restated (a) | |||||||||||
Cash Flows from Operating Activities |
||||||||||||
Net income |
$ | 153 | $ | 51 | ||||||||
Adjustments to reconcile net income to net cash flows provided by operating activities: |
||||||||||||
Cumulative effect of a change in accounting principle, net of tax |
— | 57 | ||||||||||
Minority interest |
5 | 10 | ||||||||||
Loss on disposal of property and equipment |
18 | 7 | ||||||||||
Deferred income tax provision |
131 | (36 | ) | |||||||||
Realized investment (gains) losses, net of participating policyholders’ and minority interests |
(302 | ) | 161 | |||||||||
Realized loss on disposition of discontinued operations, net of tax |
— | 37 | ||||||||||
Equity method income |
(97 | ) | (47 | ) | ||||||||
Amortization of bond discount |
(33 | ) | (65 | ) | ||||||||
Depreciation |
44 | 52 | ||||||||||
Changes in: |
||||||||||||
Receivables, net |
(805 | ) | 13 | |||||||||
Deferred acquisition costs |
(97 | ) | (92 | ) | ||||||||
Accrued investment income |
(63 | ) | (24 | ) | ||||||||
Federal income taxes recoverable/payable |
(208 | ) | 696 | |||||||||
Prepaid reinsurance premiums |
(116 | ) | (228 | ) | ||||||||
Reinsurance balances payable |
77 | (4 | ) | |||||||||
Insurance reserves |
1,276 | (225 | ) | |||||||||
Other, net |
132 | 72 | ||||||||||
Total adjustments |
(38 | ) | 384 | |||||||||
Net cash flows provided by operating activities |
115 | 435 | ||||||||||
Cash Flows from Investing Activities |
||||||||||||
Purchases of fixed maturity securities |
(34,111 | ) | (32,543 | ) | ||||||||
Proceeds from fixed maturity securities: |
||||||||||||
Sales |
28,924 | 30,109 | ||||||||||
Maturities, calls and redemptions |
3,062 | 1,175 | ||||||||||
Purchases of equity securities |
(151 | ) | (448 | ) | ||||||||
Proceeds from sales of equity securities |
265 | 516 | ||||||||||
Change in short-term investments |
1,722 | (317 | ) | |||||||||
Change in collateral on loaned securities and derivatives |
433 | 1,148 | ||||||||||
Change in other investments |
(3 | ) | (63 | ) | ||||||||
Purchases of property and equipment |
(54 | ) | (36 | ) | ||||||||
Dispositions |
(44 | ) | 71 | |||||||||
Other, net |
5 | (22 | ) | |||||||||
Net cash flows provided (used) by investing activities |
48 | (410 | ) | |||||||||
Net Cash Flows from Financing Activities |
||||||||||||
Principal payments on debt |
(135 | ) | — | |||||||||
Return of policyholder account balances on investment contracts |
(13 | ) | (26 | ) | ||||||||
Other |
(1 | ) | 4 | |||||||||
Net cash flows used by financing activities |
(149 | ) | (22 | ) | ||||||||
Net change in cash and cash equivalents |
14 | 3 | ||||||||||
Cash and cash equivalents, beginning of period |
126 | 142 | ||||||||||
Cash and cash equivalents, end of period |
$ | 140 | $ | 145 | ||||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||||||
Cash
paid (received): |
||||||||||||
Interest |
$ | 69 | $ | 75 | ||||||||
Federal income taxes |
||||||||||||