CNA FINANCIAL CORPORATION
1999 ANNUAL REPORT
FOCUSED ON PERFORMANCE
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS.......................................... 1
CHAIRMAN'S LETTER............................................. 2
FINANCIAL POSITION............................................ 5
MANAGEMENT ROUNDTABLE......................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS.......................... 13
CONSOLIDATED BALANCE SHEETS................................... 42
CONSOLIDATED STATEMENTS OF OPERATIONS......................... 44
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............... 45
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................... 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................... 48
INDEPENDENT AUDITORS' REPORT.................................. 74
DIRECTORS..................................................... 75
OFFICERS...................................................... 75
COMPANY INFORMATION........................................... 76
CNA FINANCIAL CORPORATION
COMPANY PROFILE
CNA Financial Corporation is a holding company whose primary subsidiaries
consist of property/casualty and life insurance companies. Collectively, these
subsidiaries comprise CNA, one of the largest insurance organizations in the
United States.
CNA serves businesses and individuals with a broad range of insurance and other
risk management products and services. Insurance products include property and
casualty coverages; life, accident and health insurance; and pension products
and annuities. CNA services include risk management, information services,
health care management and claims administration. CNA products and services are
marketed through agents, brokers, managing general agents and direct sales.
CNA Financial Corporation, with 1999 revenues of $16.4 billion, assets of $61.2
billion and stockholders' equity of $8.9 billion, is the holding company of
Continental Casualty Company, incorporated in 1897, Continental Assurance
Company, incorporated in 1911, and The Continental Corporation, incorporated in
1853.
CNA Financial Corporation stock is traded primarily on the New York Stock
Exchange, and is approximately 86 percent owned by Loews Corporation.
1999 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
RESULTS OF OPERATIONS & FINANCIAL CONDITION
-----------------------------------------------------------------------------------------------------------------
As of and for the Year Ended December 31 1999 1998 1997 1996 1995*
(In millions of dollars, except per share data and ratios)
-----------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenues $16,403 $17,162 $17,199 $16,988 $14,700
Net operating income (loss) (145) (152) 488 578 463
Net realized investment gains 192 434 478 387 294
Cumulative effect of a change
in accounting principle, net of tax (177) - - - -
------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (130) $ 282 $ 966 $ 965 $ 757
=================================================================================================================
EARNINGS PER SHARE
Net operating income(loss) $ (0.85) $(0.86) $ 2.59 $ 3.08 $ 2.46
Net realized investment gains, net of tax
and minority interest 1.04 2.35 2.58 2.09 1.59
Cumulative effect of a change
in accounting principle, net of tax
and minority interest (0.96) - - - -
-----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (0.77) $ 1.49 $ 5.17 $ 5.17 $ 4.05
==================================================================================================================
FINANCIAL CONDITION
Invested assets $35,560 $37,177 $36,203 $35,412 $35,886
Total assets 61,219 62,432 61,675 60,455 60,360
Reserves 39,165 40,400 39,829 39,981 40,803
Debt 2,881 3,160 2,897 2,765 3,026
Stockholders' equity 8,938 9,157 8,309 7,060 6,739
Book value per common share 47.66 47.89 44.01 37.27 35.52
Return on average stockholders' equity -1.4% 3.2% 12.6% 14.0% 13.4%
STATUTORY SURPLUS
------------------------------------------------------------------------------------------------------------------
Property/casualty companies** $ 8,679 $ 7,593 $ 7,123 $ 6,349 $ 5,696
Life insurance companies 1,222 1,109 1,224 1,163 1,056
==================================================================================================================
* RESULTS OF OPERATIONS DATA INCLUDES THE CONTINENTAL CORPORATION SINCE ITS
ACQUISITION ON MAY 10, 1995.
** SURPLUS INCLUDES EQUITY OF PROPERTY/CASUALTY COMPANIES OWNERSHIP IN LIFE
INSURANCE SUBSIDIARIES.
CNA FINANCIAL CORPORATION 1
FOCUSED ON PERFORMANCE
CHAIRMAN'S LETTER
Dear Shareholder:
According to conventional wisdom, we are in a "mature" industry. Certainly, when
you look at the recent financial and stock market performance of our company -
and of most of our competitors - that perception seems true.
But we beg to differ.
There is nothing conventional about the accelerating impact of technology in an
economy that is more global every day, or the fact that risks facing our
customers are becoming more varied and complex.
As an organization focused on helping businesses manage such risks, we believe
this time of change presents the greatest opportunity in our working lives. We
believe our industry is on the threshold of a new era of growth - particularly
for companies like CNA that have the vision and financial strength to adapt.
But before expanding on our vision, you and I know that there is still much work
to be done right now to improve CNA's operating performance and shareholder
value.
2 1999 ANNUAL REPORT
Important progress
In the year since I became chief executive officer of the CNA Insurance
Companies, I believe we have made tremendous progress in sharpening our focus
and building a solid financial foundation to help us pursue our vision
successfully. Our multi-year turnaround plan is firmly in place and the momentum
from 1999 is carrying over into 2000.
That said, this management team is not satisfied with our progress, as the
bottom line has not yet improved commensurate with our actions.
This became especially true when some of the worst storms Europe had ever seen,
together with reserve strengthening, combined to wipe out three straight
quarters of progress we had made in increasing our net operating income.
But we remain focused on performance.
Our drive to improve the quality of our underwriting across the board remains
central to our strategy, today and tomorrow. We are shedding under-priced
business in troubled lines -almost $1.2 billion of property/casualty premiums on
a base of $6.8 billion - and making significant progress in achieving adequate
rates on the remaining risks.
We have taken more than $380 million out of our run-rate cost of operations as a
down payment on our relentless determination to be a low cost competitor.
These steps are putting us on the right track.
And while there are challenges to meet, they should not obscure three truths
about CNA:
o We continue to have one of the strongest balance sheets in the industry -
despite a $363 million after-tax reserve strengthening in loss and
allocated loss adjustment expense for prior periods. This strength gives us
the financial flexibility to invest in our vision and to fix weak
businesses.
o We have many lines of business delivering outstanding underwriting results,
including insurance to protect officers and directors, liability insurance
for professionals, warranty and our majority-owned CNA Surety operation.
o We have one of the most effective partnerships with agents and brokers in
the sector. Much of our progress, especially in the troubled standard
commercial lines market, is due to the strength of these relationships.
Getting focused on business
The stage is now set for us to reach our vision: to be the premier underwriter
of the risks facing businesses.
This required some very difficult decisions. In the end, we decided to exit
long-time CNA businesses that, however successful in their own right, did not
fit with our core strategy. So, last year, we transferred our personal insurance
business to Allstate and sold the majority of our interest in AMS Services,
Inc., an insurance technology provider, to a private management partnership. In
the first quarter of 2000, we also announced a decision to explore the sale of
our life and life reinsurance businesses.
In total, CNA will re-deploy substantial assets to concentrate on businesses
where we hold strategic advantages - such as specialized products and services
targeted to businesses.
A new opportunity
With the rise of e-commerce, service- and technology-based enterprises, and the
globalization of businesses of virtually any size, the needs for risk management
products and services are evolving rapidly. This creates an enormous opportunity
that will require real focus and talent to capture.
The opportunity comes in two forms:
o Existing clients need new products and services to address their evolving
risks. The markets our customers serve are changing, their exposures are
changing, and the ways they choose to communicate and interact with us are
changing.
CNA FINANCIAL CORPORATION 3
o Entirely new types of businesses are being created with a unique set of
risks and insurance needs. They, too, will look to us for new products and
services.
Our objective is to make the most of this opportunity by refocusing CNA on its
core strength as the underwriter of choice in the business insurance market.
Completing our turnaround plan lays the essential underwriting and management
foundation for making our vision a bottom-line success.
Thanks for the hard work
Before closing, I want to thank the people of CNA for their commitment to
building a stronger company. I also want to thank our entire senior leadership
team, which was made even stronger with the addition of Bob Deutsch as our chief
financial officer late in 1999. Finally, I want to recognize Ron Gallatin, who
joined our board of directors in February 2000. We welcome the perspective and
experience he brings to our organization.
The work we have undertaken in 1999 has not been easy. But I am confident our
ongoing actions to improve operational and financial performance, in combination
with the company's strong and stable balance sheet, will enable CNA to take full
advantage of the changes sweeping through our industry. In this way, we will be
able to deliver enhanced value to our shareholders in the years ahead.
Thank you for your continued support.
Sincerely,
Bernard L. Hengesbaugh
Chairman and Chief Executive Officer
CNA Insurance Companies
March 15, 2000
4 1999 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
FINANCIAL POSITION (1989-1999)
FINANCIAL POSITION
This page of CNA Financial Corporation's annual report has four bar graphs which
illustrate the trend in revenues, assets, stockholders' equity and book value
per common share from 1989 through 1999.
($ IN BILLIONS EXCEPT PER SHARE DATA)
|-----------------------|----------|---------|---------------|---------------|
|Measurement Period | | | Stockholders'| Book Value Per|
| (Fiscal Year Covered) | Revenues | Assets | Equity | Common Share* |
|-----------------------|----------|---------|---------------|---------------|
|FYE 12/31/89...........| 9.1 | 30.9 | 4.2 | 21.58 |
|FYE 12/31/90...........| 9.9 | 34.7 | 4.5 | 23.41 |
|FYE 12/31/91...........| 11.1 | 39.2 | 5.1 | 26.75 |
|FYE 12/31/92...........| 10.8 | 39.7 | 4.8 | 25.02 |
|FYE 12/31/93...........| 11.0 | 41.9 | 5.4 | 28.22 |
|FYE 12/31/94...........| 11.0 | 44.3 | 4.5 | 23.71 |
|FYE 12/31/95...........| 14.7 | 60.4 | 6.7 | 35.52 |
|FYE 12/31/96...........| 17.0 | 60.5 | 7.1 | 37.27 |
|FYE 12/31/97...........| 17.2 | 61.7 | 8.3 | 44.01 |
|FYE 12/31/98...........| 17.2 | 62.4 | 9.2 | 47.89 |
|FYE 12/31/99...........| 16.4 | 61.2 | 8.9 | 47.66 |
|-----------------------|----------|---------|---------------|---------------|
*Previous years have been restated for 3 for 1 stock split that occurred on
5/98.
CNA FINANCIAL CORPORATION 5
MANAGEMENT ROUNDTABLE
QUESTIONS & ANSWERS
In the 1998 CNA Financial Corporation annual report, CNA Insurance Companies
Chairman and Chief Executive Officer Bernard L. Hengesbaugh stated that
conditions in the insurance industry had never been more competitive and that
CNA's operating performance was unacceptable to CNA's management and board.
Given these critical factors, 1999 was a year in which management focused on
operating performance. To help shareholders measure CNA's progress to date and
understand its strategy for handling challenges still facing the company, the
following section features a roundtable discussion with several key CNA
officers. In it, they answer the tough questions most often asked by investors
and financial analysts.
Featured are Bernie Hengesbaugh; Bob Deutsch, senior vice president and chief
financial officer; Mike McGavick, president and chief operating officer of
Agency Market Operations; and Tom Taylor, executive vice president.
6 1999 ANNUAL REPORT
Where does CNA stand today versus a year ago?
HENGESBAUGH: In short, we continue to work our turnaround plan to bring our
operating performance back up to the level of the top companies in the business.
We improved underwriting discipline, reduced expenses and strengthened our
management team. As a result, CNA is in a fundamentally stronger position today
than we were a year ago.
Even so, you reported a significant operating loss for the year. How do you
account for this performance?
DEUTSCH: Well, for the year, we strengthened loss and allocated loss adjustment
expense reserves for prior periods by $363 million after taxes, $235 million of
which was taken in the fourth quarter based upon recently-completed actuarial
studies. It became clear that losses on our existing business - primarily our
1997 and 1998 accident years - were developing higher than our earlier
estimates, so we adjusted our reserves accordingly. We also strengthened our
1999 accident year by $103 million after-tax in the fourth quarter.
With this reserve action behind us, we are well positioned to deliver strong
operating results in 2000. And by that statement, I do not in any way mean to
suggest that we will let our overall reserve adequacy slip in order to deliver
earnings.
We also had catastrophe losses for the full year of $253 million after-tax
versus $218 million for the full year 1998. The principal drivers were the
French and Danish windstorms in the fourth quarter and Hurricane Floyd in the
third quarter.
After two years of disappointing performance, your stock is selling below book
value. Why should anyone be an investor in CNA?
DEUTSCH: To begin with, we have a goal of being a top quartile performer in our
industry, which, given current interest rates, would be in the range of 10-12
percent. And of course, we're not performing anywhere near that level right now.
We believe the key is improvement in our net operating income. That's why we're
so focused on underwriting discipline and expense reduction. As we improve those
areas, we believe our shareholders will be rewarded.
The best insurance companies produce operating returns on equity north of 10
percent. We're on a program of getting ourselves positioned to compete at those
levels. When we get there, I believe the market will recognize the inherent
value of CNA.
The market values financial strength in insurance companies. How would you
characterize the strength of CNA's balance sheet?
DEUTSCH: In a word, excellent. The strength of our balance sheet really arises
from our investments, reserve position and capital structure.
Our investments in Global Crossing and Canary Wharf Group plc continue to have a
favorable impact on our equity position. Global Crossing is a provider of
Internet and long distance services with an undersea digital fiber-optic cable
network. Canary Wharf is a publicly-traded holding company that operates the
Canary Wharf Real Estate development in the London docklands.
Since year-end 1998, the market value of these two holdings increased
approximately $1.5 billion to $2.4 billion at the end of 1999. The market values
of Global Crossing and Canary Wharf at December 31 were $1.8 billion and $600
million, respectively, virtually all of which is unrealized gains.
Offsetting the equity gains were unrealized losses in our bond portfolio. Bond
interest rates generally increased across the yield curve by approximately 175
basis points during 1999. This shift contributed to a $1.3 billion unfavorable
change in unrealized bond market values for CNA, from an unrealized gain at
year-end 1998 of $600 million to an unrealized loss at December 31 of $700
million.
As for reserves, we emphasize a conservative philosophy. The paid and incurred
loss activity during the year indicated that market conditions had led to higher
loss ratios than we expected, and we stepped up to those indications. While no
one can
CNA FINANCIAL CORPORATION 7
guarantee that our actuarial estimates will not change over time, we believe
that the reserves are in a strong position to withstand further changes. The
pricing and underwriting actions taken over the last several quarters will
strengthen our financial position.
We also have a solid capital structure. Our stockholders' equity was $8.9
billion at the end of 1999. Assets were $61.2 billion, and overall debt levels,
including preferred stock, decreased by approximately $479 million, or 14
percent. This capital structure provides a strong base to build on as we move
into the future.
In 1999, we made important progress in getting the deep financial resources of
this company moving in the right direction. As this momentum builds, we continue
to believe that the value of the CNA franchise will be fully recognized and the
commitment of our shareholders will be well rewarded.
What will it take for CNA to become a top performer?
HENGESBAUGH: The first thing we have to do is produce strong returns from our
insurance operations and our investment portfolio. On the investment side, we
are already there. So the real question for the CNA leadership team is this -How
do we get the financial muscle in this company working to help us produce
superior operating returns?
As we thought about that question, there was a clear recognition of what needed
to be done, especially for our property/casualty businesses. We are in a tough
part of the cycle right now. And we knew if CNA was going to get any benefit
from future improvement in the market, however slight, then some very important
changes had to take place within CNA very quickly.
So in 1999, we started on what in fact is a turnaround plan for CNA.
It is not business as usual, and it has involved a lot of rethinking of what
we're doing and how we're doing it. While the plan involves a whole series of
strategic activities, the real day-to-day priorities are underwriting
discipline, expense reduction and overall improvement of the operating results.
OK, let's start with underwriting discipline. Can you give us an update?
HENGESBAUGH: A key priority of our turnaround plan is improved underwriting
discipline. Taking the lead in this process is our new Underwriting Policy
Group, headed by Tom Taylor, that we formed in 1999. This small group of experts
in underwriting, claims and pricing is working closely with our business leaders
to enhance underwriting proficiency across all our operations. We are totally
focused on rebuilding the disciplines required to serve our customers and
produce superior underwriting results.
TAYLOR: Adding to what Bernie said, there really is a broader context here.
Several of our specialty businesses -- directors and officers, warranty, surety,
credit, fidelity and non-medical professional liability -- are already solid
performers. These are strong businesses we are looking to grow. The businesses
that need the most work are middle markets, large accounts and medical
malpractice.
We are getting off underpriced business and working with our key agents and
brokers to achieve necessary price increases. For the year, we did not renew
$1.2 billion in property/casualty business on a base of $6.8 billion as we
worked to achieve adequate pricing and implemented key re-underwriting actions.
Average price increases were between 5 and 6 percent, with retention holding in
the 70 to 80 percent range throughout the year.
How are your agents and brokers handling this?
HENGESBAUGH: We have tremendous support from our brokers and independent agents
in middle-market commercial business, which is one of the toughest segments for
price competition. Their cooperation and support really validates our position
on the fundamental need for adequate pricing in middle-market commercial lines.
Our agents know we are committed to working with them over the long term, and
they are giving us every indication that they want to work with us.
After four consecutive quarters of essential price increases, we are encouraged
by our progress. We also recognize that our work to achieve adequate pricing
doesn't stop here. We'll need continued underwriting discipline - and more than
one renewal cycle of price increases - to get our entire property/casualty book
up to an appropriate level of profitability.
How about a specific example. Could you tell us about your efforts in commercial
middle markets?
MCGAVICK: First of all, we are aggressively getting off accounts that have been
unprofitable. Where we can't find a solution that is acceptable to us, we're
getting off the risk.
Secondly, and a much more difficult task, is getting adequate price on business
that we want to retain. Usually, this is business that many companies would like
to have. We have steadfast resolve in getting
8 1999 ANNUAL REPORT
an adequate price, even in this business. In 1999, we did not renew nearly $750
million of commercial premiums on a base of $3.4 billion as we worked through
critical underwriting and pricing initiatives.
It is also important to look at the quarter-to-quarter trend. In middle-market
business, as we work to attain rate adequacy, average price increases were 2
percent in the first quarter, 6 percent in the second quarter, 8 percent in the
third quarter and 9 percent in the fourth quarter. Retention has been holding
steady in the 70 to 75 percent range throughout the year.
You increased prices in commercial middle markets and still produced an
underwriting loss. Has anything really changed?
MCGAVICK: When you look at the fundamentals of our book of business, we are in a
much better position now than at the start of 1999. At that point, we were
coming off two quarters of price decreases - 0.5 percent in the third quarter of
1998 and 1 percent in the fourth quarter - and these rolled over into our 1999
operating results. Now we are sitting on four consecutive quarters of necessary
price increases that reached 9 percent in the fourth quarter, and we expect
these actions will work their way into our results for 2000.
At the end of 1998, we were looking back on a year when new business relative to
total business was at an all-time high. Loss ratios on new business are
generally higher than on renewal business, and that's what was rolling into our
operating results in 1999. By contrast, we were much more disciplined on new
business in 1999. As a result, a larger proportion of more adequately priced
business will be rolling into our 2000 results.
Another key fundamental relates to our cost structure. At the end of 1998, we
were in the early stages of transforming a 20-year-old operating platform. Going
into 2000, the transformation is virtually complete. Centralized processing,
restructured claims functions and greater focus on territorial underwriting are
expected to take $100 million out of our annual operating costs and to improve
our service to agents and customers.
Finally, at the end of 1998, our incentives for agents and underwriters rewarded
volume. Today, we have much stronger incentives for agents and employees tied to
the bottom line. When you consider all these factors, we are in a fundamentally
stronger position going forward.
What about progress on your large account business?
TAYLOR: In this business, we continue to see some signs of firming in the
market. For the year, we did not renew $75 million in premium on a base of
nearly $500 million. In the process, however, we achieved an average price
increase of 8 percent with the retention percentage running in the upper 70s. So
we think we're going in the right direction here.
How are you doing in your medical malpractice business?
TAYLOR: It's still a very competitive market, and we are sticking by our resolve
to achieve adequate rates. For the year, we did not renew about $105 million in
business on a base of $470 million. For the business we renewed, we achieved
price increases that averaged 7 percent for the year with the retention
percentage in the low 80s.
The biggest pricing issues in medical malpractice have been with corporate
accounts, that is, large physician groups and hospitals. Here, we achieved
average price increases of almost 12 percent on renewal business for the year,
with retention around 70 percent.
We are also encouraged by the firming in our nursing home business, where we
renewed more than 83 percent of our accounts for the year, and achieved average
price increases of 10 percent.
Business we did not renew includes accounts we chose to offer no renewal terms
as well as accounts we offered terms with increases in price significantly
larger than the amounts mentioned earlier.
Do you think you're on the right track now?
TAYLOR: The pricing and retention indicators in these three property/casualty
businesses tell us that we're on the right track. We are also achieving other
improvements in terms, such as deductibles, coinsurance and insurance to value.
As we work our plan, we recognize that there is a tier of players out there that
seems intent on growing their market share. But we strongly feel we need to get
the price necessary to make this business stable over a longer period of time,
and so we're sticking with our plan.
How long can you sustain your pricing initiatives?
TAYLOR: With our retention rates holding up, we think there is still more room
for achieving fair prices in our book of property/casualty business. We are also
encouraged by a number of signs we are seeing in the market, including trends in
reinsurance, the pricing initiatives of our competitors and the combined ratios
of key business lines.
CNA FINANCIAL CORPORATION 9
This gives us breathing room to focus on the other fundamentals of underwriting
- loss control, risk selection, claims handling and so on. That's critical,
because sustained profitability really goes back to achieving excellence across
the entire underwriting process.
MCGAVICK: CNA's scale in middle markets turns into a major advantage in the kind
of transition market Tom just described. Such a market plays to our advantages
of scale and agency relationships. Agents want to maintain their volume and
relationships with CNA and so choose to continue to do business with us. We both
win, and that's what we see starting to happen.
Turning to new business, what are your plans?
MCGAVICK: We're focusing on those markets where we know we have the underwriting
expertise and customer knowledge that differentiate us from the competition.
Although we're cautious in writing new business, we are going to stay in the
game, particularly with our top agents. We will work together with them on new
business when we think we can get an adequate rate, and the business is in a
class where we have some distinct knowledge.
HENGESBAUGH: I'd also add that there are some pockets in the overall company
that are showing growth. CNA Re is reporting a good flow of new business in its
facultative and Canadian operations. The international group in Europe is
expanding as a result of the 1998 acquisition of Maritime Insurance. Surety net
written premium is up 11 percent. Guarantee & Credit grew 13 percent.
What progress have you made on expense reduction?
HENGESBAUGH: As we've said, expense reduction is another major priority in our
turnaround plan. It goes back to 1998, when we launched an initiative to ensure
that each of our businesses is working with an operating platform that is on a
par with its most cost-efficient competitors. Each business committed to
quarterly expense reduction targets, with an aggregate goal of reducing CNA's
annualized running rate expense by $300-350 million by the end of 1999.
We completed the effort in the fourth quarter and exceeded this very important
goal. It was tough, but we got it done by thinking much more creatively about
how to work certain parts of our operating platform. One important example is
the investment we have made in our commercial insurance processing center.
Of course, the expense reduction effort doesn't stop here. It's now hard-wired
into our management process, and our intent is to keep it going year after year.
What we've learned is that this whole process is really all about simplification
and getting focused on what really matters to our customers, agents and brokers.
That is going to serve us well across all our businesses going forward.
Why aren't the expense reductions made in 1998 and 1999 going to show up in
financial results until 2000?
DEUTSCH: From a consolidated level, it's very hard to see the impact on our
expense ratios of what we're doing. It's clouded by two factors.
First, we are measuring these expense reductions on a run-rate basis. This means
that, as we're making these reductions during the year, we're still left with
the transition costs in the expense ratio for the current year. In 2000,
however, we should begin to see the effect of these efforts.
Second, our net written premiums were off by $1.5 billion as a result of the
actions we've taken in re-underwriting our book, walking away from unprofitable
business and completing the personal insurance business transaction with
Allstate. These factors cause the expense ratio to increase given the fixed
nature of some expenses.
To follow up, what impact has expense reduction had on employee morale? What
about service to your agents, brokers and customers?
HENGESBAUGH: There's no question that 1999 was a challenging year for CNA
employees, agents and brokers, and we have been watching that very carefully. My
sense from meeting with employees is that achieving our running-rate expense
reduction and operating income goals in many businesses and moving ahead on our
turnaround plan are helping build confidence. It's confidence in our ability to
accomplish what looked like very difficult goals. And that confidence is
absolutely necessary to make this turnaround work all the way through.
MCGAVICK: I'd add that when we said that we had to radically change our expense
structure, we also said the job had to be done while making our underwriting and
service better. That was the twin mission. So we radically redesigned the way we
handle business. We consolidated all premium processing and policy issue
functions from 24 branches to a central facility in Florida.
This frees our underwriters, who remain local, from backroom headaches, and
lower costs. Service hasn't been where it needs to be, but our agents have hung
in there with us, because I think they see the value of the model as well.
10 1999 ANNUAL REPORT
That's important because if you want to be a preferred agency company, you have
to have a preferred service capability, and we think we have an operating model
that can get us there.
There are still pockets of service problems, as you would expect with any
massive conversion. But when fully operational, we think our processing center
will get us to one of the best expense ratios among our competitors and to a
world-class level of service to agents and insureds.
Let's focus now on operating income.
HENGESBAUGH: Consistent improvement in net operating income is key to our
turnaround plan. In 1999, we had three consecutive quarters of improved
operating income. In the fourth quarter, there were some unique events that
interrupted the momentum temporarily - the reserve strengthening and the
catastrophe losses.
But it is the momentum that is really important to us. Hitting our targets for
three quarters is an early sign of a management team that is committed to and
capable of meeting the targets we have set out. The fourth-quarter results only
make us more focused on improving the fundamentals and getting right back on
track.
You announced in the first quarter that you are exploring the sale of your
individual life and life reinsurance operations. Can you explain the strategy
behind this?
HENGESBAUGH: Our strategy going forward is to concentrate on insurance products
and services for businesses. We believe that sharpening our focus in this way
will make CNA a more valued provider to our customers, a better partner for our
distributors and a stronger performer for our shareholders. As an employer, we
will be able to provide better opportunities for people who are excited by the
challenge of applying our core underwriting expertise to the issues faced by
small, medium and large businesses. In 1999, we took an important step in
sharpening our focus with the transfer of our personal insurance business to
Allstate. We also sold most of our stake in AMS Services, an insurance
technology company.
So, to sum up, by dedicating our substantial resources to the needs of
businesses, we are very well equipped for a leadership position in this rapidly
expanding marketplace.
What are your plans for the $1 billion in capital freed up by the personal lines
insurance business transaction with Allstate?
DEUTSCH: The Allstate transaction closed on October 1, 1999. Over time, it will
free up a good portion of capital, and we will be faced with the issue of
capital deployment. That issue is being addressed as part of the overall
turnaround plan.
We have begun a complete capital allocation review for all of our businesses.
All options will be open, including dividends or other alternatives, to get the
capital base in line with our business opportunities.
For each business, we are evaluating the value we add to our customers, the fit
with the rest of CNA's operations, the risk/return equation and our relative
expertise. This is a long-term analysis, but in the meantime, no one gets a
pass. Each of our businesses is required to earn a competitive rate of return
over a reasonable period of time.
HENGESBAUGH: I'd also say that our capital allocation strategy is not simply a
one-sided matter of exiting businesses. Rather, if we see good opportunities to
re-deploy capital that fit with our overall approach, we will seize those as
well.
CNA FINANCIAL CORPORATION 11
Is share buy back an option you're considering? What about acquisitions?
DEUTSCH: We have had a stock buy-back program in place since November 1998. To
the extent we have excess capital for it, and under the right market conditions,
we would consider buying back stock under our existing program.
But there are a lot of issues in these decisions. A simple measure such as
premiums to surplus might show us as overcapitalized. Outside constituencies, on
the other hand, are looking at a completely different set of measures of capital
adequacy.
As for acquisitions, we certainly don't want to say never. If we make an
acquisition, it has to be at a very attractive price. And then there's the
question of how we would pay for it. With our stock as undervalued as it is, we
would not want to use our stock as acquisition currency.
A lot of companies are doing what you're doing - cutting expenses and repricing
the business. Wouldn't it make sense for more of these companies to consolidate?
HENGESBAUGH: On the property/casualty side, gaining expense reduction through a
consolidation is extremely challenging. Having gone through this ourselves with
the Continental merger, we did in fact extract cost from the system. But I think
there also are some diseconomies of size and scale.
For instance, if you increase the span of control of your underwriting managers,
that can be a great economy of scale. But, if not done the right way, it also
could be disastrous to your loss ratio.
Another problem relates to shared distributors. They don't like to put all their
eggs into one basket. So a combined company may not be able to hold onto all the
business of the two separate companies.
The final item is that technology is moving so quickly that it doesn't always
require size to get some of the economies. For example, the Internet already is
altering the cost and the speed with which we can get things done with our
clients and brokers.
Can you tell us where you are with e-commerce?
MCGAVICK: We see electronic commerce and the Internet as another way to leverage
the value of our relationships with partners and customers. In commercial
insurance, our agent-centered strategy provides value-added tools and services
to the independent agent, who we believe will continue to be the dominant
distribution channel in middle markets.
For example, our electronic capabilities enable agents to underwrite, rate and
submit policies for small business customers at the point of sale. The Internet
also gives them access to real-time claim status and all of our commercial
policy forms, and makes it easy to process commercial auto endorsements. Our
product guides and sales kits are available via the Internet, and it allows
agents and staff to provide immediate feedback on CNA service.
We're using our experience in these areas to develop broader and more robust
e-commerce capabilities in all of our businesses.
Are the days of the large insurance organization numbered? Why should a company
as big as CNA exist?
HENGESBAUGH: While scale may not always produce the economies people expect, it
does have some major advantages. Foremost is the fact that a large, financially
sound company such as CNA can leverage both capital resources and brand
recognition in ways that smaller companies can't.
TAYLOR: In addition, there is the matter of underwriting knowledge. For example,
in our professional liability business for architects and engineers, scale is
critical because it has allowed us over time to understand more about the risks
architects and engineers face - and the problems we can help them solve - than
just about anybody in the business. If we didn't have the cross-section that we
do of business, we couldn't get to those understandings; and in fact that's a
major competitive advantage.
Finally, what makes you think that CNA can create superior shareholder value
over the long term in an industry as mature as insurance?
HENGESBAUGH: It's certainly true that the traditional insurance products like
workers' compensation and property are mature. But that doesn't mean insurance
is not a growth industry. It's just not going to grow through traditional
products alone. Over the last 10 years or so, the economy has been growing much
faster than insurance premiums. That means there is a lot of wealth that needs
protection but it's not being addressed by traditional insurance industry
products.
The insurance organizations that can develop the new products and respond to
these changing exposures are going to be the winners. For example, CNA is a
leading provider of commercial equipment maintenance programs that cover the
computers, copiers, fax machines and other equipment that a business owner
relies on. Instead of separate service agreements, the customer saves money and
enjoys the convenience of having one number to call for repairs. That's just one
of many opportunities for non-traditional products that respond to changing
needs.
So we believe that insurance in fact is a growth industry. It's an industry that
needs to grow with the rest of the global economy, and we intend to be a big
part of it.
12 1999 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion highlights significant factors influencing the
consolidated results of operations and financial condition of CNA Financial
Corporation and subsidiaries (CNA or the Company). This discussion should be
read in conjunction with the Consolidated Financial Statements and the related
notes, appearing on pages 42 through 73, and the five-year summary of selected
financial highlights appearing on page 1.
The discussion also includes an overview of each of the Company's seven
operating segments, the products offered, the customers served, the distribution
channels used and an analysis of operating results. Because distinct investment
portfolios are not maintained for each insurance segment, the discussion of
investment results, including investment income and realized investment gains,
is on a consolidated basis and begins on page 32. The 1999 and 1998 provisions
for restructuring and other related charges are also discussed on a consolidated
basis beginning on page 31.
CNA FINANCIAL CORPORATION 13
CONSOLIDATED OPERATIONS
BUSINESS OVERVIEW
CNA is one of the largest insurance organizations in the United States and,
based on 1998 net written premium, is the fifth largest property/casualty
company and the thirty-fifth largest life insurance company.
CNA's overall goal is to create long-term enterprise value by pursuing
disciplined underwriting as well as operating efficiencies.
CNA conducts its operations through the seven segments listed below. In addition
to the seven segments, certain other activities are reported in a Corporate
segment.
AGENCY MARKET OPERATIONS
SPECIALTY OPERATIONS
CNA RE
GLOBAL OPERATIONS
RISK MANAGEMENT
GROUP OPERATIONS
LIFE OPERATIONS
These segments reflect the way in which CNA distributes its products to the
marketplace and the way in which it manages operations and makes business
decisions. A more detailed description of each segment is included later in this
discussion.
OPERATING RESULTS
The following chart summarizes the consolidated operating results for each of
the last three years.
CONSOLIDATED OPERATIONS
------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
Operating revenues:
Premiums $13,282 $13,536 $13,624
Net investment income 2,101 2,146 2,209
Other 705 799 628
------------------------------------------------------------------------------------------
Total operating revenues 16,088 16,481 16,461
Benefits and other expenses 16,331 16,567 15,831
Restructuring and other related charges 83 246 -
------------------------------------------------------------------------------------------
Operating income (loss) before income tax and minority interest (326) (332) 630
Income tax benefit (expense) 211 200 (132)
Minority interest (30) (20) (10)
------------------------------------------------------------------------------------------
Net operating income (loss) (145) (152) 488
Net realized investment gains, net of tax and minority interest 192 434 478
Cumulative effect of a change in accounting principle, net of tax and
minority interest (177) - -
------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (130) $ 282 $ 966
==========================================================================================
|
CONSOLIDATED OPERATIONS
------------------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
BASIC AND DILUTED EARNINGS PER SHARE
Net operating income (loss) $(0.85) $(0.86) $ 2.59
Net realized investment gains, net of tax and minority interest 1.04 2.35 2.58
Cumulative effect of a change in accounting principle, net of tax
and minority interest (0.96) - -
------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(0.77) $ 1.49 $ 5.17
==========================================================================================
|
14 1999 ANNUAL REPORT
Total operating revenues were $16.1 billion in 1999 and $16.5 billion in 1998
and 1997. Premiums declined $253 million in 1999 principally in the
property/casualty product lines, due to price competition in the industry
combined with the Company's focus on underwriting discipline, and the increased
use of reinsurance. Premiums for the Company's Life and Group Operations were
down $49 million, principally due to the exit from selected medical markets in
late 1998. Premiums for 1998 declined by $107 million when compared to 1997.
This decrease was primarily due to intense price competition facing the
commercial lines insurance market.
The Company had a net operating loss for the year ended December 31, 1999 of
$145 million, or $0.85 per share, compared to a net operating loss of $152
million, or $0.86 per share, for the year ended December 31, 1998.
The 1999 operating loss includes $363 million after-tax in loss and allocated
loss adjustment expense reserve strengthening for prior periods. Included in
this amount is $33 million after-tax for excess workers' compensation
reinsurance. After-tax catastrophe losses were approximately $35 million higher
in 1999. The operating loss also includes $54 million, or $0.29 per share, in
after-tax restructuring and other related charges. This compares to $169
million, or $0.91 per share, in after-tax restructuring and other related
charges in 1998. The 1999 operating loss also reflects an after-tax benefit of
$51 million, or $0.28 per share, resulting from regulatory changes in the basis
on which certain insurance-related assessments are calculated.
Discussions of the results of operations from the Company's segments follow:
CNA FINANCIAL CORPORATION 15
AGENCY MARKET OPERATIONS
BUSINESS OVERVIEW
Agency Market Operations builds on the Company's long and successful
relationship with the independent agency distribution system to market a broad
range of property/casualty insurance products and services to both businesses
and individuals. Business products include workers' compensation, commercial
packages, general liability and commercial auto, as well as a variety of
creative risk management services. Products for individuals were primarily
personal auto and homeowners insurance. In addition, in 1997, Agency Market
Operations launched a professional employer organization, CNA UniSource, which
provides various employer-related services.
Agency Market Operations is comprised of the following four groups.
COMMERCIAL INSURANCE
Commercial Insurance (CI) provides traditional property/casualty insurance
products such as workers' compensation, general and product liability, property,
commercial auto and umbrella coverage to businesses with less than $1 million in
annual premiums. The majority of CI customers are small and medium-sized
businesses. CI is among the market leaders in applying industry segmentation
techniques to design products and services tailored to the needs of its targeted
customer groups.
During 1998, CI completed an extensive review of its business and developed a
new, more effective operating model, that management believes will position CI
as a world class competitor for the new century. The basis for this model was to
move decision-making authority and resources closer to CI's customers.
CI's focus during 1999 was the transition to this operating model. The model
includes branches, located throughout the U.S., that provide customer support in
the areas of underwriting, loss control, sales and claims, and a centralized
processing center in Maitland, Florida that houses premium processing and
accounting for all branches, and includes a call center for increased customer
service. Eight claim service centers, located throughout the U.S., provide
customers and claimants with improved service through more specialized claim
handling and easier claim reporting.
The efficiencies resulting from these changes are expected to decrease expenses
in underwriting and claims through the implementation of new technology, process
redesign and centralization. In addition, CI recognizes that an even lower cost
platform is necessary to be successful in the small commercial marketplace.
During 2000, CI will be consolidating its underwriting for small commercial
products with the existing centralized processing. Management expects that this
centralization, along with the implementation of new technology, tools and
processes, will allow CI to improve underwriting and further lower the cost
model related to its small commercial business.
PERSONAL INSURANCE
On October 1, 1999, certain CNA subsidiaries completed a previously announced
transaction with The Allstate Corporation (Allstate) involving the transfer of
substantially all of CNA's personal lines insurance business. See Note O to the
Consolidated Financial Statements.
Personal Insurance (PI) sold primarily personal auto and homeowners coverages
and also offered excess liability, separate scheduled property, boat-owners and
other recreational vehicle insurance. These coverages were primarily sold in a
package product.
CNA E&S
CNA E&S (E&S) provides specialized insurance and other financial products for a
wide array of commercial customers. Risks covered by E&S are generally viewed as
high risk and less predictable in exposure than those covered by the more
traditional insurers. By combining superior insurance and financial expertise
with a detailed understanding of customer operations and future direction, E&S
is able to create and implement innovative business solutions that are valued by
the customer. In addition, E&S actively seeks business partners who can
supplement CNA resources and enhance value for the customer.
CNA UNISOURCE
CNA UniSource offers outsourcing services and other financial products that
relieve businesses of many administrative tasks, allowing them more time to
focus on their core objectives. CNA UniSource provides human resources (HR)
information technology, payroll and benefits processing and Professional
Employer Organization (PEO) services. CNA UniSource is also engaged in
delivering Internet-based HR and payroll administrative services and is a leader
in the implementation of HR information outsourcing for large-scale businesses.
When it functions as a PEO, CNA UniSource establishes a co-employment
relationship with its clients and contractually assumes substantial employer
administrative responsibilities such as regulatory compliance and benefits
administration. At December 31, 1999, CNA Unisource had 768 clients with over
30,000 co-employees and conducts business in 45 states and the District of
Columbia via 30 geographically dispersed service offices and a state-of-the-art
customer service call center. The number of co-employees grew 150 percent
compared with 1998. The primary sales force is comprised of independent
insurance agencies. Management expects significant growth in the number of
clients and co-employees over the next several years.
16 1999 ANNUAL REPORT
OPERATING RESULTS
Year Ended December 31 1999 1998 1997
(In millions of dollars)
Net earned premiums $4,799 $5,247 $5,092
Benefits and expenses 5,791 6,050 5,491
Restructuring and other related charges 60 96 -
Underwriting loss (1,052) (899) (399)
Net investment income 686 744 787
Other revenues 80 48 50
Other expenses 77 52 6
Pre-tax operating income (loss) (363) (159) 432
Income tax benefit (expense) 162 105 (106)
NET OPERATING INCOME (LOSS) $(201) $(54) $326
RATIOS
Loss and loss adjustment expenses 90.4% 83.1% 74.9%
Expenses 31.0 32.6 31.8
Dividends 0.5 1.4 1.1
COMBINED 121.9% 117.1% 107.8%
SUMMARY
Agency Market Operations consists primarily of commercial property/casualty
insurance. For the first nine months of 1999, Agency Market Operations also
includes results of PI, which was transferred to Allstate effective October 1,
1999. Net written premium for the combined CI and E&S business units was $3.3
billion in 1999, down from $3.8 billion in 1998. This decrease reflects the
impact of the increased use of reinsurance and efforts to achieve adequate
pricing and the shedding of unprofitable business. Agency Market Operations had
a net operating loss of $201 million, compared with a $54 million loss in 1998.
The larger loss was due primarily to strengthening of prior year reserves and
the loss ratio for the 1999 accident year. Partially offsetting the effect of
the reserve strengthening was the positive impact of reinsurance, rate and
underwriting actions and regulatory changes in the basis on which certain
insurance-related assessments are calculated.
PREMIUMS
Earned premiums decreased by $448 million in 1999 from the prior year. This
decrease was mainly attributable to the transfer of essentially all the
Company's PI business to Allstate in the fourth quarter, which resulted in a
decrease in net earned premiums of $297 million. Net earned premiums for the
combined CI and E&S business units decreased $153 million during 1999, primarily
due to rate and underwriting actions taken to improve the core book of business
and the impacts of reinsurance agreements executed in 1999.
Earned premiums for 1998 increased by $155 million, or approximately 3.0%, which
was primarily attributable to premiums from involuntary risks. The increase in
involuntary risk premiums in 1998 as compared with 1997 was largely a function
of the 1997 involuntary risk premiums being reduced by a revision of prior
years' estimated premiums. Earned premiums for PI grew $61 million in 1998.
Contributing to the growth was the strong product identity of the Personal
Package policy, a personal insurance product providing a wide range of available
coverage options and the convenience of single policy delivery and combined
billing.
UNDERWRITING RESULTS
Underwriting losses for 1999 were $1.1 billion as compared to $899 million in
1998 due to deterioration in the combined ratio partially offset by reductions
in volume. The combined ratio for 1999 increased 4.8 points due to an increase
in the loss ratio of 7.3 points partially offset by decreases in the expense and
dividend ratios of 1.6 points and 0.9 points, respectively. The increase in the
loss ratio is principally due to increased adverse loss reserve development in
1999 partially offset by the beneficial effects of reinsurance agreements
executed in 1999. The 1999 adverse loss reserve development included development
related to automobile, workers' compensation and packaged general liability
exposures. The decrease in the expense ratio is attributable to lower
restructuring and other related charges in 1999 as compared to 1998. See the
discussion of restructuring and other related charges on page 31 and Note N to
the Consolidated Financial Statements. Additionally, Agency Market Operations'
1999 expense ratio benefited 0.9 points from regulatory changes in the basis on
which certain insurance-related assessments are calculated.
Underwriting results for 1998 declined by $500 million as compared with 1997 due
to a combination of increases in volume and an increase in the combined ratio.
The combined ratio for 1998 increased 9.3 points primarily attributable to an
8.2 point increase in the loss ratio. Contributing to this increase were net
changes in reserve development and catastrophe losses. Restructuring and other
related charges also contributed to the increase in the combined ratio. Net
adverse reserve development in 1998 was $168 million as compared with net
favorable reserve development of $276 million in 1997. Management strengthened
reserves in 1998 primarily in response to deteriorating claim experience for
asbestos and other mass tort exposures. Reserves were also increased for
construction defect claims. Beginning in 1997, actions were taken to mitigate
further exposure to construction defect liabilities that arose almost
exclusively out of exposures underwritten in California. The favorable loss
development in involuntary risks in 1997 was attributable to better than
expected results in workers' compensation and private passenger automobile lines
stemming from improved frequency and severity in these lines. In 1998,
catastrophe losses were $131 million higher than the 1997 losses of $68 million.
CNA FINANCIAL CORPORATION 17
SPECIALTY OPERATIONS
BUSINESS OVERVIEW
Specialty Operations provides a broad array of professional, financial and
specialty property/casualty products and services through a network of brokers,
managing general agencies and independent agencies. Specialty Operations
provides creative solutions for managing the risks of its clients, including
architects, engineers, lawyers, healthcare professionals, financial
intermediaries and corporate directors and officers.
Specialty Operations is composed of three principal groups.
CNA PRO
CNA Pro is one of the largest providers of non-medical professional liability
insurance and risk management services in the U.S. CNA Pro's customers include
architects and engineers, lawyers, accountants and real estate agents and
brokers, along with a broad range of large and small corporate clients and
not-for-profit organizations. CNA Pro's products include errors and omissions,
directors and officers, and employment practices liability coverages and a broad
range of fidelity products. Products are distributed on a national basis through
a variety of channels including brokers, agents and managing general agents.
CNA HEALTHPRO
CNA HealthPro offers a comprehensive set of specialized insurance products and
clinical risk management consulting services designed to assist health care
providers in managing the quality-of-care risks associated with the delivery of
healthcare. Key customer segments include individual, small group and large
corporate purchasers of malpractice insurance. Caronia Corporation, acquired
during 1997, provides third-party claims administration for medical professional
liability insureds.
CNA GUARANTY AND CREDIT
CNA Guaranty and Credit provides credit insurance on short-term trade
receivables for domestic and international clients and credit enhancement
products that focus on asset backed transactions. Credit insurance is primarily
distributed through captive agents with additional distribution through brokers
and financial institutions. Credit enhancement products are distributed through
specialty brokers and directly to customers.
OTHER OPERATIONS
Other operations consisted principally of Hedge Financial Products, which
focused on securitization of insurance risk and the embedding of financial
protections within traditional insurance programs, and agricultural and
entertainment insurance business. During 1999 and 1998 the Company decided to
exit Hedge Financial Products, and argiculture and entertainment insurance
businesses, respectively.
OPERATING RESULTS
Year Ended December 31 1999 1998 1997
(In millions of dollars)
Net earned premiums $1,001 $1,092 $1,251
Benefits and expenses 1,166 1,251 1,397
Restructuring and other related charges - 5 -
Underwriting loss (165) (164) (146)
Net investment income 235 245 268
Other revenues 19 27 14
Other expenses 30 44 10
Pre-tax operating income 59 64 126
Income tax expense (10) (6) (31)
NET OPERATING INCOME $49 58 95
RATIOS
Loss and loss adjustment expenses 90.6% 87.0% 80.8%
Expenses 25.9 28.1 30.9
COMBINED 116.5% 115.1% 111.7%
SUMMARY
Specialty Operations' operating income for 1999 declined principally because of
unfavorable loss reserve development in CNA HealthPro related to prior policy
years. Modest premium growth in non-medical professional liability and financial
insurance was offset by declines in medical malpractice due to efforts to
achieve needed price increases and eliminate unprofitable business. Specialty
Operations remains committed to conservative underwriting practices in this
difficult environment.
PREMIUMS
Earned premiums for 1999 declined $91 million, or 8.3%, from 1998 levels,
primarily due to declines in CNA HealthPro and businesses exited. Premiums for
CNA HealthPro declined $40 million, due mainly to two new ceded reinsurance
agreements covering 1999 risks and business lost due to efforts to achieve price
increases and eliminate unprofitable business. Hedge, agriculture and
entertainment premiums decreased a combined $46 million from 1998 due to the
decision to exit from these lines of business.
Premiums in 1998 decreased by $159 million, or approximately 12.7%, compared
with 1997. The decrease was largely attributable to an approximate $100 million
reduction in premiums caused by management's decision to exit the agricultural
insurance market. The remaining decline in premiums in 1998 was due to increased
price competition and management's resolve not to accept inadequately priced
business.
18 1999 ANNUAL REPORT
Specialty Operations' commitment to prudent underwriting and responsible pricing
is expected to continue to limit premium growth until general market pricing
improves.
UNDERWRITING RESULTS
The underwriting loss for 1999 was $165 million, essentially unchanged from
1998, due to the offsetting impacts of a higher combined ratio and lower earned
premiums. The combined ratio for 1999 increased 1.4 points due principally to a
3.6 point increase in the loss ratio, which was negatively impacted by adverse
claim experience in the medical malpractice and non-medical professional
liability lines of business. The impact of adverse claim experience in these
lines to business was to increase the 1999 loss ratio for Specialty Operations
by 6.6 points over its 1998 level. The 1999 loss ratio was favorably impacted
by 4.1 points due to the exit from the agricultural insurance line of business.
The expense declined 2.2 points in 1999 due principally to businesses exited.
The underwriting loss for 1998 worsened by $18 million over 1997 due to
deterioration in the loss ratio, partially offset by a decrease in volume. While
the exit of the agricultural and entertainment lines of business, as well as
decisions not to write inadequately priced business, had a favorable impact, an
unfavorable change in medical malpractice reserve development resulted in the
net increase in the loss ratio of 6.2 points.
CNA FINANCIAL CORPORATION 19
CNA RE
BUSINESS OVERVIEW
CNA Re operates globally as a reinsurer in the broker market, offering both
treaty and facultative products through major offices in London and Chicago. CNA
Re's operations include the business of CNA Reinsurance Company Limited (CNA Re
U.K.), a U.K. company, and U.S. operations based in Chicago. While CNA Re's
primary product is traditional treaty reinsurance, it is also developing
positions in facultative and financial reinsurance. CNA Re also participates in
Lloyd's of London through CNA Corporate Capital Ltd., which provides capital to
Lloyd's Syndicate 1229.
CNA Re U.K. writes in both the London market and other European markets through
its headquarters in London and offices in Amsterdam, Milan, Singapore and
Zurich. As one of the largest reinsurers in this market, CNA Re U.K. has ratings
of A (Strong) from Standard & Poor's, A (Excellent) from A.M. Best and A3 (Good)
from Moody's. CNA Re U.K. writes U.S. and international treaty and professional
liability business, including medical malpractice, errors and omissions, and
directors and officers coverages.
The U.S. operations of CNA Re provide products to the North American markets.
Treaty products include working layer property, working layer casualty, property
catastrophe, workers' compensation, products liability, general liability,
professional liability, specialty and excess and surplus lines. In addition,
financial reinsurance products are offered as well as property and casualty
facultative reinsurance.
OPERATING RESULTS
Year Ended December 31 1999 1998 1997
(In millions of dollars)
Net earned premiums $1,176 $944 $898
Benefits and expenses 1,369 1,005 991
Restructuring and other related charges - 1 -
Underwriting loss (193) (62) (93)
Net investment income 161 163 153
Other revenues 4 5 7
Other expenses - 11 5
Pre-tax operating income (loss) (28) 95 62
Income tax benefit (expense) 15 (27) (11)
NET OPERATING INCOME (LOSS) $(13) $68 $51
RATIOS
Loss and loss adjustment expenses 84.9% 74.9% 74.6%
Expenses 31.5 31.7 35.8
COMBINED 116.4% 106.6% 110.4%
SUMMARY
Net operating income in 1999 was adversely affected by $122 million in after-tax
catastrophe losses, compared with $50 million in after-tax catastrophe losses in
1998. The 1999 results also include $23 million in after-tax reserve
strengthening related to excess workers' compensation reinsurance. Premium
growth for the year was the result of new business and expansion of profitable
treaty relationships.
PREMIUMS
Earned premiums increased $232 million, or 24.6%, versus 1998. This growth
occurred in both foreign and domestic markets in the professional and standard
lines of business. Growth was experienced via expansion of treaty relationships
with existing clients, the continued development of new product lines and growth
in global facultative operations and the Canadian branch.
Earned premiums in 1998 increased by $46 million, or 5.1%, compared with 1997.
The increase in 1998 premiums was primarily a function of adverse premium
development of prior year estimates recorded in 1997.
UNDERWRITING RESULTS
CNA Re's 1999 combined ratio increased by 9.8 points compared to 1998, primarily
as a result of a 10.0 point increase in the loss ratio. As previously noted, the
underwriting results for 1999 were dramatically impacted by the series of
European windstorms, Hurricane Floyd and other international catastrophes, which
contributed to an aggregate 9.4 point increase in 1999's loss ratio relative to
1998.
The improvement in underwriting results of $31 million in 1998, as compared with
1997, was driven by a 4.1 point decline in the expense ratio. The decrease in
underwriting expenses in 1998 as compared with 1997 was principally due to the
start-up costs associated with expansion into facultative reinsurance and the
establishment of branch offices abroad during 1997.
20 1999 ANNUAL REPORT
GLOBAL OPERATIONS
BUSINESS OVERVIEW
Global Operations provides products and services to U.S.-based customers,
customers expanding overseas and foreign customers. Product distribution is
primarily through brokers and independent agents. The major product lines
include marine, commercial and contract surety, warranty and specialty products,
as well as commercial property and casualty.
Global Operations is composed of five principal groups.
MARINE
On July 1, 1998, CNA completed the acquisition of Maritime Insurance Co., Ltd.
(Maritime Ltd.), based in the U.K., and its Canadian subsidiary, Eastern Marine
Underwriters (EMU), strengthening CNA's position as a global marine insurer. In
1999, CNA launched the marketing brand, CNA Maritime, which unites three
industry leaders to serve global ocean marine needs. Marine Office of America
Corp. (MOAC), a leading provider of ocean marine insurance in the U.S., offers
hull, cargo, primary and excess marine liability, offshore energy, marine claims
and recovery products and services. Business is sold through national brokers,
regional marine specialty brokers and independent agencies, which work closely
with MOAC's ten branch offices located throughout the U.S. Maritime Ltd. is a
leading marine cargo and related marine insurance specialist with markets
extending across Europe and throughout the world. EMU serves the Canadian
market. As foreign subsidiaries, Maritime Ltd. and EMU are included in the
results of, and are managed by, the International business unit. Growth is
expected to result from leveraging the relationships with CNA's domestic
producers, implementing e-commerce, and providing customers with services and
products throughout the world.
SURETY
On October 1, 1997, Global Operations completed the merger of CNA's surety
operations with Capsure Holdings Corp.'s subsidiaries, Western Surety Company
and Universal Surety of America to form CNA Surety Corporation (CNA Surety). CNA
owns approximately 63% of CNA Surety.
CNA Surety, which is traded on the New York Stock Exchange (SUR), is the largest
publicly traded provider of surety bonds, with approximately 9% of that market.
Among its U.S. competitors, CNA Surety has the most extensive distribution
system and one of the most diverse surety product lines, offering small, medium
and large contract and commercial surety bonds. CNA Surety provides surety and
fidelity bonds in all 50 states through a combined network of approximately
37,000 independent agencies. Growth is expected to come from CNA Surety's broad
product and distribution resources and international expansion.
WARRANTY
CNA's warranty operation (Warranty) is the fourth largest warranty underwriter
in the U.S., providing extended service contracts, warranties and related
insurance products that protect the consumer or business from the financial
burden associated with the breakdown, under-performance or maintenance of a
product. Warranty's key market segments consist of vehicle, retail, home,
commercial and original equipment manufacturer. Each market segment distributes
its product via a sales force employed or contracted through a program
administrator.
CNA National Warranty Corporation sells vehicle warranty services in the U.S.
and Canada. In July 1998, Warranty expanded into the home warranty segment with
the acquisition of a 90% interest in Home Security of America, Inc., one of the
largest home warranty administrators in the U.S. Also, in January 1998 the
Company acquired a joint venture interest in Specialty Underwriters, a provider
of innovative equipment maintenance management services to companies worldwide.
As these entities are not licensed insurance companies, they purchase coverages
from various CNA affiliates to back the warranty products they sell.
Warranty expects growth from cross marketing efforts with other CNA businesses,
increasing product distribution via the CNA independent agency force and
introducing several warranty products in the international marketplace.
INTERNATIONAL
International is responsible for coordinating and managing the direct business
of the foreign property/casualty operations of CNA. This business identifies and
capitalizes on strategic indigenous opportunities outside the U.S. by continuing
to build its own capabilities and by initiating acquisitions, strategic
alliances and start-up operations that allow for expansion into targeted
markets. In addition, International provides U.S.-based customers that are
expanding their operations overseas with a single source for their commercial
insurance needs. To this end, International has placed underwriters within CI
branches.
International currently oversees operations in Europe, Latin America, Canada and
Asia. In Europe, CNA formed CNA Insurance Company (Europe) Limited (CIE) in
1996, which is based in London. CIE has since opened offices in France, Germany
and the Netherlands and has purchased a managing general agent in Denmark.
Through its network of offices, International intends to build on the successes
of several CNA specialty products (including travel and accident, warranty and
financial lines insurance) and introduce those products across Europe.
International also includes the results of U.K. based Maritime Ltd.
In Latin America, the Company acquired a 70% interest in Omega A.R.T. in 1997, a
workers' compensation company domiciled in Argentina. Omega ranks as the fourth
largest workers' compensation company in Argentina based on premium volume.
CNA FINANCIAL CORPORATION 21
CNA Canada, formed in 1998, sells a broad array of property/casualty and
specialty insurance products through brokers and managing general agents. The
results of EMU are also included in International.
The short to mid-term growth opportunities for International are in the more
mature foreign insurance markets, such as Europe and Canada, and in specialty
insurance products. In the longer term, emphasis will be on the emerging
insurance markets in Latin America and Asia.
FIRST INSURANCE COMPANY OF HAWAII
First Insurance Company of Hawaii, Ltd. (FICOH) is the oldest domestic insurer
in the state of Hawaii, dating back to 1911. FICOH is also the largest
commercial insurance company and the second largest property/casualty insurance
company in the state. FICOH offers commercial and personal lines solely in the
state of Hawaii. Distributed through independent agencies, the business mix has
historically been approximately 65% commercial and 35% personal lines.
On November 1, 1999, Tokio Marine & Fire Insurance Co. Ltd. (Tokio) and CNA
executed an agreement to increase Tokio's ownership share from 40% to 50%,
resulting in equal ownership by CNA and Tokio. Additionally, on November 1,
1999, Tokio merged their Hawaii-based operations into FICOH. CNA retains control
over FICOH's daily operations. CNA views this transaction as a positive step in
the ongoing strategic relationship between CNA and Tokio.
CNA's partnership with Tokio is expected to generate growth opportunities and
facilitate international expansion. Additionally, CNA foresees growth
opportunities through collaborative partnerships between FICOH and other CNA
businesses.
OPERATING RESULTS
Year Ended December 31 1999 1998 1997
(In millions of dollars)
Net earned premiums $1,010 $941 $854
Benefits and expenses 1,037 991 858
Restructuring and other related charges - 1 -
Underwriting loss (27) (51) (4)
Net investment income 132 110 117
Other revenues 120 82 29
Other expenses 100 80 26
Pre-tax operating income 125 61 116
Income tax expense (33) (18) (35)
Minority interest (28) (25) (29)
NET OPERATING INCOME $64 $18 $52
Ratios
Loss and loss adjustment expenses 56.9% 62.2% 57.4%
Expenses 45.5 42.8 43.0
Dividends 0.3 0.4 0.1
COMBINED 102.7% 105.4% 100.5%
SUMMARY
Global Operations' 1999 net operating income increased $46 million over 1998
levels. Underwriting loss improved primarily due to improved loss experience in
Surety, International and MOAC. MOAC and International have benefited from a
change in the mix of business that has reduced exposure to catastrophes and
large property losses. Increased net investment income for 1999 was primarily
due to the inclusion of a full year's results for Maritime Ltd. The increase in
other revenues predominantly reflects growth in non-insurance operations,
discussed further below.
PREMIUMS
Earned premiums increased $69 million, or 7.3%, from 1998 levels. International
contributed $56 million of the increase, the majority of which was attributable
to a full year's premiums from Maritime Ltd. Surety contributed increased
premium of $29 million, due to generally favorable domestic economic conditions
for public construction and expansion internationally. Warranty premiums
increased $24 million over 1998, mainly due to robust sales of new automobiles.
Partially offsetting this growth was a decrease in premiums in MOAC of $49
million due to competitive marine market conditions.
Earned premiums in 1998 increased by $87 million, or approximately 10.2%,
compared with 1997. This increase was primarily attributable to the effects of
acquisitions and mergers, including Omega, Maritime Ltd. and CNA Surety, which
added approximately $165 million. Offsetting this growth was the sale of a book
of business and MOAC's strategic decision to exit unprofitable non-core lines of
business.
UNDERWRITING RESULTS
Underwriting results improved $24 million from 1998 due to a decrease in the
combined ratio of 2.7 points. This was primarily due to improved loss ratios in
MOAC, Surety and CNA International partially offset by an increase in the loss
ratio in Warranty. The improvement in the MOAC and International loss ratios was
due to a change in the mix of business that reduced exposure to catastrophes and
large property losses. The decrease in Surety's loss ratio was due to favorable
loss development of $13 million in 1999 compared to $4 million in 1998. The
increase in the loss ratio in Warranty was due to unfavorable loss experience in
its automotive business.
Global Operations' underwriting results declined in 1998 by $47 million as
compared with 1997 due to deterioration in the loss ratio of 4.8 points. The
deterioration was due to a net unfavorable change in loss development of $64
million and higher catastrophe losses of $21 million. The change in net
unfavorable development of $64 million was comprised of approximately $111
million unfavorable year-over-year change related to Surety, MOAC and
discontinued pools, offset in part by favorable year-over-year change of
approximately $47 million related principally to the International and Warranty
businesses.
22 1999 ANNUAL REPORT
OTHER REVENUES AND EXPENSES
Other revenues were $120 million in 1999, an increase of $38 million over 1998
results. The growth was primarily attributable to non-insurance warranty
revenues of $98 million, which compares favorably to 1998 and 1997 revenues of
$77 million and $28 million, respectively. Non-insurance results included
warranty sales associated with CNA National Warranty Corporation, Home Security
of America, and Specialty Underwriters. Revenues related to this business grew
approximately 27% over 1998.
CNA FINANCIAL CORPORATION 23
RISK MANAGEMENT
BUSINESS OVERVIEW
Risk Management (RM) markets and sells insurance products and services to large
U.S.-based companies. These customers have a minimum of $1 million or more in
casualty claims each year. It is estimated that there are approximately 8,500
targeted companies within this market segment. RM is one of 11 significant
competitors and has a very strong reputation and presence, particularly as a
writer of casualty insurance lines.
RM includes two groups.
RISK TRANSFER Risk Transfer writes property/casualty lines of insurance. The
casualty insurance business focuses on workers' compensation, commercial auto
liability, general liability through traditional and innovative financial risk
products, and excess coverage needs. The excess products provide umbrella,
excess workers' compensation and high excess coverages.
Over the last two years, domestic and global property capabilities have been
increased, providing primary, inland marine and excess property facilities.
Global property includes a strategic alliance with Protection Mutual to address
the needs of the highly protected risk customer. Global property also includes
Northrock Insurance Company Limited, a wholly owned subsidiary in Bermuda,
offering property excess of loss insurance coverages.
RSKCoSM Formed in 1998, RSKCoSM provides total risk management services
(integrated and single component) related to claims, loss control, cost
management and information services to the commercial insurance marketplace.
RSKCo'sSM capabilities include:
CLAIM SERVICES: Services that allow customers to select from a single source the
desired level of service-from an integrated claims package to any component
service.
LOSS CONTROL: Pre-loss prevention services include industrial hygiene,
laboratory, ergonomics, field consulting and training, property, environmental
and transportation loss control. Driver training is provided through Smith
System Driver Improvement Institute, Inc., a wholly owned subsidiary.
COST MANAGEMENT: Post-loss cost control services through case management,
medical bill review, preferred provider organizations and other unique
partnerships to reduce lost work days through rapid response, quality care and
effective coordination.
INFORMATION SERVICES: These services include data access, reporting tools,
information and benchmarking analysis, consulting and custom reporting services.
OPERATING RESULTS
Year Ended December 31 1999 1998 1997
(In millions of dollars)
Net earned premiums $801 $823 $776
Benefits and expenses 936 1,018 974
Underwriting loss (135) (195) (198)
Net investment income 154 144 158
Risk management services revenues 316 230 194
Risk management services expenses 307 227 216
Non-insurance restructuring and other
related charges 10 88 -
Pre-tax operating income (loss) 18 (136) (62)
Income tax benefit 1 48 25
NET OPERATING INCOME (LOSS) $19 $(88) $(37)
Ratios
Loss and loss adjustment expenses 94.3% 89.1% 101.8%
Expenses 22.6 30.7 24.3
Dividends - 3.9 -0.6
COMBINED 116.9% 123.7% 125.5%
SUMMARY
Despite reserve strengthening, overall results rebounded to net operating
income. Positively influencing results were underwriting expense savings,
reinsurance programs, the impact of favorable regulatory changes in the basis on
which certain insurance-related assessments are calculated, and reduced
restructuring-related charges compared to those recorded in 1998. Earned
premiums decreased primarily due to greater use of reinsurance, program redesign
and disciplined underwriting of new and renewal business.
PREMIUMS
Earned premiums for Risk Management declined $22 million or 2.7% in 1999, as
compared with 1998. This decrease resulted from Risk Management's decision to
take advantage of a favorable reinsurance market and cede a larger portion of
its direct premiums, the redesign of existing risk management programs and lost
business as a result of pricing actions taken in a difficult market.
Earned premiums in 1998 increased by $47 million, or 6.1%, as compared with
1997. The increase is due to growth of $30 million in the property facility
business which was introduced in the latter part of 1997, underlying momentum in
Risk Management's core primary casualty business, and new business growth.
24 1999 ANNUAL REPORT
UNDERWRITING RESULTS
Risk Management's underwriting loss decreased $60 million in 1999 as the
combined ratio for 1999 decreased 6.8 points due to decreases in the expense and
dividend ratios of 8.1 points and 3.9 points, respectively, partially offset by
an increase in the loss ratio of 5.2 points. The increase in the loss ratio was
principally the result of adverse loss development in prior year reserves, which
was primarily related to asbestos exposures, offset in part by the beneficial
effects of reinsurance agreements executed in 1999. Risk Management's expense
ratio benefited 4.9 points from regulatory changes in the basis on which certain
insurance-related assessments are calculated. The decrease in the dividend ratio
is due to favorable development in dividend reserves.
Underwriting losses in 1998 remained consistent with 1997 as the aforementioned
increase in premiums of $47 million was offset by a like increase in benefits
and expenses as customers moved to guaranteed cost insurance.
Restructuring and other related charges in 1999 and 1998, as discussed on page
31 and Note N to the Consolidated Financial Statements, were $10 million and $88
million, respectively.
Risk management services revenues and expenses in 1999 include revenues for
services provided by RSKCoSM to other units within the Risk Management segment
that are eliminated at the consolidated level. Such intrasegment revenue and
expenses eliminated at the consolidated level were $176 million for the year
ended December 31, 1999.
CNA FINANCIAL CORPORATION 25
GROUP OPERATIONS
BUSINESS OVERVIEW
Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. Its products and services are primarily
distributed through brokers. In addition, Group Operations provides health
insurance to federal employees, retirees and their families; managed care and
self-funded medical excess insurance; medical provider network management and
administration services; and reinsurance for life and health insurers.
Group Operations includes five principal groups.
SPECIAL BENEFITS Special Benefits provides group term life insurance, short and
long term disability, statutory disability, long term care and accident
products. Products are marketed through a nationwide operation of 31 sales
offices, third party administrators, managing general agents and insurance
consultants.
PROVIDER MARKETS Provider Markets is comprised of two major businesses. CNA
Health Partners provides comprehensive managed care services to employers
offering self-funded medical plans and to healthcare provider networks,
including provider organizations that manage capitated risks. Services offered
include network development and management, medical management, medical claims
administration, consulting services and management services. Group Reinsurance
writes assumed reinsurance on health, life and other related products written on
a group basis, as well as excess risk coverages related to health care.
LIFE REINSURANCE Life Reinsurance reinsures individual life and health products
marketed by unaffiliated life insurance companies throughout North America.
Sales are through an internal sales force. See page 39 for further discussion.
FEDERAL MARKETS Federal Markets is the second largest provider of health
insurance benefits to federal employees, and operates through the Mail Handlers
Benefit Plan under the Federal Employees Health Benefit Plan (FEHBP). In
addition to insuring approximately one million members, Federal Markets is
responsible for all claim management activities under the plan, such as large
case management, hospital and provider bill negotiations, fraud detection
activities and vendor contracts.
HEALTH BENEFITS Health Benefits markets direct mail specialty products such as
accidental death and dismemberment, term life and dental insurance to bank
customers and federal employees.
OPERATING RESULTS
Year Ended December 31 1999 1998 1997
(In millions of dollars)
Net earned premiums $3,571 $3,733 $3,936
Net investment income 130 133 117
Other revenues 40 24 17
Total operating revenues 3,741 3,890 4,070
Benefits 3,053 3,171 3,408
Expenses 699 763 680
Restructuring and other related charges 5 39 -
Pre-tax operating loss (16) (83) (18)
Income tax benefit 10 35 10
NET OPERATING LOSS $(6) $(48) $(8)
SUMMARY
Group Operations experienced $42 million of improved operating results in 1999
over 1998. Key components of the improvement include better underwriting results
in Special Benefits' life and disability product lines, the exit of selected
medical markets and lower restructuring and other related charges, partially
offset by adverse losses and reserve development in the personal accident
business.
PREMIUMS
Earned premiums declined in 1999 by $162 million, or 4.3%, from 1998. Health
Benefits premiums declined $344 million, almost entirely due to the exit of
selected medical markets in late 1998. Approximately half of the Health Benefits
decline was offset by premium growth in Federal Markets of $70 million
reflecting medical claim trends, and growth in Life Reinsurance and Special
Benefits of $60 million and $53 million, respectively.
During 1998, premiums decreased by approximately 5.2% or $203 million as
compared with 1997. The decrease was attributable, in part, to a $166 million
decrease in the medical lines of coverage in Health Benefits, resulting from the
decision to exit certain markets. Additionally, due to changes in coverage
terms, FEHBP premiums decreased by $90 million. These decreases were offset, in
part, by premium growth of $65 million across almost all other lines of
business.
OPERATING RESULTS
Pre-tax operating loss in 1999 improved by $67 million compared to 1998. Health
Benefits pre-tax operating income improved $81 million, due to the exit from the
employer health and affinity lines of business in 1998 and due to the
restructuring and other related charges recorded in 1998. Offsetting these
improvements was a decline in Special Benefits' pre-tax operating income of $19
million due to adverse losses and reserve development in personal accident
business, partially offset by improved underwriting results on life and
disability products.
26 1999 ANNUAL REPORT
Pre-tax operating loss in 1998 increased by $65 million as compared with 1997.
The increase was primarily due to restructuring and other related charges of $39
million related to the decision to exit the insured comprehensive medical
portion of the employer and affinity markets. The majority of the inforce
business was sold effective January 1, 1999. Earned premiums for these lines of
business was approximately $400 million in 1998. In addition, Special Benefits
1998 accident coverages experienced $30 million in increased losses, both from
adverse claim developments and unusually high claim activity in the traditional
accident insurance line.
CNA FINANCIAL CORPORATION 27
LIFE OPERATIONS
BUSINESS OVERVIEW
Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers and various other independent insurance consultants.
Life Operations is composed of four principal groups.
INDIVIDUAL LIFE Individual Life offers primarily level premium term life
insurance, universal life insurance and related products. New sales of term life
have placed CNA as first or close to first in the market in each of the last
three years.
RETIREMENT SERVICES Retirement Services markets annuities and investment
products and services to both retail and institutional customers.
LONG TERM CARE Long Term Care products provide reimbursement for covered nursing
home and home health care expenses incurred due to physical or mental
disability.
OTHER OPERATIONS Other Life Operations businesses include viatical settlements
and developing operations in certain international markets.
See page 39 for further discussion.
OPERATING RESULTS
Year Ended December 31 1999 1998 1997
(In millions of dollars)
SALES VOLUME
Individual Life $ 873 $761 $645
Retirement Services 1,824 986 1,035
Long Term Care 343 299 251
International 78 50 41
Other 105 91 45
TOTAL $3,223 $2,187 $2,017
Net earned premiums $936 $823 $797
Net investment income 556 525 501
Other revenues 123 115 105
Total operating revenues 1,615 1,463 1,403
Benefits 1,122 998 950
Expenses 277 295 266
Restructuring and other related charges - 7 -
Pre-tax operating income 216 163 187
Income tax expense (71) (58) (66)
NET OPERATING INCOME $145 $105 $121
SUMMARY
Life Operations experienced strong growth in revenues and profitability in 1999.
Premium growth was primarily due to strong sales in retirement-related and long
term care products, as well as an increasing base of direct premiums for life
products. Net operating income growth was achieved primarily in Retirement
Services, Individual Life and in the viatical settlements business.
SALES
Sales volume increased to $3.2 billion in 1999, up 47.4% from 1998, principally
due to increased sales of Retirement Services products. Sales volume in 1998 was
8.4% higher than 1997. Sales volume is a cash-based measure which includes
premium and annuity considerations, investment deposits and other sales activity
that are not reported as premiums under generally accepted accounting
principles. The 1999 increase represents strong sales in Retirement Services and
a growing base of premiums for Life and Long Term Care. Despite an increased use
of reinsurance, net premium revenues have also shown strong growth, increasing
13.7% in 1999 and 3.3% in 1998.
Individual Life sales volume of $873 million represents a 14.7% increase over
1998's $761 million. Individual Life earned premiums were $306 million in 1999,
down 4.7% from $321 million in 1998. The primary reason for this decrease was a
reinsurance treaty that was completed in late 1998 that lowered the Company's
life insurance retention levels. Individual Life premiums in 1998 decreased from
$373 million in 1997, driven primarily by increased use of reinsurance.
28 1999 ANNUAL REPORT
Sales volume for Retirement Services increased to $1.8 billion in 1999 from $1.0
billion in 1998, primarily related to increased sales of institutional
investment products. Variable annuity sales increased 87% to $110 million.
Retirement Services earned premiums were $216 million in 1999, up 22.2% from
1998 premium of $177 million. 1998 earned premiums were essentially unchanged
from 1997 levels. The decreased sales volume from 1997 to 1998 was primarily due
to the discontinuance of fixed individual annuities and the lower volume of
guaranteed investment contracts sold in institutional markets due to the
interest rate and stock market environments in 1998.
Long Term Care sales volume of $343 million in 1999 represents a 14.7% increase
over the 1998 level of $299 million. Long Term Care premiums increased 16.6% in
1998 and 22.2% or $61 million in 1999 to reach $336 million.
International sales climbed to $78 million in 1999, for a second consecutive
year of growth, fueled primarily by retirement annuity sales in Chile. Viatical
sales volume has also continued to experience year-to-year growth, to reach $105
million in 1999. Viatical sales volume is measured as amounts paid to insureds,
along with other related costs, in return for assignment of their life insurance
policies.
OPERATING RESULTS
Life Operations continues to show strong performance in the individual life
market, where net operating income increased $7 million in 1999 to $83 million,
because of expense savings and improved mortality experience. Also, effective
use of reinsurance has reduced Life Operations exposure to volatility in its
results. Net operating income for Retirement Services for 1999 of $37 million
increased $16 million, or 76%, from 1998. This was primarily due to favorable
investment performance in the portfolio supporting Retirement Services' Index
500 product, and improved sales and economies of scale in the trust and banking
services operation. Net operating income from the viatical settlements business
improved by $12 million due primarily to expense reductions and the recent entry
into the profitable high net worth market.
CNA FINANCIAL CORPORATION 29
CORPORATE
Corporate results consist of interest expense on corporate borrowings, certain
run-off insurance operations, asbestos claims related to Fibreboard Corporation
(Fibreboard), financial guarantee insurance contracts, and certain non-insurance
operations, including the operations of AMS Services, Inc. (AMS), an information
technology and agency software development subsidiary. See Notes F and O to the
Consolidated Financial Statements.
The operating loss for 1999 was $202 million, approximately $10 million better
than 1998. The improvement was primarily attributable to decreased losses from
AMS of $20 million (each on an after-tax basis), partially offset by increased
losses from run-off insurance operations. In the fourth quarter of 1999, the
Company sold most of its interest in AMS.
Operating losses for 1998 increased by $99 million compared with 1997. This
increase was primarily attributed to a net unfavorable change in loss
development on asbestos claims related to Fibreboard of approximately $46
million after-tax, an increase in operating losses attributable to AMS, a
decrease in investment income and an increase in interest expense.
30 1999 ANNUAL REPORT
RESTRUCTURING AND OTHER RELATED CHARGES
On August 5, 1998, CNA announced estimates of the financial implications of its
initiatives to achieve world-class performance. "World-class performance," as
defined by the Company, refers to the Company's intention to position each of
its strategic business units (SBU) as a market leader by sharpening its focus on
customers and employing new technology to work smarter and faster. In the third
quarter of 1998, the Company finalized and approved a plan to restructure its
operations. The restructuring plan focused on a gross reduction in the
then-current workforce of approximately 4,500 employees resulting in a net
reduction of approximately 2,400 employees, the consolidation of certain
processing centers, the closing of various facilities, and the exiting of
certain businesses. The details of the restructuring and other related charges
recognized in 1998 and 1999 are discussed in Note N to the Consolidated
Financial Statements. The initial expectation from management was that the
Company's initiatives would result in a reduction of approximately 2 points in
the Company's expense ratio due to savings of approximately $300 to $350 million
on an annualized basis.
As of December 31, 1999, the Company had completed essentially all aspects of
its restructuring plan. Management estimates the Company has achieved annualized
run-rate expense savings of $381 million. "Annualized run-rate expense savings,"
as defined by the Company, refers to the difference between the normalized
current expense ratio and a base-line expense ratio applied to a base-line
measure of revenue, generally written premiums. Approximately $70 million of the
annualized run-rate savings relate to the Personal Insurance business
transferred to Allstate. See Note O to the Consolidated Financial Statements for
a discussion of the Personal Insurance transaction. The normalization of the
current expense ratio involves adjusting the expense ratio, exclusive of
restructuring and other related charges, for other expenses that are not
expected to recur or persist in the restructured operating platform. Because
many of the expenses to which these adjustments relate are included in the
results of operations determined in accordance with generally accepted
accounting principles, the annualized run-rate expense savings cannot be
interpreted as the difference in expenses incurred in 1999 compared to 19