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Cna Financial Corp · 10-K · For 12/31/00 · EX-13.1

Filed On 3/16/01 5:21pm ET   ·   SEC File 1-05823   ·   Accession Number 891554-1-501431

  in   Show  and 
  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 3/16/01  Cna Financial Corp                10-K       12/31/00    6:199                                    Document Tech Inc/FA

Annual Report   ·   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         27    143K 
 2: EX-10.10    First Amendment to Sale and Purchase Agreement        60    242K 
 3: EX-12.1     Computation of Ratios                                  1      6K 
 4: EX-13.1     Annual Report                                        108±   475K 
 5: EX-21.1     Primary Subsidiaries of Cnaf                           2      7K 
 6: EX-23.1     Independent Auditors' Consent                          1      6K 


EX-13.1   ·   Annual Report

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CNA CHARTING THE COURSE -------------------------------------------------------------------------------- When CNA set out to turn the company's performance around two years ago, we began evaluating each aspect of our business with a fresh perspective. We were determined to target those areas where our expertise added the most value for our clients and, ultimately, our shareholders. This intensive look at our business is engaging literally thousands of employees. As a result, we've changed a great deal at CNA during the past two years - simplifying our business, clarifying our goals and applying renewed discipline and accountability to our performance. CNA is charting the course to a future of profitable growth by focusing on what we do best, and it's a journey that will continue to drive the creation of shareholder value. This Annual Report details our substantial progress to date and the strategies that will take us where we want to go. -------------------------------------------------------------------------------- CNA - WHO WE ARE CNA Financial Corporation is a holding company for property-casualty and life insurance companies and other related businesses. The CNA insurance group of companies is one of the largest writers of commercial property-casualty insurance in the United States - using underwriting to help businesses manage their risks. CNA is the country's second largest commercial insurance writer, the eighth largest property-casualty company and the 36th largest life insurance company. CNA's insurance products include standard commercial lines, specialty lines, surety, reinsurance, marine and other property and casualty coverages; life and accident insurance; group long term care, disability and life insurance; and pension products and annuities. CNA services include risk management, information services, underwriting, loss control and claims administration. Its products and services are marketed through agents, brokers and managing general agents. "CNA" is a registered service mark, trade name and domain name of CNA Financial Corporation authorized for use by its subsidiaries. CNA's major subsidiaries include The Continental Insurance Company, incorporated in 1853, Continental Casualty Company, incorporated in 1897, and Continental Assurance Company, incorporated in 1911. The company operates in all 50 states, as well as major international markets around the world. CNA's financial strength is reflected in revenues of $15.6 billion in 2000, and at year-end 2000, assets of $62.1 billion and stockholders' equity of $9.6 billion. CNA Financial Corporation stock is traded primarily on the New York Stock Exchange, and is approximately 87 percent owned by Loews Corporation. -------------------------------------------------------------------------------- Table of Contents 2 Letter to Shareholders 6 Enhancing Underwriting Expertise 8 Continuing Our Commitment to Life and Group 10 Improving Service and Efficiency 12 Maintaining a Disciplined Financial Approach 14 Building Worldwide Capabilities 16 Developing People and Partners 18 Building a Strong Reputation 20 Financial Highlights (1991-2000) 21 Management's Discussion and Analysis 41 Consolidated Financial Statements 74 Directors and Officers IBC Company Information --------------------------------------------------------------------------------
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FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- [Enlarge/Download Table] As of and for the Years Ended December 31 (In millions, except per share data and ratios) 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------------------- Results of Operations Revenues $ 15,614 $ 16,403 $ 17,162 $ 17,199 $ 16,988 ----------------------------------------------------------------------------------------------------------------------------- Net operating income (loss) $ 354 $ (145) $ (152) $ 488 $ 578 Net realized investment gains 860 192 434 478 387 Cumulative effect of a change in accounting principle, net of tax -- (177) -- -- -- ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 1,214 $ (130) $ 282 $ 966 $ 965 ============================================================================================================================= Earnings per share Net operating income (loss) $ 1.92 $ (0.85) $ (0.86) $ 2.59 $ 3.08 Net realized investment gains, net of tax and minority interest 4.69 1.04 2.35 2.58 2.09 Cumulative effect of a change in accounting principle, net of tax and minority interest -- (0.96) -- -- -- ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 6.61 $ (0.77) $ 1.49 $ 5.17 $ 5.17 ============================================================================================================================= Financial condition Invested assets $ 35,122 $ 35,560 $ 37,177 $ 36,203 $ 35,412 Total assets 62,068 61,219 62,432 61,675 60,455 Reserves 39,054 39,271 40,509 39,829 39,981 Debt 2,729 2,881 3,160 2,897 2,765 Stockholders' equity 9,647 8,938 9,157 8,309 7,060 Book value per common share $ 52.64 $ 47.66 $ 47.89 $ 44.01 $ 37.27 Return on average stockholders' equity 13.1% -1.4% 3.2% 12.6% 14.0% Statutory surplus Property-casualty companies* $ 8,387 $ 8,679 $ 7,593 $ 7,123 $ 6,349 Life insurance companies 1,274 1,222 1,109 1,224 1,163 ============================================================================================================================= * Surplus includes equity of property-casualty companies' ownership in life insurance subsidiaries. 1
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LETTER TO SHAREHOLDERS -------------------------------------------------------------------------------- Bernard L. Hengesbaugh Chairman and Chief Executive Officer Dear Shareholder: I am pleased to report continued progress during 2000 in our efforts to improve CNA's operating performance and to enhance shareholder value. As this year's results indicate, we have a lot of additional work to do before we attain the full measure of shareholder value that is within our reach. But we are on the right path. We are beginning to achieve operating improvements through simplification, focus and improved discipline. Simplifying and clarifying our business today is also helping us chart a course for a profitable and productive future for CNA. That course is being developed around strategies focused on what we do best for our customers. 2
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CONTINUED IMPROVEMENT During the past two years, CNA exited non-core businesses, sharpened our focus on the risks of business customers and strengthened the fundamentals of our operations. We are beginning to see the results of these efforts with the continued improvement in our earnings. Our net income for 2000 was $1.2 billion, an increase of $1.3 billion over the net loss of $130 million in 1999. While this significant increase in net income is attributable largely to realized gains on our superb Global Crossing and Canary Wharf investments, operating performance also improved. Net operating income of $354 million in 2000, improved $500 million over 1999's loss of $145 million. This came on operating revenues of $14.3 billion in 2000, compared with operating revenues of $16.1 billion in 1999. This is an indicator of improved margins in our business. Our performance during 2000 increased CNA's book value per share to $52.64 at the end of the year, a 10 percent increase compared with $47.66 at year-end 1999. TWO KEY ELEMENTS The two priorities that have driven the CNA turnaround since inception - underwriting discipline and cost-effective operations - continued in 2000. First, our underwriting actions were favorably influenced by three factors: 1. An underwriting, pricing, loss control and claims team more attuned to underwriting excellence than even one year ago. 2. Continued strong partnerships with agents and brokers who are willing to work with us to solve problems. 3. A generally supportive marketplace. (Reinsurance was a notable exception to this through most of the year.) As happened in 1999, the re-underwriting and pricing actions resulted in renewal retention rates lower than historical levels with only modest new business writings, and consequent reductions in premium volume. On the business renewed, we achieved increases in the 14 to 20 percent range, thereby improving future profit potential both from the rate increases and the improved quality of the business retained. Second, we are maintaining our commitment to drive unnecessary costs out of the business. In spite of our decreased premium volume, our expense reduction efforts are starting to show in the expense ratio and in real dollars of underwriting and acquisition expenses. Having said that, this management team is not satisfied with these results. We have more to do to complete this fundamental improvement process. But we are establishing the momentum for profitable growth and increased shareholder value over the long term. MILESTONES During 2000, we reached some significant milestones on our path to improved operating performance. o Six of our seven business segments reported improved net operating results for 2000. o We launched our eBusiness initiative, supported by a long term commitment to invest more than $150 million over the next several years in support of this strategy. 3
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o We began to see improved service levels through our new, centralized processing facility in Maitland, Florida. o We sold our life reinsurance business to MARC, the U.S. life subsidiary of Munich Re. This allowed us to focus better on our core strategies. o We affirmed our ongoing commitment to our Individual Life, Long Term Care and Retirement Services businesses after a comprehensive analysis. CHARTING THE COURSE Looking forward, the people of CNA have responded enthusiastically to solving the challenges we face - not just within our own company, but also new and emerging challenges that face our industry and our clients in this new century. During 2000, I was privileged to meet with more than 15,000 of our employees to discuss our direction. I am more convinced than ever that our success is assured by our talented people who work on the front lines with our customers every day. As you will see from our Statement of Direction on the facing page, our commitment is simple and straightforward. Our future is centered on providing significant value to our customers through great underwriting. This commitment will be the core of our strategies and everything we do. To sharpen and simplify our focus, we're creating three new organizations as announced on January 29, 2001: Worldwide Field Operations, unifying CNA's domestic and international branches, led by Gary Owcar; Global Specialty Underwriting and Claims, extending our underwriting expertise worldwide, headed by Peter Wilson; and Technology Solutions, combining eBusiness Operations, information technology and business processing systems for the property-casualty organization, led by Robert James. In addition, we have combined CNA Life and Group Operations under the leadership of Robert Patin, who joined us earlier this year as chief executive officer of this unit, having served eight years as chairman and CEO of Washington National Corporation. Through these changes, we are improving our ability to communicate and collaborate within our organization on behalf of our clients, and we are removing the "internal walls" so that we have the opportunity to provide solutions to our clients' needs. Three of these four new organizations draw very capable people promoted from within CNA - a very healthy sign. But we have also continued our success in attracting talented and experienced insurance and technology people from outside CNA. These people recognize the opportunity that now exists to be part of the re-emergence of CNA as a winner in coming years. IN THE FUTURE When you combine the momentum of our financial improvement and our newly focused direction, I believe you can see why we are optimistic about the future of CNA. We have outstanding franchise value, including a broad base of thousands of customers . . . we have excellent partnerships with outstanding agents and brokers . . . we maintain a strong balance sheet . . . and we have the resources to make targeted investments that will enhance our ability to serve our customers. 4
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CNA STATEMENT OF DIRECTION -------------------------------------------------------------------------------- Businesses face changing risks worldwide that demand great underwriting. The people of CNA are dedicated to being the experts in understanding these risks and in building well-reasoned products and services that serve the best interest of our customers. By doing so, CNA will be very profitable. Great underwriting requires expertiese across many disciplines and about many different businesses. The people of CNA are committed to investing continuously in research about the businesses wer serve, training to advance our skills, and the technology to get the job done well. Only the highest caliber of people can deliver great underwriting. The people of CNA are dedicated to building a disciplined and diverse organization that expects and regards superior results deivered with integrity and mutual respect. We have made the tough decisions to improve our performance, we are demonstrating the strength of our business model and we are providing a solid platform for profitable growth and enhanced shareholder value. BOARD CHANGES Finally, I want to salute two directors who will be retiring from our board in May: Robert Gwinn and Walter Mondale. Bob Gwinn, former Chairman and CEO of Encyclopaedia Brittanica, served for over 40 years on our board with great dedication and distinction. Walter Mondale, who served on our board for 12 years, has been a steady source of insight and sound advice. We will miss them both. Early this year, we announced that Walter Harris, president and CEO of Tanenbaum-Harber Company, had become the newest member of our Board of Directors. He brings more than two decades of insurance industry leadership, and we are pleased to have Walter's experience and perspective on our Board. In summary, it has been a year of significant effort and progress in improving the fundamentals at CNA. We clearly have more work to do. But we are a stronger organization today than even a year ago, and we are more confident of delivering enhanced value for you in the years ahead. Thank you for your continued support. Sincerely, Bernard L. Hengesbaugh Chairman and Chief Executive Officer CNA insurance companies March 10, 2001 5
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MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- INTRODUCTION The following discussion highlights significant factors influencing the consolidated results of operations and financial condition of CNA Financial Corporation (CNAF) and its subsidiaries (collectively CNA or the Company). Loews Corporation (Loews) owns approximately 87% of the outstanding common stock of CNAF. This discussion should be read in conjunction with the Consolidated Financial Statements and the related Notes, appearing on pages 41 through 72, 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. The provisions for restructuring and other related charges, recorded in prior years, are discussed on a consolidated basis on page 32. Because distinct investment portfolios are not maintained for each insurance segment, the discussion of investment results, including investment income and realized investment gains, is also on a consolidated basis and begins on page 32. CONSOLIDATED OPERATIONS Business Overview CNA is one of the largest insurance organizations in the United States. Based on 1999 net written premiums, CNA is the eighth largest property-casualty company and the 36th largest life insurance company. CNA conducts its operations through the seven operating segments listed below. In addition to the seven operating segments, certain other activities are reported in a Corporate and Other segment. Agency Market Operations Specialty Operations CNA Re Global Operations Risk Management Group Operations Life Operations These operating 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 results of operations for each of the last three years. Consolidated Operations [Download Table] Years ended December 31 (In millions, except per share data) 2000 1999 1998 -------------------------------------------------------------------------------- Revenues: Net earned premiums $ 11,474 $ 13,282 $ 13,536 Net investment income 2,080 2,101 2,146 Other revenues 739 705 799 -------------------------------------------------------------------------------- Total revenues 14,293 16,088 16,481 Claims, benefits and expenses 13,804 16,331 16,567 Restructuring and other related charges -- 83 246 -------------------------------------------------------------------------------- Operating income (loss) before income tax and minority interest 489 (326) (332) Income tax (expense) benefit (107) 211 200 Minority interest (28) (30) (20) -------------------------------------------------------------------------------- Net operating income (loss) 354 (145) (152) Net realized investment gains, net of tax and minority interest 860 192 434 Cumulative effect of a change in accounting principle, net of tax and minority interest -- (177) -- -------------------------------------------------------------------------------- Net income (loss) $ 1,214 $ (130) $ 282 ================================================================================ Basic and diluted earnings (loss) per share: Net operating income (loss) $ 1.92 $ (0.85) $ (0.86) Net realized investment gains, net of tax and minority interest 4.69 1.04 2.35 Cumulative effect of a change in accounting principle, net of tax and minority interest -- (0.96) -- -------------------------------------------------------------------------------- Basic and diluted earnings (loss) per share available to common stockholders $ 6.61 $ (0.77) $ 1.49 ================================================================================ Weighted average outstanding common stock and common stock equivalents 183.6 184.2 184.9 ================================================================================ 21
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The following table summarizes net income excluding after-tax realized investment gains/losses (net operating income) by segment. Net Operating Income by Segment [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Agency Market Operations $ 110 $(201) $ (54) Specialty Operations 131 49 58 CNA Re 57 (13) 68 Global Operations 42 64 18 Risk Management 29 19 (88) Group Operations 36 (6) (48) Life Operations 169 145 105 Corporate and Other (220) (202) (211) -------------------------------------------------------------------------------- Net operating income (loss) $ 354 $(145) $(152) ================================================================================ 2000 Compared with 1999 Net earned premiums decreased $1,808 million, or 14%, to $11,474 million in 2000 as compared with 1999. This decline was attributable to $1,354 million related to the CNA Personal Insurance business (Personal Insurance) transaction (see Note O to the Consolidated Financial Statements for discussion of the Personal Insurance transaction), as well as continued efforts to re-underwrite business and obtain adequate rates for exposure underwritten. Net operating income was $354 million, or $1.92 per share, in 2000 as compared with a net operating loss of $145 million, or $0.85 per share, in 1999. Net operating income increased $499 million in 2000, primarily as a result of the improvement of $451 million for the property-casualty segments, $42 million for Group Operations and $24 million for Life Operations, partially offset by a decline for Corporate and Other of $18 million. The improvement in the property-casualty net operating income was principally attributable to improved underwriting results of $554 million, partially offset by decreased investment income and increased expenses, including increased interest expense related to the cost of reinsurance. The improvement in 2000 results was primarily due to significant rate increases across the entire book of business, favorable catastrophe experience, reduced prior year reserve strengthening and the non-recurrence of $54 million in restructuring and related charges incurred in 1999. After-tax catastrophe losses for 2000 improved by $189 million, including $62 million related to Personal Insurance. See Note O to the Consolidated Financial Statements for a discussion of the Personal Insurance transaction. In addition, net operating income in both 2000 and 1999 benefited from a change in estimate for certain insurance-related assessments resulting from regulatory changes in the basis on which certain of these assessments are calculated. The after-tax impact of these releases was $60 million in 2000 and $51 million in 1999. Net income for 2000 was $1,214 million, or $6.61 per share, as compared with a net loss for 1999 of $130 million, or $0.77 per share. Net realized gains increased $668 million in 2000 primarily attributable to sales of equity securities. Included in the net loss for 1999 was a charge of $177 million, net of tax, or $0.96 per share, for the cumulative effect of a change in accounting principle for insurance-related assessments. 1999 Compared with 1998 The Company had a net operating loss for 1999 of $145 million, or $0.85 per share, compared with a net operating loss of $152 million, or $0.86 per share, for 1998. The net operating loss for 1999 includes $363 million in loss and allocated loss adjustment expense reserve strengthening for prior periods. After-tax catastrophe losses were approximately $35 million higher in 1999 as compared with 1998. The 1999 net operating loss also included $54 million in after-tax restructuring and other related charges, as compared with $160 million in after-tax restructuring and other related charges in 1998. The 1999 net operating loss also reflects an after-tax benefit of $51 million 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. 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 small and middle market businesses. Business products include workers' compensation, commercial packages, general liability, umbrella and commercial auto, as well as a variety of creative risk management services. In addition, Agency Market Operations includes a professional employer organization, CNA UniSource, which provides various employer-related services. Personal Insurance included personal auto and homeowners coverage and also offered personal umbrella, separate scheduled property, boat-owners and other recreational vehicle insurance. These operations were transferred to The Allstate Corporation (Allstate) effective October 1, 1999. See Note O to the Consolidated Financial Statements for discussion of the Personal Insurance transaction. Agency Market Operations is comprised of the following four groups: Commercial Insurance, CNA E&S, CNA UniSource and Personal Insurance. 22
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Commercial Insurance (CI) provides standard property-casualty insurance products such as workers' compensation, general and product liability, property, commercial auto and umbrella coverage to a wide range of businesses. The majority of CI customers are small and middle-market businesses, with less than $1 million in annual insurance premiums. Most insurance programs are provided on a guaranteed cost basis, although customized loss sensitive programs are also available for larger middle-market customers. CI is a market leader in applying industry segmentation techniques to design products and services tailored to the needs of its targeted customer groups. CI's operating model focuses on underwriting performance, exposure based pricing, relationships with selective distribution sources and aligning resources closer to CI's customers. The model includes more than 35 branches that provide underwriting, loss and sales for all of CI's lines of business. In addition, these branches provide claim services for the workers' compensation business. Also, there are eight claim service centers which provide customers and claimants, for all non-workers' compensation lines of business, with efficient and quality service and focus on the total claims outcome through specialized claim handling and timely claims reporting. The branches and service centers are all located in the United States. Further, a centralized processing center in Maitland, Florida, handles all policy processing and accounting, and also acts as a call center for all branches to optimize customer service. CNA E&S (E&S) provides specialized insurance and other financial products for selected commercial risks on both an individual customer or program basis. Risks insured by E&S are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. By combining superior insurance and financial expertise with an in-depth understanding of each customer's unique and changing risks, E&S develops innovative business solutions that are valued by the customer and producer. E&S's products are distributed throughout the United States through specialist producers, program agents, and CI's agents and brokers. E&S has specialized underwriting and claims resources in Chicago, New York City, Denver and Columbus. CNA UniSource is a business solutions provider offering outsourcing services and products that relieve businesses of many administrative tasks, allowing them more time to focus on their core business. CNA UniSource provides human resources (HR) information technology, payroll processing and professional employer organization services. CNA UniSource is also engaged in delivering Internet-based HR and payroll administrative services and implementing HR information outsourcing for large-scale businesses. CNA UniSource's results are included in other revenues and expenses in the segment results. Personal Insurance: On October 1, 1999, certain CNA subsidiaries completed a transaction with Allstate to transfer substantially all of CNA's personal lines insurance business. See Note O to the Consolidated Financial Statements for discussion of the Personal Insurance transaction. Operating Results [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Net written premiums $ 3,230 $ 3,667 $ 5,496 ================================================================================ Net earned premiums $ 3,331 $ 4,799 $ 5,247 Claims, benefits and expenses 3,772 5,791 6,050 Restructuring and other related charges -- 60 96 -------------------------------------------------------------------------------- Underwriting loss (441) (1,052) (899) Net investment income 604 686 744 Other revenues 151 80 48 Other expenses 185 77 52 -------------------------------------------------------------------------------- Pre-tax operating income (loss) 129 (363) (159) Income tax (expense) benefit (19) 162 105 -------------------------------------------------------------------------------- Net operating income (loss) $ 110 $ (201) $ (54) ================================================================================ Ratios Loss and loss adjustment expense 80.9% 90.4% 83.1% Expense 29.8 31.0 32.6 Dividend 2.5 0.5 1.4 -------------------------------------------------------------------------------- Combined 113.2% 121.9% 117.1% ================================================================================ 2000 Compared with 1999 Agency Market Operations' net written and earned premiums were impacted by the transfer of Personal Insurance to Allstate. The 1999 net written premiums through October 1, 1999 (the transfer date) were largely offset by the impact of the ceded unearned premium relating to Personal Insurance. As a result, 1999 net written and earned premiums included $379 million and $1,354 million related to Personal Insurance. Excluding the impact of Personal Insurance, Agency Market Operations' net written premiums decreased $58 million, or 2%, to $3,230 million in 2000 as compared with 1999. Net earned premiums for Agency Market Operations, excluding Personal Insurance, decreased $114 million, or 3%, to $3,331 million in 2000 as compared with 1999. These declines were due to the continued effort to re-underwrite business and obtain adequate rates for exposure underwritten, partially offset by a change in the structure of reinsurance which reduced ceded premiums. The combined ratio improved 8.7 points to 113.2% for 2000 as compared with 1999 and underwriting results improved $611 million. The loss ratio improvement of 9.5 points is comprised of underwriting actions including the increased use of reinsurance, the continued efforts to achieve adequate rates for exposure underwritten, the 23
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non-renewal of unprofitable business and lower catastrophe losses than in 1999. Also, the 1999 loss ratio included adverse loss development related to automobile, workers' compensation and packaged general liability exposures. The expense ratio improved 1.2 points principally as a result of decreased underwriting expenses and the absence of restructuring-related charges, partially offset by a decrease in ceding commissions received relating to a change in the structure of reinsurance. The dividend ratio increase of 2.0 points is attributable to favorable development in dividend reserves in 1999 not present in 2000. Net operating income increased $311 million based on improved underwriting results, partially offset by lower investment income and an increase in interest expense related to the cost of reinsurance. Net operating income in both 2000 and 1999 benefited from a change in estimate for certain insurance-related assessments due to changes in the basis on which certain of these assessments are calculated. The after-tax impact of this change was $30 million in 2000 and $25 million in 1999. CI achieved an average rate increase of approximately 15% in 2000. The improvement in the reported loss ratio for the 2000 accident year is the first for CI since 1993 and this improvement is expected to accelerate as the benefits of rate increases and underwriting actions are fully realized. CI's effective retention rate is in the low 70 percent range. 1999 Compared with 1998 Agency Market Operations' net written and net earned premiums were impacted by the transfer of Personal Insurance to Allstate. Net written and earned premiums from Personal Insurance decreased by $1,310 million and $268 million in 1999. Excluding the impact of Personal Insurance, Agency Market Operations' net written and earned premiums decreased $519 million and $180 million in 1999 as compared with 1998. These decreases reflect the impact of the increased use of reinsurance and efforts to achieve adequate pricing and the shedding of unprofitable business. 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. The increase in the loss ratio is due principally 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 with 1998. 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 losses for 1999 were $1,052 million as compared with $899 million in 1998 due to deterioration in the combined ratio partially offset by reductions in volume. Agency Market Operations had a net operating loss of $201 million for 1999 as compared with a $54 million loss in 1998. The larger loss was due primarily to the deterioration in underwriting results as described above. 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 HealthPro and CNA Guaranty and Credit. CNA Pro is one of the largest providers of non-medical professional liability insurance and risk management services in the United States. CNA Pro's products include errors and omissions, directors and officers, 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 underwriters. 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 HealthPro offers a comprehensive set of specialized insurance products and clinical risk management consulting services designed to assist healthcare 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, an operating company of CNA HealthPro, provides third-party claims administration for medical professional liability insureds. CNA Guaranty and Credit provides credit insurance on short-term trade receivables for domestic and international clients, reinsurance to insurers who provide financial guarantees to issuers of asset-backed securities, money market funds and investment grade corporate debt securities and credit enhancement products that focus on asset backed transactions. These products are distributed through brokers, captive agents, financial institutions and directly to customers. In addition, CNA Guaranty and Credit includes R.V.I. Guaranty Co. Ltd. (RVI), a 50% owned, but not controlled, affiliate. RVI is the largest monoline residual value insurer in the world, offering coverages to protect the insured against a decrease in the market value of a properly maintained asset at the termination of a lease. 24
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Other Operations consist principally of Hedge Financial Products (Hedge), which focused on securitization of insurance risk and the embedding of financial protections within traditional insurance programs, and agricultural and entertainment insurance businesses. During 1999 and 1998, the Company decided to exit Hedge and the agriculture and entertainment insurance businesses. Operating Results [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Net written premiums $ 805 $ 948 $ 1,023 ================================================================================ Net earned premiums $ 799 $ 1,001 $ 1,092 Claims, benefits and expenses 819 1,166 1,251 Restructuring and other related charges -- -- 5 -------------------------------------------------------------------------------- Underwriting loss (20) (165) (164) Net investment income 216 235 245 Other revenues 26 19 27 Other expenses 35 30 44 -------------------------------------------------------------------------------- Pre-tax operating income 187 59 64 Income tax expense (56) (10) (6) -------------------------------------------------------------------------------- Net operating income $ 131 $ 49 $ 58 ================================================================================ Ratios Loss and loss adjustment expense 75.4% 90.6% 87.0% Expense 27.0 25.9 28.1 -------------------------------------------------------------------------------- Combined 102.4% 116.5% 115.1% ================================================================================ 2000 Compared with 1999 Net written premiums for Specialty Operations for 2000 declined $143 million, or 15%, to $805 million as compared with 1999. Net earned premiums declined $202 million, or 20%, to $799 million as compared with 1999. These premium declines relate principally to 1) active decisions to renew only those accounts which meet current underwriting guidelines supporting the ongoing commitment to underwriting discipline, 2) a $46 million decline related to Hedge and the agriculture and entertainment lines of business, 3) an increase in the retrospective return premium relating to favorable loss experience in the retrospectively rated architects' and engineers' business and 4) a $30 million decline due to the increased use of reinsurance for the medical professional liability lines of CNA HealthPro. The combined ratio improved 14.1 points to 102.4% for 2000 as compared with 1999 and underwriting results improved $145 million. These improvements are the result of the ongoing commitment to underwriting discipline reflected by a 15.2 point decline in the loss ratio, partially offset by a 1.1 point increase in the expense ratio. The 2000 loss ratio was impacted by favorable loss experience in the retrospectively rated architects' and engineers' business and the increased use of reinsurance for the medical professional liability lines, partially offset by large loss experience in the guaranty and credit business. The 1999 loss ratio was unfavorably impacted by adverse loss experience mainly in the medical malpractice lines of business. Acquisition and underwriting expenses have decreased year-over-year, but the expense ratio has increased due to the reduced net earned premium base. Net operating income has increased $82 million in 2000 as compared with 1999, principally from the improvement in the underwriting results, partially offset by lower net investment income. Specialty Operations achieved on average, premium-weighted retention levels in the high 70 percent range across its entire book of business in 2000. CNA HealthPro achieved an average rate increase of 18% in 2000, including an average rate increase of 17% in the institutions and physicians products. For CNA Pro, rate increases and other underwriting actions have been initiated for the directors' and officers' product in late 2000. 1999 Compared with 1998 Net written premiums for Specialty Operations for 1999 declined $75 million, or 7%, to $948 million as compared with 1998. Net earned premiums for 1999 declined $91 million, or 8%, to $1,001 million as compared with 1998, due primarily to declines in CNA HealthPro and businesses exited. Net earned premiums for CNA HealthPro declined $40 million, due mainly to new ceded reinsurance agreements covering 1999 risks and the efforts to achieve adequate price increases and eliminate unprofitable business. Hedge, agriculture and entertainment net earned premiums decreased a combined $46 million from 1998 due to the exit from these lines of business. The combined ratio for 1999 increased 1.4 points due principally to a 3.6 point increase in the loss ratio as a result of adverse claim experience in the medical malpractice and non-medical professional liability lines of business. The impact of adverse claim experience in these lines of 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 ratio declined 2.2 points in 1999 due principally to businesses exited. The underwriting loss for 1999 was $165 million, essentially unchanged from 1998, due to the offsetting impacts of a higher loss ratio and a lower expense ratio. Net operating income for 1999 declined principally because of lower net investment income. CNA RE Business Overview CNA Re operates globally as a reinsurer in the broker market, offering both treaty and facultative products. CNA Re's operations include the business of CNA Reinsurance Company Limited (CNA Re U.K.), a United Kingdom reinsurance company, and United States operations based in Chicago. While CNA Re's primary product is traditional treaty reinsurance, it also offers 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. 25
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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 (S&P), A (Excellent) from A.M. Best and A3 (Good) from Moody's. CNA Re U.K. writes United States and international treaty and professional liability business, including medical malpractice, errors and omissions and directors' and officers' coverages. The United States 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. In 2000, CNA Re instituted a new global operating structure by creating six specialized underwriting centers of excellence and three centers of functional excellence that span geographic boundaries. This structure allows the organization to better utilize the specialized expertise of its people worldwide and take advantage of market opportunities. Operating Results [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Net written premiums $ 951 $ 1,275 $ 908 ================================================================================ Net earned premiums $ 1,089 $ 1,176 $ 944 Claims, benefits and expenses 1,186 1,369 1,005 Restructuring and other related charges -- -- 1 -------------------------------------------------------------------------------- Underwriting loss (97) (193) (62) Net investment income 195 161 163 Other revenues 5 (1) 5 Other expenses 14 (5) 11 -------------------------------------------------------------------------------- Pre-tax operating income (loss) 89 (28) 95 Income tax (expense) benefit (32) 15 (27) -------------------------------------------------------------------------------- Net operating income (loss) $ 57 $ (13) $ 68 ================================================================================ Ratios Loss and loss adjustment expense 81.6% 84.9% 74.9% Expense 27.3 31.5 31.7 -------------------------------------------------------------------------------- Combined 108.9% 116.4% 106.6% ================================================================================ 2000 Compared with 1999 Net written premiums for CNA Re for 2000 decreased $324 million, or 25%, to $951 million as compared with 1999. Net earned premiums decreased $87 million, or 7%, to $1,089 million as compared with 1999. These declines reflect decisions not to renew contracts that management believed did not meet its underwriting profitability targets, partially offset by modest rate increases. The combined ratio improved 7.5 points to 108.9% in 2000 as compared with 1999 and underwriting results improved $96 million. The improvement in the underwriting results is attributable to improvements in both the loss and expense ratios. The loss ratio improvement is attributable mainly to favorable 2000 catastrophe experience as compared with 1999 catastrophe results that were negatively impacted by a series of European windstorms, Hurricane Floyd and other international catastrophes. The improvement in the expense ratio was related to decreased contingent commissions in 2000. Net operating income increased $70 million in 2000 as compared with 1999 due to the improvement in the underwriting results and an increase in investment income. A significant portion of CNA Re's treaty business renewals are effective on January 1. Reinsurance renewals for the January 1, 2001 cycle were the latest experienced in the past several years. The delay was driven by a significant difference between the improvement in the terms, conditions and rates required by reinsurers and what clients considered acceptable. The retrocessional and catastrophe markets exhibited the greatest amount of tightening. Casualty lines, however, continued to be a challenge. CNA Re has been able to achieve targeted rate increases but at a lower retention level than expected. 1999 Compared with 1998 Net written premiums for CNA Re increased $367 million, or 40%, to $1,275 million as compared with 1998. Net earned premiums increased $232 million, or 25%, to $1,176 million as compared with 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. CNA Re's 1999 combined ratio increased by 9.8 points as compared with 1998, primarily as a result of a 10.0 point increase in the loss ratio. 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 the 1999 loss ratio relative to 1998. 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. GLOBAL OPERATIONS Business Overview Global Operations provides products and services to United States-based customers expanding overseas and foreign customers. The major product lines include marine, commercial and contract surety, warranty and specialty products, as well as commercial property and casualty coverages. Global Operations is composed of five principal groups: Marine, Surety, Warranty, CNA Global and First Insurance Company of Hawaii (FICOH). Marine completed the acquisition of Maritime Insurance Co., Ltd. (Maritime Ltd.), based in the United Kingdom, and its Canadian subsidiary, Eastern Marine Underwriters (EMU) on July 1, 1998, 26
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strengthening CNA's position as a global marine insurer. In 1999, CNA launched the marketing brand, CNA Maritime, which unites three industry leaders, MOAC, Maritime Ltd. and EMU, to serve global ocean marine needs. MOAC, a leading provider of ocean marine insurance in the United States, offers hull, cargo, primary and excess marine liability, 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 nine branch offices located throughout the United States. Maritime Ltd. is a leading marine cargo and related marine insurance specialist with markets extending across Europe and throughout the world. As foreign subsidiaries, Maritime Ltd. and EMU are included in the results of, and are managed by, CNA Global. 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. On September 22, 2000, CNA Maritime launched the first phase of OMMnism (Ocean Marine Manager network interface), an automated cargo insurance system accessible over the Internet. This first phase of OMMnism allows potential customers to receive real-time quotes, issue certificates, pay by credit card, and access an array of other convenient policy services, such as on-line reports and first notice of loss services. The core of CNA Maritime's global cargo strategy will occur through interactive products such as OMMnism. Surety consists primarily of CNA Surety Corporation (CNA Surety), which is traded on the New York Stock Exchange (SUR) and is the largest publicly traded provider of surety bonds, with approximately 8% of that market. Among its United States competitors, CNA Surety has one of the most extensive distribution systems 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. CNA owns approximately 64% of CNA Surety. Warranty is one of the largest warranty underwriters in the United States, 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 manufacturers. Each market segment distributes its product via a sales force employed or contracted through a program administrator. CNA National Warranty Corporation (CNA Warranty) sells vehicle warranty services in the United States 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 United States. 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. These entities are service administrators whose products are backed by insurance coverages provided by CNA's insurance affiliates. CNA Global 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 United States 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, CNA Global provides United States-based customers expanding their operations overseas with a single source for their commercial insurance needs. To this end, CNA Global has placed underwriters within commercial insurance branches. CNA Global currently oversees operations in Europe, Latin America, Canada and Asia. CNA Insurance Company (Europe) Limited (CIE) is based in London, with offices in France, Germany, the Netherlands and Denmark. In Europe, CNA Global's operations include the results of U.K.-based Maritime Ltd. and CIE. On July 1, 2001, a planned merger of CIE into Maritime Ltd. is expected to be completed. Through its network of offices, CNA Global built on the successes of several CNA specialty products (including travel and accident, warranty and financial lines insurance) and introduced those products across Europe in 2000. During 2000, the Company had a majority and controlling interest in Omega A.R.T. (Omega), a workers' compensation company domiciled in Argentina. Omega ranks as the fifth largest workers' compensation company in Argentina based on premium volume. The short- to mid-term growth opportunities for CNA Global 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 is the oldest and largest domestic property-casualty insurer in Hawaii and offers commercial and personal lines solely in that state. Distributed through 30 independent agencies, the business mix has historically been approximately 70% commercial and 30% 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. Concurrently, Tokio merged their Hawaii-based operations into FICOH. As CNA retains control over FICOH, its operations are consolidated with CNA's operations. CNA viewed 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. 27
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Operating Results [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Net written premiums $ 1,160 $ 1,080 $ 985 ================================================================================ Net earned premiums $ 1,089 $ 1,010 $ 941 Claims, benefits and expenses 1,128 1,037 991 Restructuring and other related charges -- -- 1 -------------------------------------------------------------------------------- Underwriting loss (39) (27) (51) Net investment income 136 132 110 Other revenues 116 120 82 Other expenses 123 100 80 -------------------------------------------------------------------------------- Pre-tax operating income 90 125 61 Minority interest (24) (28) (25) Income tax expense (24) (33) (18) -------------------------------------------------------------------------------- Net operating income $ 42 $ 64 $ 18 ================================================================================ Ratios Loss and loss adjustment expense 60.3% 56.9% 62.2% Expense 43.1 45.5 42.8 Dividend 0.1 0.3 0.4 -------------------------------------------------------------------------------- Combined 103.5% 102.7% 105.4% ================================================================================ 2000 Compared with 1999 Net written premiums for Global Operations in 2000 increased $80 million, or 7%, to $1,160 million as compared with 1999. Net earned premiums increased $79 million, or 8%, to $1,089 million as compared with 1999. These increases were driven by growth in the commercial casualty and property lines in the European operations, as well as growth in the commercial warranty and surety lines. The combined ratio increased 0.8 points to 103.5% in 2000 as compared with 1999 and underwriting results declined $12 million. The decline in underwriting results is mainly attributable to adverse current and prior year loss experience in the vehicle warranty insurance line of business. Net operating income decreased $22 million in 2000 as compared with 1999 due to the decline in underwriting results and an increase in other expenses related to the non-insurance operations in the warranty business. Global operations achieved pricing increases in 2000 that averaged approximately 3% across the businesses in this segment. Retention rates were in the mid 70 percent range. Retention rates do not apply to the Surety and Warranty businesses. 1999 Compared with 1998 Net written premiums in 1999 increased $95 million, or 10%, as compared with 1998. Net earned premiums increased $69 million, or 7%, to $1,010 million as compared with 1998. CNA Global contributed $56 million of the increase, the majority of which was attributable to a full year's premiums from Maritime Ltd. Surety contributed increased net earned premium of $29 million, due to generally favorable domestic economic conditions for public construction and expansion internationally. Warranty net earned premiums increased $24 million over 1998, due mainly to increased sales of new automobile warranties. Partially offsetting this growth was a decrease in net earned premiums in MOAC of $49 million due to competitive marine market conditions. Underwriting results improved $24 million from 1998 due to a decrease in the combined ratio of 2.7 points. This was due primarily to improved loss ratios in MOAC, Surety and CNA Global partially offset by an increase in the loss ratio in Warranty. The improvement in the MOAC and CNA Global 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 experience in 1999 compared with 1998. The increase in the loss ratio in Warranty was due to unfavorable loss experience in its automotive business. Net operating income for 1999 increased $46 million as compared with 1998 primarily from the improved underwriting results and increased investment income. RISK MANAGEMENT Business Overview Risk Management serves the property-casualty needs of large domestic commercial businesses, offering customized strategies to address the management of business risks. Also, Risk Management, primarily through RSKCoSM, provides total risk management services relating to claims, loss control, cost management and information services to the commercial insurance marketplace. Risk Management includes two groups: Risk Transfer and RSKCoSM. Risk Transfer writes casualty and property lines of insurance. The casualty business focuses on workers' compensation, commercial auto liability and general liability through traditional and innovative advanced financial risk products. Excess products provide umbrella, excess workers' compensation and high excess coverages. Casualty offerings target Fortune 1000 businesses. Over the last three years, domestic and global property insurance capabilities have been increased, providing primary, quota share and excess of loss property facilities. Capabilities include providing property, inland marine, global and boiler and machinery coverages to large accounts and Fortune 100 businesses. RSKCoSM was formed in 1998 and 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 provides services that allow customers to select from a single source the desired level of service ranging from an integrated claims package to any component service. Loss Control provides pre-loss prevention services that 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. 28
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Cost Management provides 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 provides services including data access, reporting tools, information and benchmarking analysis, consulting and custom reporting services. Operating Results [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Net written premiums $ 633 $ 839 $ 889 ================================================================================ Net earned premiums $ 637 $ 801 $ 823 Claims, benefits and expenses 760 936 1,018 -------------------------------------------------------------------------------- Underwriting loss (123) (135) (195) Net investment income 163 154 144 Other revenues 318 316 230 Other expenses 324 307 227 Non-insurance restructuring and other related charges -- 10 88 -------------------------------------------------------------------------------- Pre-tax operating income (loss) 34 18 (136) Income tax (expense) benefit (5) 1 48 -------------------------------------------------------------------------------- Net operating income (loss) $ 29 $ 19 $ (88) ================================================================================ Ratios Loss and loss adjustment expense 95.8% 94.3% 89.1% Expense 23.5 22.6 30.7 Dividend -- -- 3.9 -------------------------------------------------------------------------------- Combined 119.3% 116.9% 123.7% ================================================================================ 2000 Compared with 1999 Net written premiums for Risk Management in 2000 decreased $206 million, or 25%, to $633 million as compared with 1999. Net earned premiums decreased $164 million, or 20%, to $637 million as compared with 1999. These declines resulted from a continued focus on re-underwriting the book of business, as well as the increased utilization of reinsurance. Despite the combined ratio increase of 2.4 points to 119.3% in 2000 as compared with 1999, underwriting results improved by $12 million. Increases in both the loss and expense ratios led to the unfavorable change in the combined ratio. The loss ratio increase of 1.5 points is principally the result of adverse property and casualty experience for both the current and prior accident years. Acquisition and underwriting expenses have decreased year-over-year, but the expense ratio has increased due to a reduced net earned premiums base in the current year. Net operating income improved $10 million primarily as a result of improved underwriting results, improved net operating income for RSKCoSM, increased investment income and restructuring-related charges incurred in 1999 that did not recur in 2000. These improvements were partially offset by an increase in interest expense related to the cost of reinsurance. Net operating income in both 2000 and 1999 benefited from a change in estimate for certain insurance-related assessments due to regulatory changes in the basis on which certain of these assessments are calculated. The after-tax impact of this change was $30 million in 2000 and $26 million in 1999. Risk Management has been involved in numerous underwriting initiatives to improve results. Risk Management achieved double-digit price increases in 2000 on average across its book of business while maintaining premium-weighted retention in the low 80 percent range. Risk Management's underwriting initiatives continue to focus on risk selection, increased attachment points and strengthened underwriting terms and conditions through increasing deductibles and limiting the scope of coverages. Risk Management has also launched a quality initiative designed to increase net operating income through the review and improvement of all activities that create, market and support products and services. 1999 Compared with 1998 Net written premiums for 1999 declined $50 million, or 6%, to $839 million as compared with 1998. Net earned premiums for 1999 declined $22 million, or 3%, to $801 million 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 decreased business as a result of pricing actions taken in a difficult market. 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, 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 related primarily 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 and a decrease in restructuring-related charges of $78 million. The decrease in the dividend ratio is due to favorable development in dividend reserves. Despite reserve strengthening, overall results increased to a net operating income of $19 million from a net operating loss of $88 million in 1998. 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 with those recorded in 1998. 29
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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. Group Operations also provides health insurance to federal employees, retirees and their families (Federal Markets); 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 four principal groups: Group Benefits (formerly Special Benefits), Provider Markets, Life Reinsurance and Federal Markets. Group 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 is composed of two major businesses. CNA Health Partners provides comprehensive managed care services to employers offering self-funded medical plans. Services offered include network development and management, medical management, medical claims administration, consulting services and management services. Group reinsurance assumes reinsurance on health, life and other related products written on a group basis, as well as excess risk coverages related to healthcare. Life Reinsurance reinsures individual life and health products marketed by unaffiliated life insurance companies throughout North America. Sales are generated through an internal sales force. On December 31, 2000, CNA sold its Life Reinsurance business. See Note O to the Consolidated Financial Statements for discussion of the Life Reinsurance transaction. Federal Markets is the second largest provider of health insurance benefits to federal employees, insuring approximately one million members under the Mail Handlers Benefit Plan (MHBP) offered through the Federal Employees Health Benefit Plan (FEHBP), and also underwrites conversion policies and supplemental coverages for 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. Operating Results [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Net earned premiums $ 3,675 $ 3,571 $ 3,733 Net investment income 142 130 133 Other revenues 49 40 24 -------------------------------------------------------------------------------- Total operating revenues 3,866 3,741 3,890 Benefits 3,068 3,053 3,171 Expenses 748 699 763 Restructuring and other related charges -- 5 39 -------------------------------------------------------------------------------- Pre-tax operating income (loss) 50 (16) (83) Income tax (expense) benefit (14) 10 35 -------------------------------------------------------------------------------- Net operating income (loss) $ 36 $ (6) $ (48) ================================================================================ 2000 Compared with 1999 Net earned premiums for Group Operations in 2000 increased $104 million, or 3%, to $3,675 million as compared with 1999. This increase was principally a result of a $41 million increase in Group Benefits, primarily related to the group life line of business; a $35 million increase in Life Reinsurance; an $18 million increase in Provider Markets, primarily related to the group reinsurance line of business and a $10 million increase in Federal Markets. The increases in Group Benefits and Life Reinsurance relate to new business production. Net operating income increased $42 million in 2000 as compared with 1999. This increase relates to a $24 million improvement in Federal Markets due to the 1999 exit of unprofitable medical lines, a $34 million improvement in Provider Markets and a $4 million improvement in Life Reinsurance. These improvements were partially offset by an $18 million decline in Group Benefits due to favorable 1999 loss experience in the group life line of business. The improvement associated with Provider Markets relates to adverse experience and loss development for the personal accident business recorded in 1999, which exceeded $7 million of exit costs incurred from the Management Services Organization (MSO) business and $13 million of adverse development on the medical stop loss business in 2000. The decision to shut down the MSO business was based on lack of demand as providers are backing away from risk contracting. The strategy to focus on Group Benefits, Federal Markets and the group reinsurance lines of business positions Group Operations for the expectation of modest improvement in net operating income in 2001. 1999 Compared with 1998 Net earned premiums declined in 1999 by $162 million, or 4%, to $3,571 million as compared with 1998. Federal Markets' net earned premiums declined $274 million, almost entirely due to the exit of selected medical markets in late 1998. This decline was partially offset by growth in Life Reinsurance and Group Benefits of $60 million and $53 million. 30
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Net operating results in 1999 improved by $42 million as compared with 1998. Key components of the improvement include better underwriting results in Group Benefits' life and disability product lines, the exit of the employer health and affinity lines of business and lower restructuring and other related charges, partially offset by adverse losses and reserve development in the personal accident business. 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, Retirement Services, Long Term Care and Other Operations. Individual Life primarily offers level premium term life insurance, universal life insurance and related products. New sales of term life have consistently placed CNA among the top five producers in the market in each of the past three years. Retirement Services markets annuities and investment products and services to both retail and institutional customers. In the institutional market, CNA has benefited from strong sales and earnings of its Index 500 product, which is a guaranteed investment contract that is indexed to the performance of the Standard and Poor's 500(R) (S&P 500(R)) Index. Long Term Care products provide reimbursement for covered nursing home and home health care expenses incurred due to physical or mental disability. New sales of Long Term Care have placed CNA among the top producers in the individual marketplace in each of the past three years. Other Operations businesses include developing operations in certain international markets and life settlements. Operating Results [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Sales volume*: Individual life $ 929 $ 873 $ 761 Retirement services 1,723 2,270 1,553 Long term care 398 343 299 Other operations 141 183 141 -------------------------------------------------------------------------------- Total $ 3,191 $ 3,669 $ 2,754 ================================================================================ Net earned premiums $ 876 $ 936 $ 823 Net investment income 601 556 525 Other revenues 192 123 115 -------------------------------------------------------------------------------- Total operating revenues 1,669 1,615 1,463 Benefits 1,104 1,122 998 Expenses 311 277 295 Restructuring and other related charges -- -- 7 -------------------------------------------------------------------------------- Pre-tax operating income 254 216 163 Income tax expense (85) (71) (58) -------------------------------------------------------------------------------- Net operating income $ 169 $ 145 $ 105 ================================================================================ * Sales volume is a cash-based measure that includes premium and annuity considerations, investment deposits and other sales activities that are not reported as premiums under accounting principles generally accepted in the United States of America (GAAP). 2000 Compared with 1999 Sales volume for Life Operations declined $478 million, or 13%, to $3,191 million in 2000 as compared with 1999. Sales volume decreased because of a reduction in Retirement Services' products sold to institutions. These products tend to be "large case" institutional markets' sales, which can be sporadic, opportunistic and sensitive to independent agency ratings. Despite the overall decline, Life Operations' competitively priced product portfolio enabled most of its businesses to experience growth in 2000. Individual Life and Long Term Care products had an increasing base of direct premiums, and variable investment contracts experienced growth of $270 million to reach an annual sales level of $380 million in 2000. Net earned premiums declined $60 million, or 6%, to $876 million in 2000 as compared with 1999. This decline was mainly attributable to sales declines in structured settlements and single premium group annuities due to a competitive pricing environment. These declines were partially offset by a growing in-force block of Long Term Care and annuity products. Net operating income increased $24 million in 2000 as compared with 1999. The increase was principally attributable to increased earnings in the Index 500 product, the continued growth of Individual Life insurance in-force and favorable investment results in Individual Life and the Retirement Services businesses. Life Operations expects that its continued product innovation and strong commitment to growth will generate increased sales, particularly of variable products and Long Term Care business. 1999 Compared with 1998 Sales volume increased $915 million, or 33%, to $3,669 million in 1999 as compared with 1998. The 1999 increase represents increased sales of $717 million in Retirement Services and a 31
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growing base of premiums for Individual Life and Long Term Care. The significant growth in Retirement Services was largely attributable to strong sales in institutional investment products and variable annuities. Net earned premiums increased $113 million, or 14%, to $936 million in 1999 as compared with 1998. This increase was attributable mainly to increases in Long Term Care of $61 million and Retirement Services of $39 million. Net operating income increased to $145 million in 1999 as compared with $105 million in 1998. The 1999 improvement in net operating income was due primarily to favorable investment performance in the portfolio supporting Retirement Services' Index 500 product, improved mortality experience in the individual life market and expense reductions across virtually all of the other principal groups. CORPORATE AND OTHER The Corporate and Other segment 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 eBusiness initiatives. Net operating loss increased to $220 million for 2000 as compared with 1999 primarily as a result of expenses in 2000 for CNA's eBusiness initiatives. The net operating loss for 1999 was $202 million, or $9 million less than 1998. The improvement was primarily attributable to decreased interest expense and decreased losses of $20 million from AMS Services, Inc. (AMS), an information technology and agency software development subsidiary which was sold in the fourth quarter of 1999, partially offset by increased losses from run-off insurance operations. See Note O to the Consolidated Financial Statements for discussion of the AMS transaction. 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 workforce reduction 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. As of December 31, 2000, the remaining accrued restructuring and other related charges consist of $7 million of lease termination costs, all of which are expected to be paid during 2001. INVESTMENTS The components of net investment income for the years ended December 31, 2000, 1999 and 1998 are presented in the following table. Net Investment Income [Download Table] Years ended December 31 (In millions) 2000 1999 1998 -------------------------------------------------------------------------------- Fixed maturity securities: Bonds: Taxable $ 1,549 $ 1,509 $ 1,490 Tax-exempt 216 267 340 Redeemable preferred stocks 1 -- 2 Equity securities 52 36 33 Mortgage loans and real estate 4 4 5 Policy loans 12 11 11 Short-term investments 201 188 241 Securities lending transactions, net 22 26 10 Other invested assets 71 101 67 -------------------------------------------------------------------------------- Gross investment income 2,128 2,142 2,199 Investment expenses (48) (41) (53) -------------------------------------------------------------------------------- Net investment income $ 2,080 $ 2,101 $ 2,146 ================================================================================ Lower net investment income results for 2000 as compared with 1999 was due to lower levels of invested assets caused by asset transfers in the fourth quarter of 1999 in connection with the Personal Insurance transaction with Allstate and the $1.1 billion payment from escrow to Fibreboard to settle certain asbestos-related claims. The impact of a lower invested asset base on net investment income was partially offset by the increase in yield on the bond portfolio. Lower net investment income in 1999 compared with 1998 was due to the lower invested asset base, as discussed above, and due to a decline in yield on th