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Annual Report · Form 10-K
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EX-13.1 · Annual Report
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CNA CHARTING THE COURSE
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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.
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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.
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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
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[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
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Results of Operations
Revenues $ 15,614 $ 16,403 $ 17,162 $ 17,199 $ 16,988
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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) -- -- --
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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) -- -- --
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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
LETTER TO SHAREHOLDERS
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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
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
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
CNA STATEMENT OF DIRECTION
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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
MANAGEMENT'S DISCUSSION AND ANALYSIS
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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
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Revenues:
Net earned premiums $ 11,474 $ 13,282 $ 13,536
Net investment income 2,080 2,101 2,146
Other revenues 739 705 799
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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
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Operating income (loss) before
income tax and minority interest 489 (326) (332)
Income tax (expense) benefit (107) 211 200
Minority interest (28) (30) (20)
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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) --
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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) --
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Basic and diluted earnings (loss)
per share available to
common stockholders $ 6.61 $ (0.77) $ 1.49
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Weighted average outstanding
common stock and common
stock equivalents 183.6 184.2 184.9
================================================================================
21
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
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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)
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Net operating income (loss) $ 354 $(145) $(152)
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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.
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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
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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
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Underwriting loss (441) (1,052) (899)
Net investment income 604 686 744
Other revenues 151 80 48
Other expenses 185 77 52
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Pre-tax operating income (loss) 129 (363) (159)
Income tax (expense) benefit (19) 162 105
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Net operating income (loss) $ 110 $ (201) $ (54)
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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
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Combined 113.2% 121.9% 117.1%
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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
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
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
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
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
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
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
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
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
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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
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Total $ 3,191 $ 3,669 $ 2,754
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Net earned premiums $ 876 $ 936 $ 823
Net investment income 601 556 525
Other revenues 192 123 115
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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
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Pre-tax operating income 254 216 163
Income tax expense (85) (71) (58)
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Net operating income $ 169 $ 145 $ 105
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* 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
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
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Years ended December 31
(In millions) 2000 1999 1998
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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
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Gross investment income 2,128 2,142 2,199
Investment expenses (48) (41) (53)
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Net investment income $ 2,080 $ 2,101 $ 2,146
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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