CNA Financial Reports Q2 Net Income of $70M; Reductions in Workforce to Occur

CNA Financial Corporation reported net income for the second quarter of 2003 of $70 million, or $0.25 per share, as compared with net income of $31 million, or $0.14 per share, for the same period in 2002. Net income for the six months ended June 30, 2003 was $153 million, or $0.55 per share, compared with net income of $51 million, or $0.23 per share, for the same period in 2002.

Results for the second quarter of 2003 included $308 million after-tax of unfavorable net prior year development in the property and casualty operations, of which approximately 80 percent relates to accident year 2000 and prior. The significant unfavorable net prior year premium and loss development was recorded primarily for workers’ compensation, directors and officers coverages, and a recent adverse arbitration decision involving a single large property and business interruption loss that occurred in 1995.

The results also included increases in the bad debt reserves for reinsurance and insurance receivables, catastrophe losses for the Texas tornados and Midwest rain storms and decreased net investment income. These adverse items were more than offset by increased net realized investment results and strong current accident year results.

The current accident year continued to improve within the primary property and casualty businesses as evidenced by strong rate increases of 19 percent during the quarter and solid production of new business. Gross written premiums increased 19 percent in the second quarter of 2003 compared with the same period in 2002.

The company has launched a $200 million expense reduction initiative. The primary components of the initiative are a reduction of the current workforce by approximately five percent, lower commissions and other acquisition costs, principally related to workers’ compensation, and reduced spending in other areas. Strategies to realize such savings are expected to be implemented over the next year.

Realized investment results, net of participating policyholders and minority interests, increased $354 million after-tax in the second quarter of 2003 as compared with the same period in 2002. This increase was due primarily to increased gains on sales of fixed maturity securities and a decrease in investment related impairment charges in the second quarter of 2003. After-tax investment related impairment losses were $20 million for the second quarter of 2003 as compared with $190 million for the same period in 2002.

“While disappointed with prior year development recorded in the second quarter, we continue to focus on our strategic underwriting efforts to obtain profitable growth,” said Stephen Lilienthal, chairman and CEO of the CNA insurance companies. “Our underwriting discipline over the past few years is evidenced by the continued improvement in the current gross accident year results.

“Gross accident year loss ratios for Property and Casualty Operations have improved by roughly 7 points compared to 2002. Gross written premiums are up 7 percent over the first six months of 2002. Underwriting discipline remains strong, rates continue to be robust and our $200 million expense reduction and streamlining will position us for strong results going forward.”

Net written premiums decreased $166 million for the second quarter of 2003 as compared with the same period in 2002, due primarily to additional ceded premiums of approximately $200 million for the corporate aggregate and other reinsurance treaties, partially offset by strong rate increases.

Standard Lines achieved average rate increases during the second quarter of 2003 of 17 percent.

Results for the second quarter of 2003 included $185 million after-tax of unfavorable net prior year premium and loss development, principally recorded for workers’ compensation, increased catastrophe losses, decreased net investment income and an increase in the bad debt reserve for insurance receivables. These items were partially offset by improvements in the current net accident year loss ratio. Specialty Lines provides a broad array of professional, financial and specialty property and casualty products and services in the U.S. and abroad.

Net written premiums increased $109 million for the second quarter of 2003 as compared with the same period in 2002, primarily in the professional liability lines.

Specialty Lines achieved average rate increases during the second quarter of 2003 of 24 percent, primarily across most professional liability lines of business.

Results for the second quarter of 2003 included $123 million after-tax of unfavorable net prior year reserve development recorded for the previously disclosed adverse arbitration decision involving a single large property and business interruption loss, directors and officers coverages and the commutation of certain CNA Health Pro reinsurance treaties. This unfavorable development was partially offset by continued improvement in the current net accident year loss ratio. CNA Re operates globally as a reinsurer in the broker market for treaty products and in the direct market for facultative products.

Net written premiums decreased $37 million for the second quarter of 2003 for CNA Re as compared with the same period in 2002, due primarily to additional ceded premiums related to the corporate aggregate reinsurance treaties and reduced level of premiums from prior underwriting years. CNA Re achieved average rate increases during the second quarter of 2003 of approximately 7 percent.

Results for the second quarter of 2003 included $8 million after-tax of unfavorable net prior year reserve development, principally for directors and officers coverages; increased catastrophe losses and decreased net investment income. These items were partially offset by an improvement in the current net accident year loss ratio.

Net earned premiums decreased $491 million for the second quarter of 2003 as compared with the same period in 2002, due principally to the transfer of the Mail Handlers Plan, partially offset by premium growth in the disability, life and long term care products within Group Benefits due to increased new sales and rate increases. Group Operations achieved average rate increases during the second quarter of 2003 of approximately 7 percent.

Net earned premiums increased $29 million for the second quarter of 2003 as compared with the same period in 2002, due primarily to higher sales of structured settlement annuities and growth in individual long term care and life insurance products. Based on the company’s decision to significantly reduce new sales, a lower rate of premium growth is expected in its individual long term care product for the remainder of 2003.

Results for the second quarter of 2003 included unfavorable individual long term care morbidity, severance costs and decreased net investment income as compared with the same period in 2002. These items were partially offset by improved results related to life settlement contracts.

Results also included an increase in the bad debt reserve for reinsurance receivables related to deterioration in the financial strength ratings of several reinsurers, partially offset by decreased eBusiness expenses. Beginning in 2003, expenses related to eBusiness were included within property and casualty operations.

Third Quarter Reserve Reviews
Adverse trends in both APMT and non-APMT property and casualty segments continue to impact the property and casualty insurance industry.

The company reviews its property and casualty claim and claim adjustment expense reserves (reserves) on a regular basis, and as part of these reviews, has noted an increase in reported construction defect claims. The company expects to complete a comprehensive reserve review of construction defect exposures in the third quarter. In addition, other volatile exposures will also be reviewed on a comprehensive basis in the third quarter.

While the company continues to monitor and evaluate its APMT exposures on a regular basis, the completion of a comprehensive ground up analysis of its APMT exposures, previously scheduled for the second quarter, will be completed in the third quarter of 2003. Significant resources were dedicated to the proposed national asbestos reform legislation and to support the regulatory reviews described below. As such, the company plans to complete its more formal and comprehensive analysis in the third quarter of 2003.

In addition, in connection with routine state regulatory exams of Continental Casualty Company (CCC) and Continental Insurance Company (CIC), an independent actuarial firm is in the process of reviewing the company’s reserves as of Dec. 31, 2001. The company intends to have the independent actuarial firm update its review to include an assessment of its Dec. 31, 2002 reserves using more recent data. These independent reviews are expected to be completed by Dec. 31, 2003. The company will consider the results of these independent actuarial reviews in the reserving process.