CNA Reports Solid Quarter; Expense Trimming

By Susanne Sclafane

NU Online News Service, July 29, 4:00 p.m.EDT?-For CNA's Chief Executive Stephen Lilienthal, noextraordinary news was good news today when he announced the firm'ssecond-quarter result--$289 million in net income, or $1.07 pershare.[@@]

In contrast, in last year's second quarter, CNA had a $308million reserve-strengthening charge to announce that pushedsecond-quarter 2003 net income down to $70 million, or only 25cents per share.

"This will be our third consecutive quarter where we had nothingmajor to announce," he said, attributed the good result tofundamentals built up in recent quarters. This was a "quiet solidquarter," he said.

Following that 2003 boost of $308 million for prior- year lossdevelopment in workers' compensation, directors and officerscoverage, and an adverse arbitration decision on a businessinterruption claim, the Chicago-based insurer's third-quarter waseven worse last year. In third-quarter 2003, CNA reported a $1.76billion net loss triggered by a $1.5 billion charge to beef upreserves for asbestos and other claims.

During last year's second quarter, CNA said it was launching acost-saving initiative to slice some $200 million inexpenses--downsizing its work force by some five percent andlowering commissions on workers' comp policies. And today, Mr.Lilienthal reported that while that initiative is virtually done,more expense initiatives are in the works.

CNA is now going forward with additional initiatives to take outin excess of another $100 million this year and in 2005, Mr.Lilienthal said.

While he did not provide details of these initiatives, he said,"the actions to support this are in place as we speak." He addedthat further analysis is underway to remove additional costs"through process improvement, consolidation and organizationalstreamlining."

Mr. Lilienthal reported that in spite of expense initiatives,CNA's expense ratio remains heavier than he would like it to be.But "our decision to let it [the expense ratio] run a bit heavy toinvest in underwriting and claims initiatives, we think is wellgrounded," he said.

"We feel that the trade of approximately two points of expense,combined with other rate and other underwriting to reduce our lossratio 18 points was a very good strategy."

CNA's loss ratio for the quarter was 68.6, and the combinedratio (which adds on the expense ratio) was 96.8.

Turning to overall market conditions, the CEO said, "The tide isin fact going out. Rates are slowly and persistently dropping.Terms and conditions are easing," he said. He reported that largeproperty, large casualty, and large directors and officers linescontinue to loosen more than other lines.

"There are players that are writing construction withoutresidential exclusions. There are markets paying excess commissionson workers' compensation. And in the excess and surplus area, weare seeing risks moving into standard market that should havestayed in E&S market," he said.

CNA also reported that its gross written premiums for thequarter decreased 3.6 percent to $2.18 billion, with standard linesgross premiums falling 8.7 percent to $1.5 billion.

Jim Lewis, president of p-c operations, attributed the premiumdeclines to "intentional underwriting actions."

"Our priority isn't growth. It's building a diversifiedportfolio in profitable classes of business," Mr. Lewis said, goingon to explain how intentional actions lowered retention levels."This is not the time to load up on new business--and we're not,"he added.

"We continue to shift our portfolio away from workers'compensation," he reported, highlighting high-hazard workers' compclasses like construction as those which CNA underwriters have areduced appetite for in 2004.

CNA has also exited some unprofitable programs in the excess andsurplus lines segment, moved out of some habitational constructionbusiness, and business with silica-related risks, he said.

Going into some detail on the workers' comp area, Mr. Lewis saidthat between 2002 and 2003, CNA reduced its workers' comp exposuresroughly 32 percent, while premiums remained flat as a result ofrate hikes. Working to improve the hazard mix of its workers' compbusiness, he said that CNA reduced the proportion of the workers'compensation book in construction classes to 20 percent in 2003from 30 percent in 2000.