Incoming CEO: CNA Rebuild Over

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By Susanne Sclafane

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NU Online News Service, Aug 8, 3:00 p.m.EST?CNA Financial Corporation in Chicago today reportedsecond-quarter 2002 net operating income of $140 million, or 62cents per share, compared with a net operating loss of $2.1billion, or $11.32 per share, for second-quarter 2001.

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Last year, CNA's second-quarter 2001 loss was primarily theresult of a $1.7 billion after-tax charge related to a change inthe estimate of the company's prior year loss reserves.

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In addition to the $1.7 billion charge, CNA recorded a $0.4billion after-tax charge related to premium accruals, and severalother charges for restructuring, asset write-offs, and an estimatedrealized loss related to the disposition of certain subsidiaryoperations.

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Adjusting second-quarter 2001 results to remove those items andprovide what Chairman and Chief Executive Officer BernardHengesbaugh described as a "more meaningful" comparison with themost recent second quarter during a conference call this morning,operating earnings for second-quarter 2001 were $46 million.

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On that basis, operating earnings improved by $94 million, hesaid, noting that all three of CNA's operatingunits?property-casualty, reinsurance, and life?reported growth andoperating profits.

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Net income, however, which includes the impact of realizedinvestment losses, was only $35 million, or 16 cents per share. Bycomparison, last year's second-quarter net income figure, adjustedto exclude the unusual reserve and other charges, was $361 million,or 1.97 per share.

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This year's net income figure was impacted by a $190 millionafter-tax hit related to impairment write-downs on CNA's bondinvestments in WorldCom and other telecommunications companies.

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"We're done with the rebuild," said Stephen Lilienthal,president of CNA's property-casualty operations, during hispresentation on this morning's call, suggesting that restructuringcharges and reunderwriting would not impact results goingforward.

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Mr. Lilienthal, who was recently named to ascend to Mr.Hengesbaugh's position as CEO on Aug. 26, went on to say that CNAis now looking to expand its overall insurance writings.

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But while the executives reiterated those sentiments withsimilar remarks throughout the conference call, they still had todevote a substantial amount of time discussing "adjusted" results,not all of which were necessitated by the enormity of last year'scharges.

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For example, CFO Robert Deutsch noted that a combined ratioimprovement of 3 points?to 107 for primary p-c operations insecond-quarter 2002, compared to 110.3 for second-quarter 2001without the reserve charges?appeared small when viewed in relationto rate increases averaging 27 percent.

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He suggested that the fact that results in 2001 were improved byfinite reinsurance covers, and that results in 2002 were impactedby costs of traditional reinsurance, obscured a more substantialunderlying improvement. This coaxed analysts to focus of gross(before reinsurance) accident year loss ratios for the two periodsinstead.

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On that basis, he noted that the gross accident year loss ratiohad improved 10.5 points.

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Mr. Lilienthal also pointed out that net written premium growthfor primary or p-c operations was only 6 percent in the quarter,while premiums grew 13 percent through the first half.

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He explained that continued reunderwriting restrained growth inthe quarter, highlighting a large amount of business related toprofessional employer organizations, some programs, and some"balancing" of workers' compensation writings among theunderwriting actions.

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In spite of adverse loss development of $44 million in thequarter, executives said they were comfortable with overall reserveposition.

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When questioned specifically about workers' compensationreserves, however, Mr. Lilienthal said, "It's an area I look atwith a lot of cynicism and a lot of worry." He noted that thecompany reviews workers' comp on a regular basis.

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He also said that the 1999 and 2000 years are of particularconcern for workers' comp for the industry, not just CNA, and thathis concerns related to the volatility of the line as well as thesize of the company's workers' comp portfolio.

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Mr. Hengesbaugh summarized the company's overall position today,saying, "We believe that our restructuring efforts?all thoseunusual things are really behind us. [But] we are subject to allthe aberrations that occur in this business," reiterating remarksmade by Mr. Deutsch that industry events and court decisions canimpact any p-c insurer.

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