Chicago-based CNA Financial Corporation announced third quarter of 2003 results, which included significant reserve strengthening as a result of the company’s recently completed reserve reviews. The company also announced a plan to strengthen its capital base. The third quarter of 2003 results included the following after-tax charges:
— Net prior year development of $1,495 million, which includes premium and claim and allocated claim adjustment expense development.
— Increase in bad debt reserves for insurance and reinsurance receivables of $332 million.
Including the above items, the company reported a net loss for the third quarter of 2003 of $1,760 million, or $7.94 per share, as compared with net income of $54 million, or $0.24 per share, for the same period in 2002. The net loss for the nine months ended September 30, 2003 was $1,607 million, or $7.39 per share, compared with net income of $105 million, or $0.47 per share, for the same period in 2002.
The net prior year development consisted of $978 million after-tax related to core reserves and $517 million after-tax related to asbestos, environmental pollution and mass tort (APMT) reserves. The primary factors that led to the net prior year development were the previously announced third quarter of 2003 comprehensive reserve reviews, which included construction defect and other volatile exposures, and a ground up analysis of APMT exposures. The net prior year development also resulted in additional cessions to the company’s reinsurance contracts, including the corporate aggregate reinsurance treaties. These additional cessions resulted in $67 million of after-tax interest expense, which is recorded as a reduction in net investment income.
To support statutory capital adversely impacted by the significant third quarter charges, CNA has developed a capital plan, which includes substantial support from Loews Corporation (Loews), the owner of 90% of CNA’s outstanding shares.
The capital plan includes a number of components, including the capital support from Loews and possible sales or other dispositions of businesses and assets. Under an agreement approved by a special committee of independent members of CNA’s Board of Directors, Loews has agreed to purchase $750 million of a new series of CNA non-voting convertible preferred stock, having terms that make it economically equivalent to CNA common stock. The conversion price is based on current average market prices of CNA common stock. Proceeds from the preferred stock sale will be applied by CNA to increase the statutory surplus of CNA’s principal insurance subsidiary, Continental Casualty Company (CCC). Under the agreement, Loews has also committed up to $500 million of additional capital support, through the purchase of surplus notes of CCC, in the event that certain additions to CCC’s statutory capital are not achieved by February 26, 2004 from business or asset sales and related actions. The obligation of Loews to consummate this agreement is subject to certain customary closing conditions.
In addition, Loews has indicated its commitment to provide up to an additional $150 million by March 31, 2004, in a form to be determined, to support the statutory capital of CCC in the event of additional shortfalls in relation to business and asset sales. Other elements of the capital plan include the October of 2003 sale of CNA Re renewal rights and withdrawal from the assumed reinsurance business, CNA’s previously announced initiative to reduce operating expenses by $200 million and planned changes in the ownership structure of certain insurance subsidiaries to align statutory capital more efficiently.
“CNA has undergone enormous change over the last two years” said Stephen Lilienthal, chairman and CEO of the CNA insurance companies. “Essentially, we have re-underwritten, re-platformed, re-staffed and repositioned the business portfolio, and will be recapitalizing CNA. I am certainly disappointed with the actions necessary to strengthen our balance sheet, but I remain very positive about the current performance of our core businesses, particularly Property and Casualty and Group Operations.”
The current accident year continued to improve within the primary property and casualty businesses as evidenced by strong rate increases during the quarter and solid production of new business. Gross written premiums increased 12% in the third quarter of 2003 compared with the same period in 2002.
Realized investment results increased $89 million after-tax in the third quarter of 2003 as compared with the same period in 2002. This increase was due primarily to increased realized gains related to derivative securities and a reduction in impairment losses for other-than-temporary declines in market values for fixed maturity and equity securities, partially offset by decreased gains on sales of fixed maturity securities. After-tax investment related impairment losses were $10 million for the third quarter of 2003 as compared with $144 million for the same period in 2002.
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