CNA Financial Looking Fiscally Sharp (News) November 3, 1999

CNA Financial Looking Fiscally Sharp

By Richard McCaffery (TMF Gibson)
November 3, 1999

Commercial and consumer property and casualty insurance company CNA Financial (NYSE: CNA) posted net income of $29 million, or $0.15 per share for the third quarter, a serious turnaround from a net loss of $14 million, or $0.09 per share, a year ago as cost cutting and restructuring efforts take hold.

Net operating income increased to $82 million, or $0.82 per share, up from a loss of $68 million, or $0.39 per share a year ago.

The results, which included $78 million in catastrophe charges thanks to the storm services of Hurricane Floyd and $10 million in restructuring charges, are largely the result of underwriting discipline, expense reduction, and better operating performance, said Bernard Hengesbaugh, CNA's chairman and chief executive officer.

This should be music to shareholder's ears. Consider that Warren Buffet assembled a major part of his fortune investing in insurance companies that "maintained underwriting discipline," a fancy way of saying he took positions in companies smart enough not to underwrite policies at a loss just to bolster premiums in the short term.

Since there are about 3,400 companies that sell property/casualty insurance, and about 1,600 companies that sell life insurance in the United States alone, it makes sense for companies to pick their spots rather than try and compete on a cost basis with everyone. This is what CNA has tried to do in the last year, after watching net income plunge to $282 million in 1998 from $966 million in 1997.

Last year, the company exited the agriculture insurance business and some areas of the employer health insurance business because carriers had driven prices below levels at which a reasonable return could be expected. Early this year, CNA left the entertainment insurance business, and in October it sold its personal insurance business to Allstate. It's now focusing on its core property/casualty, commercial insurance and life insurance businesses.

CNA's return on average shareholder's equity, which tells investors how well the company's assets are being deployed by management, fell to 3.2% last year, a far cry from the previous three years when ROE averaged 13.3%.

Now, it's hard to make an apples-to-apples comparison in this quarter because the most recent balance sheet isn't available, and income is fluctuating as the company cuts costs and divests businesses. But if you annualize CNA's Q2 income and divide by shareholder's equity you get 7%, which gives you a strong sense the company is moving in the right direction.

Hengesbaugh, who took over in early 1999, is committed to improving operating results quarter by quarter, which seems to be the kind of blocking and tackling approach the company needs. CNA expects to save $300 million in annual pretax costs as a result of its restructuring plan.

It's currently trading at a 30% discount to book value and at less than 1x sales. At these prices it's worth a thorough examination. Consider that competitor American International Group (NYSE: AIG) -- which has grown net income impressively for at least the last three years -- trades at nearly 4x book value and more than 4x sales.

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