CNA SAYS REVIEW MEANT TO BOOST COMPETITIVENESS

CHICAGO -- CNA Financial Corp.'s plan to re-examine each of its strategic business units over the next year and a half is sparked by a desire to boost its competitiveness, its top executive says.

"We're doing this in an effort to put ourselves in a stronger position," said Chairman and Chief Executive Officer Dennis Chookaszian. "We see the world as a much more competitive place. . . .We believe only companies in a very strong position are going to survive it."

Chicago-based CNA announced earlier this month that as a first step in its review of operations that it plans to lay off 1,100 workers, or about 20% of the workforce, in its largest unit, Commercial Insurance, which focuses on businesses generating $1 million or less in annual premiums (BI, July 13). The number of strategic business units, now 29, varies from year to year and can range between 20 and 40.

CNA also will consolidate all Commercial Insurance policy transactions into its Orlando, Fla., office, and claims handling into eight units, down from the 24 that have been handling both these functions.

The insurer reported $966 million in net income in 1997, which was almost flat with 1996's $965 million.

Mr. Chookaszian said that despite CNA's strong earnings over the past two years, the insurer has still not quite reached its goal of a 15% return on equity, hovering instead at about 12% to 14%.

"We believe that's achievable, and we believe that we can bring ourselves to the point where we're one of the top companies in each of the businesses we're in" by ensuring CNA is the lowest-cost producer as well as among the top couple of companies in each of its businesses, he said. While in some cases this may entail reducing workforces, in others "we're looking at growth issues," he said.

Cutting expenses was an issue raised by CNA's acquisition of Continental Corp.

CNA launched its $1.1 billion buyout of Continental in late 1994 (BI, Dec. 12, 1994). The Continental deal, said Mr. Chookaszian, led to annual cost savings of about $300 million as a result of the layoffs of 3,000 employees in the year and a half after the merger and related operation expense reductions. This brought its total employee count down to about 18,000.

Mr. Chookaszian said Continental had had much higher expense ratios for its businesses than did CNA. In the period since completion of the deal, though, the merged company has in most cases brought down those ratios to about the level they were previously for CNA alone, said Mr. Chookaszian.

CNA posted a 109% combined ratio for 1997, including a 30.7% expense ratio. This compares with the 102.2% average combined ratio reported by other major prop-erty/casualty insurers who participated in the Business Insurance survey (BI, March 23).

"In many of our businesses today we have expense ratios that are better than the average company, but they're not all at the top level," said Mr. Chookaszian. "Our intention is to try to get ourselves to the point where we can compete with the low-cost producer in every line that we're in."

Mr. Chookaszian said of the remaining strategic business units besides Commercial Insurance, 21 are already "in a very strong position."

"They have a strong market share, and we have plans in place to bring those businesses to another level, to essentially take them to a stronger position."

Five others, including its securitization business, still are in a start-up mode, said Mr. Chookaszian.

But, "We need to do something to improve the strategic position" of the remaining three: group health/major medical, personal auto and homeowners, and entertainment insurance, said Mr. Chookaszian.

Mr. Chookaszian said CNA already has exited several businesses over the past three years, including its announcement this year that it was leaving the agricultural insurance business. "These are businesses that we exited because we feel that we couldn't achieve a dominant market position," he said.

For the future, Mr. Chookaszian said CNA has five "transformational ideas that we feel are extremely important in the changing nature of the insurance business, and we have activities to strengthen" its position in each of these areas (BI, March 9; Oct. 30, 1997).

These are: banks selling insurance; securitization; Internet or electronic sale of insurance; business process outsourcing; and employee leasing or professional employer organizations.

Analysts view CNA's move as a response both to general market conditions as well as its own circumstances.

Mr. Chookaszian has known for some time that "the ante is rising in terms of size, scale and efficiency," said Ronald Frank, an analyst with Salomon Smith Barney in New York. "It's why CNA bought Continental. . .and from my way of thinking, it's why they're doing this."

Matthew T. Coyle, director at New York-based rating agency Standard & Poor's Corp., said: "I think it's about time, to be honest with you."

S&P last year changed CNA's ratings outlook to negative from stable, citing a significant decrease in operating margins.

CNA's expense ratio is high relative to other industry peers, said Mr. Coyle, and in today's environment, being efficient in terms of writing premiums and keeping the cost down "is a big positive."

"I think we need to see what the results of this are going to be long- term," he added.

"The restructuring efforts they're undertaking appear to be a response to the very challenging market conditions in commercial lines," said Jay Cohen, an analyst with Merrill Lynch in New York. "I would say it's mainly driven by the need to reduce expenses because of the adverse market conditions," he said of CNA's review.

Pointing to CNA's moves in its Commercial Insurance unit in particular, Gary Ransom, senior vp at Conning & Co. in Hartford, Conn., said "that broad, middle-market American business has been very competitive and very difficult to make money at for lots of insurance companies, not just CNA."

"It seems like CNA is trying to have another attempt at increasing profit through expense cuts," added Mr. Ransom. "That might help. It seems to me most of it has just been premiums are too low compared to the losses, so cutting expenses may not be a sufficient response."

However, looking at its strategic business units is a "real smart way to look at the whole company" and at how it operates and to examine ways to "make it leaner, meaner, more efficient," said John L. Ward, CEO of the Cincinnati-based Ward Financial Group.

Other companies are expected to do the same, analysts say.

"It wouldn't surprise me to see others examine their expenses more closely," said Mr. Cohen of Merrill Lynch.

"I think it's fair to say most insurance companies are looking at their cost structure and ways they can improve upon it, particularly in today's environment, with pricing what it is," said S&P's Mr. Coyle.

"To my knowledge, everybody's watching costs," said Gloria Vogel, senior vp at Advest Inc. in New York. "I think being efficient is part of what's important in keeping the margins up, particularly with pricing under so much pressure.

"Everybody's got to watch their expenses, and it seems to be an ongoing process," said Ms. Vogel. She added that she does not expect other insurers to institute mass layoffs, which many have done in years past, because "it's pretty lean at this point." However, "new technologies are clearly creating new efficiencies and sometimes require fewer people.'