Washington’s Republican candidate for Senate, Mike McGavick, likes to toot his horn about turning around Safeco – his campaign website talks repeatedly about his leadership and experience. McGavick in his KING 5 debate with Senator Maria Cantwell specifically made a point about turning Safeco around.
However, prior to Safeco, McGavick worked for CNA Financial Corporation in Chicago for about 6 years. CNA Financial Corporation is a large insurance company in Chicago that is owned 90% by the Loews Corporation.
The media has paid very little attention to McGavick’s time at CNA Financial. Yet I think there is more to McGavick’s story than we have been told.
From McGavicks website:
“In 1995, Mike went to work for Chicago-based CNA Financial Corporation. He held a number of positions and was responsible for developing CNA’s e-commerce strategy. Soon, however, CNA tapped Mike’s problem-solving leadership, naming him president and chief executive officer of the company’s largest operating
Mike’s professional career is testament to his leadership abilities. It’s also a testament to Mike’s unwavering focus on what real leadership is: taking responsibility and solving problems.”
O.K. well lets look a little closer.
McGavick worked for CNA Financial through 2000. It was announced in late Jan. 2001 that he had been selected to head up Safeco. But what happened at CNA Financial Corporation while McGavick was there and after he left?
In an official announcement written for the May 7, 2003 annual meeting there is an interesting graph that states the following:
STOCK PRICE PERFORMANCE GRAPH
The following graph compares the total return of the Company’s Common Stock, the Standard & Poor’s 500 Composite Stock Index (“S&P 500”) and the Standard & Poor’s Multi-Line Insurance Index for the five years ended December 31, 2002. The graph assumes that the value of the investment in the Company’s Common Stock and for each Index was $100 on December 31, 1997 and that dividends were reinvested.
STOCK PRICE PERFORMANCE GRAPH:
————————–1997 — 1998– 1999 — 2000 — 2001 — 2002
CNA FINANCIAL CORP…..100 — 94.52–91.44–91.00–70.13–61.55
S&P 500 INDEX …….100 –128.58–155.63–141.46–124.65–97.10
Thus $100 invested in CNA Financial Corporation between 1997 and 2002 became worth $61.55 while the same $100 invested in the S&P Multiline Insurance Index was worth $130.53
That doesn’t exactly sound like a company you’d want to invest in. And this was the company Mike McGavick worked for from 1995 through 2000. Maybe there’s more to the story about Mike McGavick’s time at CNA Financial than he’d like us to know.
One place to start is to look at what Mike McGavick actually did at CNA Financial. The story isn’t quite as usually told. McGavick was not the CEO at CNA Financial as has sometimes been said. See as just one example Seattle Times 4/17 2006 which erroneously lists him as “President, chief operating officer, CNA Financial, 1995-2000”
McGavick’s exact position in CNA changed over time, but he was on a senior management team starting in July 1997. He headed up the largest division of CNA Financial – the commercial insurance division, starting in 1997. As such he was the COO of the CNA division entitled Agency Market Operations.
As The National Underwriter in 2002 noted,when he left CNA Financial his “ most recent position prior to Safeco was as head of Agency Market Operations”
The 1999 CNA Financial Report to shareholders noted that CNA conducted its operations at that time through 7 separate units of which Agency Market Operations was one. The others were Specialty Operations, CNA Re, Global Operations, Risk Management, Group Operations and Life Operations.
In looking up Loews Financial Statements I came across the following in their 2003 Financial Report:
“Much of Loews’’s attention in 2003 was directed towards CNA, which made great progress in restoring and realigning its balance sheet to reflect claims development on policies written before 2001. CNA conducted a thorough review of its reserve base over the course of much of the year, which resulted in two significant charges in 2003. While this outcome was certainly undesirable, it represented a committed, genuine initiative to create a profitable commercial property-casualty insurance company. In support of these efforts, Loews lent its financial strength to the capital plan that CNA devised to augment its statutory surplus. In total, Loews invested $1.1 billion in CNA during the fourth quarter of 2003… “
Sounds like McGavick left an unprofitable company that had lots of problems that were the result of policies at least partially written during the time McGavick was with the company. Was McGavick just leaving a bad situation? What role did he have in creating or trying to solve the situation mentioned in the 2003 financial report?
In the 1999 CNA Financial Report released in March of 2000 McGavick gives the following perspective on his job at CNA Financial:
“Could you tell us about your efforts in commercial middle markets?
MCGAVICK: First of all, we are aggressively getting off accounts that have been unprofitable. Where we can’t find a solution that is acceptable to us, we are getting off the risk. Secondly, and a much more difficult task, is getting adequate price on business that we want to retain. Usually, this is business that many companies would like to have. We have steadfast resolve in getting an adequate price, even in this business. In 1999, we did not renew nearly $750 million of commercial premiums on a base of $3.4 billion as we worked through critical underwriting and pricing initiatives.
It is also important to look at the quarter-to-quarter trend. In middle-market business, as we work to attain rate adequacy, average price increases were 2 percent in the first quarter, 6 percent in the second quarter, 8 percent in the third quarter and 9 percent in the fourth quarter. Retention has been holding steady in the 70 to 75 percent range throughout the year.
You increased prices in commercial middle markets and still produced an underwriting loss. Has anything really changed?
MCGAVICK: When you look at the fundamentals of our book of business, we are in a much better position now than at the start of 1999. At that point, we were coming off two quarters of price decreases – 0.5 percent in the third quarter of 1998 and 1 percent in the fourth quarter – and these rolled over into our 1999 operating results. Now we are sitting on four consecutive quarters of necessary price increases that reached 9 percent in the fourth quarter, and we expect these actions will work their way into our results for 2000.”
The following 1997 through 2000 figures are from media release.
The 2001 through 2005 net income figures from the The 2005 Annual Report of CNA Financial Corp.( page 2 ).
Agency Market Operations saw net income (loss) figures of :
1997————–($326 million) loss
1998—————($54 million) loss
1999————–($201 million) loss
2000————– $110 million
They list the following net income (loss) figures as a whole for CNA Financial:
1998————- $228 million
1999————-($172 million) loss
2000————$1,182 million * see note below
2001————($1,605 million) *restated loss
2002 ————–$163 million *restated
2003———– ($1,417 million) *restated loss
2004—————$425 million *restated
The year 2000 deserves special note “…this significant increase in net income is attributable largely to realized gains on our superb Global Crossing and Canary Wharf investments…” SEC info
The year 2000 for CNA Financial as a whole showed a good profit on paper but when you look at the next three years it disappears. As noted, this increase was due mainly to investments separate from daily operations. If you add all the earning from 1998 to 2005, CNA Financial Corporation shows a cumulative loss of close to a billion dollars or $932 million to be more exact. If you exclude 2004 and 2005 as years beyond correcting for 1990’s losses, the loss becomes ($1.611 billion) after the input of funding by Loews.
Remember McGavick headed up Agency Market Operations since 1997 through 2000. In 1999 looking at the income from premiums of $4,799 million and investment income of $686 million and comparing it with the income of $13.282 billion for CNA as a whole, the sector that McGavick headed up brought in $4.799 billion or 36% of the total revenue.
Yet Agency Market Operations that year recorded a loss of $202 million. In 2000 with similar revenues it only recorded a $100 million gain after McGavich’s leadership for 4 years. Agency Market Operations did not contribute much to the income gain in 2000.
After McGavick left to join Safeco in Jan 2001 , the CNA Financial Corporation in 2001 underwent significant restructuring and Agency Market Operations disappeared as a division and as a separate entity that one could individually break out for an on-going income (loss) comparison. What was McGavick’s job no longer existed as such in the reorganization.
As noted in Loews 2001 10 – K report filed 3/08/2002 Loews reduced its seven operating groups to five – “Standard Lines, Specialty Lines and CNA Re (these groups comprise the Company’s Property-Casualty segment); Group Operations and Life Operations.” The group entitled Ageny Market Operations , that McGavick had headed, ceased to exist as such.
“CNA underwent significant management changes, strategic realignment and restructuring in the second half of 2001. These management changes as well as the strategic realignment and restructuring have changed the way CNA manages its operations and makes business decisions; and therefore, necessitated a change in CNA’s reportable segments.
The changes made to CNA’s reportable segments were as follows: (i)Commercial Insurance and CNA Excess & Select (formerly included in AgencyMarket Operations) and Risk Management Operations, were combined into Standard Lines; ….”
In Loews 2003 Annual Report they note that
“Over the course of the last two years, CNA has been replatformed, re-positioned, re-taffed, and re-underwritten. It has demonstrated unparalleled initiative and resolve in coming to terms with its past, all in an effort to lift any and all clouds of uncertainty as it works to become a strong, focused, and profitable commercial property-casualty insurance leader. Although the nature of the insurance business is to take calculated risks, which from time to time can imply a volatile earnings profile, CNA believes that its recent actions have positioned it to perform at a high level in the years ahead.”
One could speculate that McGavick in late 2000 saw the writing on the wall and decided it was time to get a new job. As noted in the same report above there is this further discussion of CNA’s reorganization in 2001 after McGavick left :
CNA’s organizational structure was streamlined and its infrastructure costs were reduced. From 2001 to 2002, roughly $200 million in annual operating expenses were eliminated, while cost reductions to bring overhead in line with the current size of the company are still ongoing. Selective staff reductions were made at the same time that high-caliber managers and technical underwriting professionals were recruited through investments in compensation plans and training and development programs.”
It definitely seemed like an opportune time for McGavick to move on in Jan 2001. Maybe he had no choice considering the circumstances. You’ll have to ask him.
To cover myself in case I made a mistake or two in interpreting this information cited above I give the following excuse. Sid Cato of Cato Communications made the following statement in a news release reviewing the best and worst company annual reports.:
CNA Financial, “an insurance company regardless of what it calls itself.” He said that traditionally its annual “is awful. As it is this year.” he said CNA “more than once” has made his list of world’s worst reports. Its ’98 product, he said, contains “precious little of substance.”
Feel free to comment.