A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of CNA Insurance Companies (CNA) and its property/casualty members. Concurrently, A.M. Best has affirmed the ICR of “bbb” and debt ratings of CNA Financial Corporation (CNAF) (NYSE:CNA). A.M. Best also has affirmed the FSR of A- (Excellent) and ICR of “a-” of CNAF’s life/health subsidiary, Continental Assurance Company (CAC). The outlook for all ratings is stable. The above companies are headquartered in Chicago, IL. (See below for a detailed listing of the companies and ratings.) The ratings reflect CNA’s strong level of risk-adjusted capitalization, consistent and profitable operating performance and established position as a leading writer within the commercial lines segment of the U.S. property/casualty industry. In addition, the ratings recognize initiatives undertaken by CNA’s management to improve operating performance; its vastly improved technological infrastructure, which has enhanced data collection and segment reporting tools; and its continued focus on enterprise risk management. Moreover, in 2010, CNA transferred approximately $1.6 billion of the group’s net legacy asbestos and environmental (A&E) liabilities to National Indemnity Company. While CNAF recognized an after-tax GAAP charge of $365 million in 2010 as part of this transaction, A.M. Best views the long-term benefits CNA will derive from the substantial reduction in the uncertainty of its legacy A&E liabilities and potential A&E earnings drag positively. Partially offsetting these positive factors are the group’s exposure to the adverse impact related to the company’s discontinued long-term care program and other long-term liabilities on operating performance, and the current highly competitive environment in its property/casualty markets, which will likely pressure underwriting margins over the near term. In recent years, CNA’s specialty lines segment (CNA Specialty) has achieved excellent underwriting results, while its standard commercial lines segment’s (CNA Commercial) performance has continued to trail that of competitors, resulting in CNA’s aggregate property/casualty underwriting margins underperforming its peer composite. Operating performance for CNA Commercial has improved in recent years, and the gap to peers is beginning to narrow. The group’s current operational focus in CNA Specialty is to continue to invest resources and capitalize on market opportunities, while CNA Commercial’s focus is to improve profitability with increased rates and an accelerated shift to targeted, higher margin customers and industry segments.
The ratings acknowledge the historical financial support provided by CNA’s ultimate parent, Loews Corporation (Loews). In 2008, Loews purchased $1.25 billion of senior perpetual preferred stock issued by CNAF. The majority of proceeds from this offering ($1.0 billion) was down-streamed to CNA’s lead property/casualty insurer, Continental Casualty Company (CCC), via a surplus note, to strengthen statutory surplus, which had experienced a notable decline due to growing investment losses during the financial crisis. An additional $500 million capital contribution to CNA from CNAF and other miscellaneous surplus credits in 2008 largely offset significant investment losses during the year. In recent years, CNAF’s dramatically improved financial position has enabled it to redeem all of the $1.25 billion preferred stock it had issued to Loews by year-end 2010 and enabled CNA to pay down $750 million of its $1.0 billion surplus note issuance to CNAF by year-end 2011.CNAF’s financial leverage decreased during 2011, with CNAF’s adjusted debt to-total-tangible capital measuring 18.6% at year-end 2011, compared with 19.5% at year-end 2010. Debt repayments, redemption of preferred securities and a modest increase in shareholders’ equity contributed to the decrease in financial leverage in 2011. CNAF’s liquidity is adequate despite the above average risk and volatility of its investments. While the company has made significant progress to reduce this risk by repositioning its portfolio, the company maintains an above-average exposure to below investment grade securities and long-dated maturities, which are largely held to support liabilities from its run-off long-term care and life operations. CNAF’s cash and equivalents were approximately $292 million at year-end 2011. Combined with the availability of a $250 million credit facility and operating company dividend capacity, the holding company has ample liquidity near term to meet its corporate obligations, which include projected interest payments of $170 million on outstanding debt. In 2010 and 2011, CNAF’s coverage ratios were well within A.M. Best’s guidelines for its ratings.
While the ratings for CNA are stable, future positive rating actions may result if the group outperforms its projections. However, negative rating actions could result if the operating performance falls markedly short of A.M. Best’s expectations.The ratings of CAC recognize its strong risk-adjusted capitalization, favorable operating results and effective asset/liability management. For year-end 2011, CAC reported statutory profits for the second consecutive year as it operates in run-off status. Although CAC’s earnings have historically been favorable, the company recorded a net loss in both 2008 and 2009, primarily due to investment losses in its separate account group annuity business, general account investment losses and costs associated with a legal settlement. However, investment losses have declined noticeably over the last two years as financial markets have stabilized and as a result of CAC’s efforts to reduce its exposure to higher risk investments. A.M. Best notes CAC’s effective asset/liability matching in light of the long duration of its remaining liabilities. CAC maintains substantial long duration structured settlement liabilities as it continues to operate in run off, although this concern is somewhat mitigated by the company’s well-developed asset/liability matching and cash flow testing practices. A.M. Best believes that CAC is well positioned at its current rating level for the foreseeable future. However, downward rating pressure may occur should CAC experience unfavorable earnings or capital trends. Additionally, downward rating actions on CAC may occur should Continental Casualty Company experience a material decline in its financial strength. The FSR of A (Excellent) and ICRs of “a” have been affirmed for the following property/casualty members of the CNA Insurance Companies:
- American Casualty Company of Reading, Pennsylvania
- Columbia Casualty Company
- Continental Casualty Company
- The Continental Insurance Company of New Jersey
- The Continental Insurance Company
- National Fire Insurance Company of Hartford
- North Rock Insurance Company Limited
- Transportation Insurance Company
- Valley Forge Insurance Company
CNA Financial Corporation—--”bbb” on $100 million 8.375% senior unsecured notes, due 2012 --”bbb” on $550 million 5.85% senior unsecured notes, due 2014 --”bbb” on $350 million 6.5% senior unsecured notes, due 2016 --”bbb” on $150 million 6.95% senior unsecured notes, due 2018 --”bbb” on $350 million 7.35% senior unsecured notes, due 2019 --”bbb” on $500 million 5.875% senior unsecured notes, due 2020 --”bbb” on $400 million 5.75% senior unsecured notes, due 2021 --”bbb” on $250 million 7.25% senior unsecured debentures, due 2023 The following indicative debt ratings on securities available under the shelf registration have been affirmed: CNA Financial Corporation— --”bbb” on senior unsecured debt --”bbb-” on senior subordinated debt --”bb+” on junior subordinated debt --”bb+” on preferred stock CNA Financial Capital I, II and III— --”bb+” on preferred securities The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include “Risk Management and the Rating Process for Insurance Companies”; “Rating Members of Insurance Groups”; “A.M. Best’s Ratings & the Treatment of Debt”; “Catastrophe Analysis in A.M. Best Ratings”; “Evaluating Non-Insurance Ultimate Parents”; “The Treatment of Terrorism Risk in the Rating Evaluation”; and “Equity Credit for Hybrid Securities.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.