Best Affirms CNA and Subs Ratings; Revises Outlook to Stable

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of CNA Insurance Companies (CNA) and its members.

At the same time Best revised the outlook to stable from negative and affirmed the ICR of “bbb” and debt ratings of Delaware-based CNA Financial Corporation (CNAF). Best also revised the outlook to stable from negative and affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of CNAF’s life/health subsidiary, Continental Assurance Company (CAC).

Best said the revised outlook primarily “reflects the significant increase in the fair value of CNA’s investments in 2009, which combined with solid operating income and other miscellaneous surplus credits, have resulted in an increase in the group’s statutory surplus and substantially improved risk-adjusted capitalization that is more supportive of its ratings.

At the CNAF holding company level, the substantial increase in the fair values of investments in 2009 contributed significantly to dramatically improve comprehensive income and stockholders’ equity, which resulted in appreciably lower financial leverage. At December 31, 2009, CNAF’s adjusted debt plus preferred-to-total capital was 19.3 percent, which compares with 25.8 percent at year-end 2008 (including accumulated other comprehensive income), which is well within A.M. Best’s guidelines for the ratings. In addition, CNAF maintains sound coverage ratios.”

In addition best noted that CNAF’s holding company liquidity “appears adequate despite the above-average risk and volatility of its investments, which the company has been actively reducing in recent quarters by repositioning its portfolio. During this repositioning process, CNAF has maintained substantial cash and short-term investments and continues to generate positive cash flows. The company believes it has sufficient liquidity to fund its preferred stock dividend and debt service payments through at least 2010. The company discontinued its common stock dividend in fourth quarter 2008, and no debt matures before 2011.

“CNAF’s improved financial and liquidity position, combined with more accommodating credit markets for corporate debt issuance in the second half of 2009, allowed the company to issue $350 million of senior unsecured notes in November 2009 and use a portion of the net proceeds to redeem $250 million of the $1.25 billion of cumulative senior perpetual preferred stock it had issued to its parent, Loews Corporation (Loews), in November 2008, demonstrating financial flexibility”.

Following upon this analysis, “CNA’s ratings reflect its substantially improved risk-adjusted capitalization, continued solid underwriting fundamentals, adequate liquidity and good business position as a leading writer within the commercial lines segment of the property/casualty industry,” best explained. “In addition, the ratings recognize CNA’s underwriting and other operating initiatives completed and currently underway to improve operating performance; vastly improved technological infrastructure, which has enhanced data collection segmentation and reporting tools; and greater focus on enterprise risk management.”

However, the group’s “significant investment losses in 2007 and 2008 (both realized and unrealized), incurred catastrophe losses in recent years and the drag from the run-off of long-term care and other long-term liabilities, including those associated with the group’s life, asbestos/environmental and other mass torts,” should also be taken into account as offsetting factors, according to Best..

In addition there are “uncertainties regarding the potential for future investment losses, which “are magnified at CNA given its above average exposure to structured securities, including residential and commercial mortgage-backed securities, and below investment-grade securities, as well as longer dated maturities, which are largely to support liabilities from the run-off long-term care and life operations,” Best continued. Best also pointed out that it “expects the continued soft pricing and continued competitive forces in the U.S. commercial lines sector will likely pressure underwriting margins over the near term.”

The ratings report also took into account “the historical financial support provided by CNA’s ultimate parent, Loews. The majority of the net proceeds of the $1.25 billion of preferred stock CNAF issued to Loews in November 2008 was down streamed to CNA’s lead property/casualty insurer, Continental Casualty Company (CCC), via a surplus note to strengthen statutory surplus. In addition, CNAF made a $500 million capital contribution to CCC in third quarter 2008.

“The ratings of CAC recognize its solid level of absolute and risk-adjusted capitalization, despite realized capital losses in the company’s investment portfolio, various legal settlement and large dividends that have been paid to its immediate parent, CCC, over the last several years.

“Current capitalization is primarily the result of favorable historical operating results, which have been enhanced by reduced operating expenses as the company manages in run-off mode. In addition Best noted that “operating losses over the past two years are the result of non-recurring events and expects favorable operating results to emerge over the near to medium term.

“However, CAC maintains a limited business profile as it has exited many of its life/health business lines in recent years as part of a strategic decision by its intermediate parent, CNAF, to focus on its property/casualty insurance business. The stable outlook reflects the improved financial position of CNAF,” Best concluded.

Source: A.M. Best – www.ambest.com