Best Affirms CNA Financial and Subs’ Ratings; Outlook Stable

December 20, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the property/casualty subsidiaries of CNA Financial Corporation (CNAF), also known as CNA Insurance Companies (CNA).

Best also affirmed the ICR of “bbb” and all debt ratings of CNAF and CNA Financial Capital I, II and III, and 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. All above named companies are headquartered in Chicago, Illinois.

In a separate action Best has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a” of Western Surety Company and its subsidiaries, Surety Bonding Company of America and Universal Surety of America, collectively referred to as Western Surety (and previously known as CNA Surety Corporation Group), and assigned them a stable outlook.

The rating actions reflect CNA’s “excellent 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,” Best said.

“In addition, the ratings recognize initiatives undertaken by CNA’s management to improve underwriting performance; its vastly improved technological infrastructure, which has enhanced data collection and segment reporting tools; and its continued focus on enterprise risk management. Additionally, the ratings acknowledge the historical financial support provided by CNA’s ultimate parent, Loews Corporation.”

As partial offsetting factors Best noted the “adverse impact of CNA’s discontinued long-term care program and other long-term liabilities on underwriting performance and the current competitive environment in its property/casualty markets, which will likely pressure underwriting margins over the near term.”

The report also noted: “Over the past five years, CNA’s specialty lines segment (CNA Specialty) has achieved solid underwriting results, while its standard commercial lines segment’s (CNA Commercial) performance has shown improvement, but continues to trail that of competitors. As a result, CNA’s aggregate property/casualty underwriting margins have underperformed when measured against its peer composite. The group’s current operational focus is to improve profitability by increasing rates and shifting to targeted, higher margin customers and industry segments.

“CNAF’s liquidity is solid. While the company has made significant progress in reducing its investment risk by re-positioning its portfolio, it maintains an above average exposure to below investment grade securities and long dated maturities. These securities are largely held to support liabilities from its run-off long-term care and life operations.

“CNAF’s financial leverage has declined in 2013, with its adjusted debt to-total-tangible capital measuring 17.8 percent at September 30, 2013, compared with 18.57 percent at year-end 2012. A.M. Best’s current methodology for calculating financial leverage excludes accumulated other comprehensive income, which is primarily driven by an increase in stockholder equity.

“CNAF’s cash and equivalents were approximately $500 million as of September 30, 2013. Combined with the availability of a $250 million credit facility, access to over $325 million of additional liquidity from Continental Casualty Company’s recently completed membership with the Federal Home Loan Bank of Chicago and operating company dividend capacity, the holding company has ample liquidity near term to meet its corporate obligations, which include projected interest payments of $166 million in outstanding debt. CNAF’s financial leverage and coverage ratios are well within A.M. Best’s guidelines for its ratings.”

Best said its ratings for CAC “recognize its strong risk-adjusted capitalization, favorable operating results and effective asset/liability management as it operates in run-off status. CAC reported positive statutory profits for 2011, 2012 and through the third quarter of 2013.”

Best also indicated that “CAC’s effective asset/liability matching in light of the long duration of its remaining liabilities are comprised primarily of structured settlements.” Best said it “remains concerned with the low interest rate environment, which may pressure returns over the medium term. However, this concern is somewhat mitigated by CAC’s well-developed asset/liability matching and cash flow testing practices.”

In conclusion Best said it “believes that CAC is well positioned at its current rating level for the foreseeable future. However, downward rating pressures may occur should CAC experience unfavorable earnings or capital trends. Additionally, downward rating actions on CAC may occur should CCC experience a material decline in its financial strength.

“While the ratings for CNA are stable, future positive rating actions may result if it outperforms its projections. However, negative rating actions could result if its operating performance falls markedly short of A.M. Best’s expectations.

Best summarized the companies affected buy the rating actionsas follows:
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

The following debt ratings have been affirmed:
CNA Financial Corporation—
–”bbb” on $550 million 5.85 percent senior unsecured notes, due 2014 (of which $549 million was outstanding as of September 30, 2013)
–”bbb” on $350 million 6.5 percent senior unsecured notes, due 2016
–”bbb” on $150 million 6.95 percent senior unsecured notes, due 2018
–”bbb” on $350 million 7.35 percent senior unsecured notes, due 2019
–”bbb” on $500 million 5.875 percent senior unsecured notes, due 2020
–”bbb” on $400 million 5.75 percent senior unsecured notes, due 2021
–”bbb” on $250 million 7.25 percent senior unsecured debentures, due 2023 (of which $243 million was outstanding as of September 30, 2013)

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

Source: A.M. Best

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