Fitch Downgrades CNA, Best Stands Still

August 8, 2003

A $308 million after-tax charge taken by Chicago-based carrier CAN Financial Corp.’s primary insurance subsidiaries have led to a downgrade by Fitch Ratings, while A.M. Best says its ratings had already taken into account the company’s “sizable reserve deficiency.”

Both CNA’s and the Continental Corp.’s senior debt ratings were downgraded to “BBB-” from “BBB” by Fitch. Further, the insurer financial strength ratings for members of the Continental Casualty Pool (CCC), the Continental Insurance Company Pool (CIC) and the primary life insurance subsidiaries were each downgraded one level.

All Ratings have been placed on rating watch negative, which reflects further uncertainty related to the reserve study that will be completed during the second half of 2003 and any potential capital actions that may occur as a result.

Given the multiple charges taken in the past five years to strengthen reserves, Fitch believes CNA’s reserves have exhibited levels of volatility inconsistent with the prior rating category. As such, this continued reserve volatility was the main consideration in the downgrade. Between 1998 and 2001, CNA incurred $2.7 billion in after-tax adverse prior year reserve development. Favorably, the current charge is not expected to impact capital as both current accident year earnings and realized capital gains through the first half of 2003 will offset the expense.

Resolution of the rating watch will depend on the size of the resultant reserve charge, if any, and the steps taken by CNA to replenish capital in the event of a material loss. Ultimate rating actions could include a rating affirmation if Fitch becomes comfortable that post-study reserves are adequate and overall capitalization, including both operating company leverage and parent company financial leverage, remain consistent with the organization’s recent past. Otherwise, the ratings could be lowered further.

A.M. Best said CNA management has indicated that a review of prior accident year reserves is continuing. Given the explicit support provided to CNA Financial Corp. by its majority owner, Loews Corp., A.M. Best does not foresee a possible charge arising from the reserve review as being likely to have a negative impact upon the financial strength ratings of the insurance underwriting subsidiaries or the ratings of the existing debt securities.

A.M. Best believes that the ongoing commitment of Loews Corp. will enable the group to strengthen its reserves for both asbestos and environmental (A&E) and non-A&E liabilities while maintaining appropriate balance sheet strength through capital support. Although the group increased reserves by $2.3 billion in 2001 in an effort to stem the tide of adverse loss reserve development, this study is likely to be more comprehensive as the data is more seasoned and the most recent accident years appear to be more conservatively reserved.

The support provided by Loews Corp. was most recently evidenced in 2002 by the $750 million preferred stock offering from CNA to Loews. CNA used the proceeds of approximately $750 million primarily to repay debt coming due in 2003, with the balance being applied to increase the statutory surplus of its insurance subsidiaries.

Moreover, as a leading writer of commercial insurance in the United States, CNA continues to benefit from improved market conditions. Combined with improvements in underwriting discipline, operating efficiencies and a more conservative approach to initial reserves on more recent accident years, these market conditions and the elimination of the earnings drag from adverse loss reserve development should enable the group to improve earnings and internal capital generation in the near term.

A listing of Fitch’s actions follows:

CNA Financial Corp.:
—Senior debt downgrade from “BBB” to “BBB-“; placed on rating watch negative.
The Continental Corp.:
—Senior debt downgrade from “BBB” to “BBB-“; placed on rating watch negative.

Continental Casualty Company Pool:
—Insurer financial strength downgrade from “A” to “A-“; placed on rating watch negative.
—Members include: Continental Casualty Company, American Casualty Company of Reading, Pennsylvania, CNA Casualty of California, CNA Lloyd’s of Texas, Columbia Casualty Company, National Fire Insurance Company of Hartford, Transcontinental Insurance Company, Transportation Insurance Company, and Valley Forge Insurance Company.

Continental Insurance Company Pool:
—Insurer financial strength downgrade from “A” to “A-“; placed on rating watch negative.
—Members include: The Continental Insurance Company, Boston Old Colony Insurance Company, Buckeye Union Insurance Company, Continental Reinsurance Corporation, The Fidelity and Casualty Company of New York, Firemen’s Insurance Company of Newark, New Jersey, Niagara Fire Insurance Company and Pacific Insurance Company.

Continental Assurance Company Pool:
—Insurer financial strength downgrade from “AA-” to “A+”; place on rating watch negative.
—S-T insurer financial strength Downgrade from “F1+” to “F1”; placed on rating watch negative.
—Members include: Continental Assurance Company and Valley Forge Life Insurance Company.

Topics Carriers Abuse Molestation AM Best Casualty

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