Best Affirms CNA and Subs Ratings

March 3, 2011

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 and its P/C members, as well as the ICR of “bbb” and debt ratings of CNA Financial Corporation (CNAF), headquartered in Chicago, Ill.

In addition Best affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of CNAF’s life/health subsidiary, Continental Assurance Company (CAC). The outlook for all of the ratings is stable.

“At December 31, 2010, CNAF’s adjusted debt plus preferred-to-total capital was 19.5 percent, which compares with 19.3 percent at year-end 2009 and 25.8 percent at year-end 2008 (including accumulated other comprehensive income),” Best noted. “CNAF’s lower financial leverage at December 31, 2009, as compared with year-end 2008, primarily reflects the substantial increase in the fair value of the company’s investments in 2009, and to a lesser degree, operating earnings, which contributed to dramatically improved comprehensive income and stockholders’ equity. Adjusted financial leverage remained relatively flat in 2010, largely due to CNAF redeeming the remaining $1.0 billion of 10 percent cumulative senior perpetual preferred stock issued in 2008.”

Best pointed out that CNAF’s $400 million senior notes, issued earlier this month, would affect the proforma year-end 2010 adjusted financial leverage by increasing it to 21.8 percent, which, Best said, is “well within” its “guidelines for CNAF’s current ratings. However, Best continued, in 2011, it estimates CAN will achieve profitable operating income, which, “combined with the planned early redemption next month of CNAF’s $400 million senior notes due in August, will result in adjusted financial leverage below 20 percent for the remainder of 2011. No other substantial amounts of the company’s debt will mature until December 2014.”

In addition Best said that “CNAF’s liquidity is adequate despite the above average risk and volatility of its investments, which the company has actively reduced by repositioning its portfolio, a process management regards as having largely completed in 2009. Nevertheless, the company still has above average exposure to structured securities, including residential and commercial mortgage backed securities and below investment grade securities, as well as dated maturities, which are largely to support liabilities from its run-off long-term care and life operations.

“CNAF’s cash and equivalents were approximately $215 million at year-end 2010. 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 $175 million on outstanding debt. In 2009 and 2010, CNAF’s coverage ratios were well within A.M. Best’s guidelines for its ratings.”

As results Best indicated that CNA’s ratings “reflect its substantially improved risk-adjusted capitalization, continued solid operating performance, adequate liquidity and good business position as a leading writer within the commercial lines segment of the U.S. property/casualty industry.

“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 and segment reporting tools; and continued focus on enterprise risk management.

“Moreover, in the third quarter of 2010, CNAF transferred approximately $1.6 billion of the group’s net legacy asbestos and environmental (A&E) liabilities to National Indemnity Company. CNAF recognized an after-tax GAAP charge of $365 million as part of this transaction.” Nevertheless, Best added that it “believes the transaction is positive for CNA as it substantially reduces the uncertainty of it legacy A&E liabilities and virtually eliminates any potential A&E earnings drag for the foreseeable future.”

As partial offsetting factors Best cited the group’s “significant realized and unrealized investment losses in years 2007 through 2009, catastrophe losses in 2008, the drag from the run-off of long-term care and other long-term liabilities 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.

“The group’s current operational focus in CNA Specialty is to continue to invest resources and capitalize on market opportunities, while the focus in CNA Commercial is to improve profitability with increased rates and an accelerated shift to targeted, higher margin customers and industry segments.”

Best also pointed out that the ratings “acknowledge the historical financial support provided by CNA’s ultimate parent, Loews Corporation. In November 2008, Loews purchased $1.25 billion of 10 percent cumulative 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.

“An additional $500 million capital contribution to CCC from CNAF and other miscellaneous surplus credits in 2008 largely offset significant investment losses during the year. In 2009 and 2010, CNAF’s dramatically improved financial position enabled the company to redeem all of the $1.25 billion preferred stock it had issued to Loews by year-end 2010. In addition, CNA’s substantially improved financial position over this two-year period enabled CCC to pay down $500 million of its $1.0 billion surplus note issuance to CNAF in the fourth quarter of 2010.

“The ratings of CAC recognize its solid levels of absolute and risk-adjusted capitalization, improving operating results, effective asset/liability matching and the benefits of CNA’s comprehensive enterprise risk management program.

“CAC had experienced statutory operating losses in 2008 and 2009 primarily due to non-recurring events, including impairments and realized losses in its group annuity business and cost associated with legal settlements. Net income was further impacted by substantial realized capital losses in the company’s investment portfolio primarily owing to the impact of the recent financial crisis.

“However, investment losses have declined noticeably over the past year as financial markets have stabilized and as a result of CAC’s efforts to reduce the company’s exposure to higher risk assets within its investment portfolio.”

Best also noted that CAC “maintains a narrow business profile as it has exited many of its life/health business lines in recent years, but believes operating results will remain favorable over the near term as the company benefits from the reduced operating expenses indicative of its run-off status.”

Best summarized the companies and the ratings as 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 $400 million 6.0 percent senior unsecured notes, due 2011
–“bbb” on $100 million 8.375 percent senior unsecured notes, due 2012 (of which $70 million is outstanding)
–“bbb” on $550 million 5.85 percent senior unsecured notes, due 2014 (of which $549 million is outstanding)
–“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 is outstanding)

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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