Posted on 16 Feb 2009
OLDWICK, N.J. February 13 (BestWire) — A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of CNA Insurance Companies (CNA) (Chicago, IL) and its members. Concurrently, A.M. Best has revised the outlook to negative from stable and affirmed the ICR of “bbb” and debt ratings of CNA Financial Corporation (CNAF) (Delaware) [NYSE: CNA].
A.M. Best also has revised the outlook to negative from stable and affirmed the FSR of A- (Excellent) and ICR of “a-” of CNAF’s life/health subsidiary, Continental Assurance Company (CAC) (Chicago, IL).
The negative outlook reflects CNA’s fourth quarter 2008 results, which were strained by significant investment losses, both realized and unrealized, as well as declining net investment income due to losses from limited partnership investments. Given the magnitude of investment losses already reported, continued turmoil in capital markets and CNA’s sizeable investment in mortgage and asset-backed securities, uncertainties exist regarding the potential for continued investment losses and the further strain that may place on risk-adjusted capitalization.
CNAF does appear to have adequate liquidity as evidenced by approximately $500 million in holding company cash and liquid investments, solid operating cash flows and no debt maturities until 2011. However, as uncertainties surrounding global financial markets persist, earnings and risk-adjusted capitalization at CNA will likely continue to be challenged by investment results, particularly due to their exposure to structured securities and below investment grade securities as well as longer dated maturities, which are largely to support liabilities from the run-off life and long-term care operations.
CNA’s ratings reflect its adequate risk-adjusted capitalization (including $1.0 billion and $500 million in contributed capital from CNAF in third and fourth quarters 2008, respectively, and other miscellaneous surplus credits), continued solid underwriting fundamentals, adequate liquidity and good business position as a top writer within the commercial lines segment of the U.S. property/casualty industry. In addition, the ratings recognize the emphasis on expense efficiencies and vastly improved technological infrastructure, which has enhanced data collection, segmentation and reporting tools.
Partially offsetting these positive factors are variability in loss reserves during the earlier portion of the prior five-year period, catastrophe losses, drag from the run-off of long-term care business and growing investment losses in recent years. Investment losses were particularly high in third quarter 2008, reflecting substantial impairments, including securities issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, Washington Mutual, Inc., two Icelandic banks and American International Group, Inc. However, impairments continued in fourth quarter 2008, across a majority of asset classes and numerous securities, totaling $644 million (pre-tax). In addition, CNA’s unrealized investment losses grew by nearly 60% in fourth quarter 2008 to $5.4 billion (pre-tax) at year-end 2008.
The ratings acknowledge the historical financial support provided by CNA’s ultimate parent, Loews Corporation (Loews). In November 2008, CNAF issued $1.25 billion of cumulative senior perpetual preferred stock to Loews. The majority of the proceeds from this offering were downstreamed into CNAF’s lead property/casualty insurance subsidiary, Continental Casualty Company (CCC) (Chicago, IL), via a surplus note to strengthen statutory surplus.
At year-end 2008, CNAF’s financial leverage increased considerably as a result of the decline in GAAP equity (including accumulated other comprehensive income) due to continued investment losses. However, leverage measures still remain in line with A.M. Best’s expectations at current rating levels when incorporating a level of equity credit for the preferred stock.
The ratings of CAC recognize its sufficient level of absolute and risk-adjusted capitalization, despite substantial realized capital losses in the company’s investment portfolio and large dividends that have been paid to its immediate parent, CCC. This adequate level of capital is primarily the result of favorable operating results in recent years, which have been enhanced by reduced operating expenses as the company manages in run-off mode. However, A.M. Best notes that 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 negative outlook reflects the weakened financial position of CNAF, which has experienced substantial realized and unrealized losses in its investment portfolio as a result of the current economic environment.
The ratings and outlook for CNA Surety Corporation, CNA Surety Corporation Group and its members, (both of Chicago, IL) and First of Hawaii Group (Honolulu, HI) and its members are unchanged.
For a complete listing of CNA Financial Corporation’s FSRs, ICRs and debt ratings, please visit http://www.ambest.com/press/021301cna.pdf.