CNA seeks buyer for life insurer

The Chicago insurer is shedding noncore assets to focus exclusively on its property/casualty business.Chicago-based insurance company CNA Financial Corp. (http://www.cna.com/news/index.shtml) has put its life insurance and group health insurance businesses on the auction block, sources said. Together the units could fetch about $1.5 billion, according to Gary Ransom, an analyst at Fox-Pitt, Kelton Inc. The life insurance unit, considered the crown jewel of the sale, could fetch about $1 billion alone, Ransom said.Morgan Stanley is the banker for CNA, according to sources, who said that CNA has been shopping the units for the past few months. Representatives from CNA and Morgan Stanley declined to comment.

Published on October 29, 2003

Possible bidders for the unit include the largest life insurance companies in the industry, Lincoln National Corp., MetLife Inc. and Prudential Financial Inc. While sources most often mention Prudential as a possible acquirer, the company may pass on the acquisition if, as widely expected, it buys Cigna Corp.'s pension unit in a deal valued at more than $2 billion. The divestiture is consistent with CNA's strategy over the past year. Faced with the need to boost its reserves, CNA has chosen to sell noncore businesses and focus exclusively on property/casualty insurance. The company is the fourth-largest commercial insurer in the U.S., and more than 80% of the company's business is in p/c insurance. On the other hand, its life insurance unit is ranked 40th by size. In 2002 the life insurance unit earned $94 million after tax, and the group health unit earned $104 million. While Ransom said that the units could be sold for 10 times earnings, he added that the health group's profits in 2002 should not be used to value the company's sale price. "I am not sure if they are going to see those type of earnings again," he said, explaining that CNA has been shrinking its health operations over the past year. On Oct. 3 CNA announced a deal to sell part of its reinsurance business to Folksamerica Reinsurance Co., a unit of White Mountains Insurance Group Ltd. The sale will enable the company to write down about $600 million in premiums this year. And almost a year ago, on Oct. 31, 2002, CNA sold its Canadian life insurance group to Canada Life Financial Corp. for an undisclosed price. The divestiture of the life insurance unit will help CNA build its capital reserves, in part, to protect it against exposure to asbestos litigation. Currently, there are hundreds of claims against CNA and Continental Corp., another p/c behemoth, which CNA merged with in 1995.CNA has already set aside $1.161 billion in reserves for asbestos, but in the second quarter the company suggested that further reserves may be necessary to fend off litigation.

"Even though the company took a large asbestos charge in the second quarter of 2001, there have been numerous settlements and new data points on how asbestos claims will be settled since that time. Other companies' views on how these claims may hit excess layers have changed, and this may have an impact on how the company's excess exposures are viewed," Ransom wrote in a recent research report. Without the divestitures it is unclear whether the company would be able to have adequate capital reserves. In his second-quarter report Ransom questioned "whether the profits from the current business will be adequate to offset problems from the past and leave the company with a clean balance sheet."The rating agencies have also been critical of CNA's financials. Last August Moody's Investors Service placed the ratings of CNA on a review for possible downgrade, expressing concerns about the level of the company's reserves. Also in August, Fitch Ratings downgraded the company to BBB- from BBB, and it too expressed concerns about the company's reserves. Nevertheless, CNA's decision to divest also fits into a