Standard & Poor's also said that it lowered its counterparty credit and financial strength ratings on Western Surety Co., Universal Surety of America, and Surety Bonding Co. of America, which are CNA Surety Corp.'s subsidiaries, to 'A-' from 'A'.
In addition, Standard & Poor's affirmed its 'BBB-/A-3' counterparty credit rating on CNA and its 'A-' counterparty credit and financial strength ratings on CNA's property/casualty companies (CNAPC).
The outlook on all these companies is stable.
CNAPC is made up of the Continental Casualty Co. Intercompany Pool (CCC) and Continental Insurance Co. Intercompany Pool (CIC). "The ratings on CNAPC reflect its market position in commercial lines, disappointing historical operating performance, adequate capitalization, and strong financial flexibility," said Standard & Poor's credit analyst John Iten. Over the past two years, the group has benefited enormously from financial support from its parent, Loews Corp. (Loews).
Standard & Poor's has reviewed the 2001 Schedule P data for the property/casualty companies and believes that despite significant strengthening of reserves for asbestos and other factors in recent years, CNAPC's reserves continue to be deficient by about 5%-8% of total reserves over time, including the potential for additional adverse development on the company's significant asbestos exposure and in non-asbestos (primarily workers' compensation and other liability) reserves. Standard & Poor's believes Loews will provide capital support if CNAPC determines that material strengthening of reserves is necessary.
Standard & Poor's expects CNAPC's net and gross writings for 2002 to increase for the first time since 1998 and then increase another 15%-20% in 2003. Growth will continue to come from the standard and specialty lines segments. Underwriting results should continue to improve while investment income remains depressed by the near record low interest rate environment. Investment of new funds should allow investment income to rise moderately. The modest dividend demands of CNA should allow CNAPC to retain most of its earnings, thereby boosting surplus, which will help support the higher volume of premium writings.
Standard & Poor's expects CNA Surety to have modest top-line growth in 2003, as rate increases are largely offset by planned reductions in exposure to large accounts. Operating results are expected to remain weak relative to historical performance until the economic recovery is well underway.
Standard & Poor's expects the life companies' pretax GAAP operating earnings to increase modestly in 2003 following the sales of significant portions of the business over the past two years. The combined surplus position of the life companies is expected to remain extremely strong. Premium revenue is expected to increase by more than 15% in core lines. Liquidity will remain very strong, financial flexibility will remain strong, and invested assets will continue to be of high quality, though investment revenues are likely to continue to be modest in a low interest rate environment.
Underlying each of these expectations is a number of factors, including a continuation of the current favorable market trends, the realization of positive cash flow from operations,