OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of the property/casualty subsidiaries of CNA Financial Corporation (CNAF) [NYSE:CNA], also known as CNA Insurance Companies (CNA). Concurrently, A.M. Best has affirmed the ICR of “bbb” and all debt ratings of CNAF and CNA Financial Capital I, II and III. A.M. Best also has affirmed the FSR of A- (Excellent) and ICR of “a-” of CNAF’s life/health subsidiary, Continental Assurance Company (CAC). The outlook for all ratings is stable. All above named companies are headquartered in Chicago, IL. (See below for a detailed listing of the companies and ratings.)
The rating actions reflect CNA’s excellent level of risk-adjusted capitalization, consistent and profitable operating performance and established position as a leading writer within the commercial lines segment of the U.S. property/casualty industry. In addition, the ratings recognize initiatives undertaken by CNA’s management to improve underwriting performance; its vastly improved technological infrastructure, which has enhanced data collection and segment reporting tools; and its continued focus on enterprise risk management. Moreover, in 2010, CNA transferred approximately $1.6 billion of the group’s net legacy asbestos and environmental (A&E) liabilities to National Indemnity Company. A.M. Best views positively the long-term benefits CNA will derive from the substantial reduction in the uncertainty of its legacy A&E liabilities and potential A&E earnings drag.
Partially offsetting these positive rating factors are CNA’s exposure to the adverse impact related to its discontinued long-term care program and other long-term liabilities on underwriting and operating performance, and the current highly competitive environment in its property/casualty markets, which will likely pressure underwriting margins over the near term.
Over the past five years, CNA’s specialty lines segment (CNA Specialty) has achieved excellent underwriting results, while its standard commercial lines segment’s (CNA Commercial) performance has improved but still continues to trail that of competitors, resulting in CNA’s aggregate property/casualty underwriting margins underperforming its peer composite. The group’s current operational focus is to improve profitability with increasing rates and shift to targeted, higher margin customers and industry segments.
The ratings acknowledge the historical financial support provided by CNA’s ultimate parent, Loews Corporation (Loews). In 2008, Loews purchased $1.25 billion of senior perpetual preferred stock issued by CNAF. The majority of proceeds from this offering, $1.0 billion, were down-streamed to CNA’s lead property/casualty insurer, Continental Casualty Company (CCC), via a surplus note. Also in 2008, CNAF contributed an additional $500 million to CNA largely to offset significant investment losses during that year. Since 2008, CNAF’s dramatically improved financial position has enabled it to redeem all of the $1.25 billion preferred stock issued to Loews by year-end 2010 and enabled CNA to pay off the $1.0 billion surplus note issuance to CNAF by June 2012.
CNAF’s financial leverage decreased as of September 2012, with CNAF’s adjusted debt to-total-tangible capital measuring 18.6%, compared with 19.4% at year-end 2011, based on A.M. Best’s current methodology for calculating financial leverage that excludes accumulated other comprehensive income, which was primarily driven by an increase in stockholder equity.
CNAF’s liquidity is adequate. While the company has made significant progress to reduce investment risk by repositioning its portfolio, CNAF maintains an above average exposure to below investment grade securities and long dated maturities, which are largely held to support liabilities from its run-off long-term care and life operations.
CNAF’s cash and equivalents were approximately $292 million at year-end 2011. 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 $170 million in outstanding debt. In 2011 and 2012, CNAF’s coverage ratios were well within A.M. Best’s guidelines for its ratings.
The ratings of CAC recognize its strong risk-adjusted capitalization, favorable operating results and effective asset/liability management as it operates in run-off status. CAC reported solid statutory profits for 2010, 2011 and through third quarter 2012. A.M. Best notes CAC’s effective asset/liability matching in light of the long duration of its remaining liabilities, comprised primarily of structured settlements. A.M. Best remains concerned with the low interest rate environment, which may pressure returns over the medium term. However, this concern is somewhat mitigated by CAC’s well-developed asset/liability matching and cash flow testing practices.
A.M. Best believes that CAC is well positioned at its current rating level for the foreseeable future. However, downward rating pressures may occur should CAC experience unfavorable earnings or capital trends. Additionally, downward rating actions on CAC may occur should CCC experience a material decline in its financial strength.
While the ratings for CNA are stable, future positive rating actions may result if it outperforms its projections. However, negative rating actions could result if its operating performance falls markedly short of A.M. Best’s expectations.
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 $550 million 5.85% senior unsecured notes, due 2014 (of which $549 million was outstanding as of September 30, 2012) |
| --”bbb” on $350 million 6.5% senior unsecured notes, due 2016 |
| --”bbb” on $150 million 6.95% senior unsecured notes, due 2018 |
| --”bbb” on $350 million 7.35% senior unsecured notes, due 2019 |
| --”bbb” on $500 million 5.875% senior unsecured notes, due 2020 |
| --”bbb” on $400 million 5.75% senior unsecured notes, due 2021 |
|
--”bbb” on $250 million 7.25% senior unsecured debentures, due 2023 (of which $243 million was outstanding as of September 30, 2012) |
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 |
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Catastrophe Analysis in A.M. Best’s Ratings”; “Insurance Holding Company and Debt Ratings”; “The Treatment of Terrorism Risk in the Rating Evaluation”; “Understanding BCAR for Property/Casualty Insurers”; “Understanding BCAR for Life/Health Insurers”; “A.M. Best’s Liquidity Model of U.S. Life Insurers”; and “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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