CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed CNA Financial Corporation's (CNA) Issuer Default Rating (IDR) at 'BBB+' and senior unsecured debt at 'BBB'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of CNA's property/casualty insurance subsidiaries at 'A'. The Rating Outlook for all ratings is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Fitch's rationale for the affirmation of CNA's ratings reflects the company's strong capitalization, stable earnings, and adequate reserve position in ongoing p/c operations. The ratings also reflect anticipated challenges in a competitive property/casualty market rate environment and the potential for adverse reserve development in the runoff of long-term care business.
CNA's financial leverage ratio was 19% at first-half 2016 (1H16), in line with previous years and below the current rating tolerance of 25%. GAAP fixed charge coverage was 5.6x for 1H16, down from 7.0x in 1H15. The decrease was attributable to lower investment income and higher non-catastrophe current accident year losses, partially offset by higher net favorable reserve development. Fitch expects that over the next 12-18 months CNA's earnings-based interest coverage will modestly improve over current levels.
The reported property/casualty GAAP combined ratio was 96.8% for 1H16, an improvement over 1H15 of 98.6%; however, on an accident year basis 1H16 deteriorated 3.0 pp to 101.7% over the same period in the prior year. From a segment perspective, The International segment underperformed with several large losses, but modest improvement is anticipated for full-year 2016 results.
The company reported $163 million (approximately 4.9 pp on the combined ratio) of favorable development for 1H16. Fitch believes that Specialty and International reserves will likely develop redundantly over time and will reduce any adverse development in the Commercial segment. Fitch has concerns about the adequacy of long-term care reserves due to past experience, interest rates, and the long-tail nature of the claims.
CNA's capital position remains solid with stated GAAP stockholders' equity of $11.9 billion at June 30, 2016 and operating leverage of 0.6x. CNA's Prism score for year-end 2015 was 'Very Strong'.
Fitch's rating rationale continues to recognize Loews' ownership of CNA, as the company benefits from the financial flexibility of a strong majority owner and is able to manage the company with a more long-term approach. Loews has demonstrated its support of CNA over the years through various actions that have improved CNA's capitalization. Fitch views Loews' continued commitment as likely to reduce the magnitude of potential downgrades should CNA's creditworthiness deteriorate, but considers CNA's ratings standalone.
Key rating triggers that could lead to an upgrade include:
--Improved view of long-term care reserve adequacy;
--Strong operating performance with a return on earnings (ROE) of 9% and a sustained GAAP calendar year combined ratio for the ongoing property/casualty business of approximately 100% or better;
--Maintaining a Prism score of 'Very Strong' or higher for several consecutive years and maintain debt-to-total capital below 25%.
Key rating triggers that could lead to a downgrade include:
--Decline in ROE below 6% and sustained combined ratio of 105% or worse;
--Adverse GAAP reserve development in excess of 5% of prior year's equity;
--Achieving a Prism score of 'Adequate' or below or debt-to-total capital maintained above 30%.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
CNA Financial Corporation
--IDR at 'BBB+';
--$150 million 6.95% due Jan. 15, 2018 at 'BBB';
--$350 million 7.35% due Nov. 15, 2019 at 'BBB';
--$500 million 5.875% due Aug. 15, 2020 at 'BBB';
--$400 million 5.75% due Aug. 15, 2021 at 'BBB';
--$243 million 7.25% due Nov. 15, 2023 at 'BBB';
--$550 million 3.95% due May 15, 2024 at 'BBB';
--$400 million 4.50% due March 1, 2026 at 'BBB'.
Continental Casualty Company Group
American Casualty Company of Reading, Pennsylvania
Columbia Casualty Company
Continental Casualty Company
The Continental Insurance Company
The Continental Insurance Company of New Jersey
National Fire Insurance Company of Hartford
Surety Bonding Company of America
Transportation Insurance Company
Universal Surety of America
Valley Forge Insurance Company
Western Surety Company
--IFS at 'A'.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 15 Sep 2016)
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