S&P Reports CNA Financial Corp., Affiliates Ratings Remain on CreditWatch Negative

November 12, 2003

Standard & Poor’s said that its ratings on CNA Financial Corp. and CNA’s affiliates are remaining on CreditWatch with negative implications, where they were placed on Aug. 7, 2003.

This decision follows CNA’s announcement – as part of its third-quarter 2003 earnings release – that it incurred a $2.35 billion pretax charge for reserve strengthening ($1.5 billion after taxes). Combined with a $332 million addition to its bad-debt reserve for reinsurance recoverables and other charges, the company reported a net loss of $1.76 billion for the quarter.

CNA had announced at the time of its second-quarter earnings release that it was undertaking a comprehensive review of all its reserves, including a review of reserves for asbestos claims. However, the magnitude of the charge reportedly exceeded Standard & Poor’s expectation by a wide margin.

In Feb. 2003, Standard & Poor’s affirmed its ratings on CNA. Incorporated into the affirmation decision was the expectation that the reserves of CNA’s property/casualty affiliates were deficient by 5%-8%. However, CNA has benefited from the substantial capital support provided by its parent, Loews Corp. (A/WatchNeg/–), which contributed a total of $1.75 billion in 2001 and 2002, and Standard & Poor’s expected future support from Loews if a material deficiency in CNA’s balance sheet arose.

CNA has presented a plan for restoring capital adequacy over the near term to a level consistent with a rating in the ‘A’ category. The capital plan calls for Loews to make an initial $750 million capital contribution by purchasing a preferred stock issue, which would convert into CNA common stock once necessary regulatory approval is obtained. The proceeds would be contributed to Continental Casualty Co. (CCC), the primary operating insurance company. In addition, Loews has committed to provide up to $500 million of additional support in the form of surplus notes purchased from CCC if the capital improvement expected from asset sales does not materialize.

Finally, Loews has committed to provide up to $150 million of new capital to CCC by March 31, 2004, if needed to meet the full capital plan. In total, Loews will provide up to $1.4 billion of capital contributions to CNA.

The company is also taking other steps to improve capital adequacy. CNA has already begun the process of exiting noncore businesses with the sale of renewal rights of its assumed reinsurance business last month to Folksamerica. Such dispositions will reduce the required level of capital and should result in a more focused business strategy.

About $2.1 billion of total debt was outstanding at Chicago, Ill.-based CNA as of June 30, 2003.


As noted above, capitalization is expected to return swiftly to a level consistent with an ‘A’ range rating. Profitability is expected to benefit substantially from this restructuring.

Given the magnitude of the current charge, Standard & Poor’s anticipates no material additions to CNA’s prior-year reserves. Earnings will also benefit from the planned $200 million of expense reductions. These factors, together with the strong pricing environment for current business, should result in CNA achieving a combined ratio of 100% or better in 2004 and 2005.

The ratings on CNA’s affiliates could fall into the nonsecure range (below ‘BBB-‘) if substantial portions of the plan are not executed or if significant additional adverse operating results develop. If the plan is executed in full and no new adverse developments occur, Standard & Poor’s will likely affirm the current ratings. The outlook assigned to CNA would be the same as the outlook on Loews.

Another factor that could affect the ratings on CNA is a revision to the rating on Loews. Because the CNA ratings are supported by Loews, and the financial strength ratings assigned to the core CNA insurance companies are currently only one notch below the senior debt rating on Loews, any downward revision to the Loews rating or outlook would result in the same change to the financial strength ratings on CNA’s operating companies, although the debt ratings on CNA could potentially remain unchanged.

Ratings List CNA Financial Corp. Counterparty credit rating BBB-/WatchNeg/A-3 Senior unsecured debt rating BBB-/WatchNeg Commercial paper rating A-3/WatchNegAmerican Casualty Co.Boston Old Colony Insurance Co.Buckeye Union Insurance Co.CNA Casualty of CaliforniaCNA Insurance Co. (Europe) Ltd.CNA Insurance Co. Ltd.CNA Lloyd’s of TexasColumbia Casualty Co.Commercial Insurance Co. of Newark, NJContinental Casualty Co.Continental Insurance Co.Continental Insurance Co. of NJContinental Lloyds Insurance Co.Continental Reinsurance Corp.Fidelity & Casualty Co. of New YorkFiremen’s Insurance Co. of Newark, NJGlens Falls Insurance Co.Kansas City Fire & Marine Insurance Co.Mayflower Insurance Co. Ltd.National-Ben Franklin Insurance Co. of ILNiagara Fire Insurance Co.Pacific Insurance Co.National Fire Insurance Co. of HartfordSurety Bonding Co. of AmericaTranscontinental Insurance Co.Transportation Insurance Co.Universal Surety of AmericaValley Forge Insurance Co.Western Surety Co. Counterparty credit rating A-/WatchNeg/– Financial strength rating A-/WatchNegContinental Assurance Co. Counterparty credit rating A/WatchNeg/A-1 Financial strength rating A/WatchNegValley Forge Life Insurance Co. Counterparty credit rating A/WatchNeg/– Financial strength rating A/WatchNeg

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