CNA Financial Corp., Subs Have Ratings Affirmed

Standard & Poor’s Ratings Services has affirmed its ‘BBB-‘ counterparty credit rating on CNA Financial Corp. (NYSE:CNA) and its ‘A-‘ counterparty credit and financial strength ratings on CNA’s insurance affiliates (except for Continental Assurance Co., which is rated ‘BBB+’). The outlook on all of these companies remains negative.

The ratings reflect CNA’s strong market position in commercial lines, historically weak operating performance, substantially improved capitalization, and the demonstrated capital support of CNA’s ultimate parent, Loews Corp. (NYSE:LTR; ‘A/Negative/–‘).

At the end of April 2004, CNA completed the balance-sheet restructuring it initiated in November 2003 to help offset the effect of a $2.85 billon reserve strengthening charge ($1.85 billion after-tax) and a $610 million ($396 million after-tax) increase in the provision for reinsurance and insurance receivables. During this period, the company raised $1.4 billion of new capital. Included in Standard & Poor’s analysis is the effect on statutory and GAAP capital of the aggregate stop-loss reinsurance contracts in force at year-end 2003, and the current rating is fully reflective of Standard & Poor’s conclusions in this regard.

In the third quarter of 2003, CNA presented a plan for restoring capital adequacy that committed Loews to provide up to $1.4 billion of additional capital support by March 31, 2004, through a combination of capital contributions from Loews and asset sales by CNA. This plan was fully implemented, with most of the proceeds used to strengthen the capital base of Continental Casualty Co., CNA’s primary operating insurance company.

As part of this restructuring, the company exited the assumed reinsurance, group benefits, and individual life businesses and is now focused exclusively on its commercial property/casualty business. CNA posted pretax income of $78 million in the first nine months of 2004 versus a loss of $2.6 billion in the prior year, as the company is benefiting from the strong pricing environment of the past three years, savings from the restructuring and expense-reduction steps the company has undertaken, and the absence of significant prior-year reserve strengthening. The 2004 pretax result includes $278 million of losses arising from hurricane activity.

About $1.7 billion of total debt was outstanding at CNA as of Sept. 30, 2004, down from $1.9 billion at year-end 2003. Financial leverage (debt plus hybrid securities divided by total capital adjusted for unrealized gains on fixed-income investments) was 25% as of Sept. 30, 2004, down from 34% at year-end 2003.

Outlook

Based on Standard & Poor’s group rating methodology, the ratings on CNA and its affiliates are closely tied to the rating on Loews. Because the ratings on CNA are supported by Loews, and the financial strength ratings on the core CNA insurance companies are currently only one notch below the senior debt rating on Loews, any downgrade on Loews would result in the same change to the financial strength ratings on CNA’s property/casualty operating companies. The outlook on CNA companies is therefore negative, reflecting the negative outlook on Loews.

CNA has benefited greatly from the substantial capital support provided by Loews, which has contributed a total of $2.85 billion since 2001. Incorporated into the ratings is Standard & Poor’s expectation that Loews will continue to support CNA if another material deficiency in CNA’s balance sheet arises. However, given the magnitude of the actions taken in 2003 to shore up its balance sheet, Standard & Poor’s expects no material addition to CNA’s prior-year reserves or other events that would require Loews to provide additional capital support over the outlook period.

The capitalization of the property/casualty group has been restored to a level consistent with the rating. Profitability in 2004 is expected to benefit from the strong pricing environment for current business and savings from the restructuring and expense reduction steps the company has undertaken. These factors should result in CNA achieving a combined ratio of 100% or better in 2004 (excluding the impact of the third-quarter 2004 hurricane losses) and 2005.

Ratings list

CNA Financial Corp.
Counterparty credit rating BBB-/Negative/A-3
Senior unsecured debt rating BBB-
Commercial paper rating A-3
Continental Corp.
Counterparty credit rating BBB-/Negative/–
Senior unsecured debt rating BBB-
American Casualty Co.
Boston Old Colony Insurance Co.
Buckeye Union Insurance Co.
CNA Casualty of California
CNA Insurance Co. Ltd.
CNA Lloyd’s of Texas
Columbia Casualty Co.
Commercial Insurance Co. of Newark, NJ
Continental Casualty Co.
Continental Insurance Co.
Continental Insurance Co. of NJ
Continental Lloyds Insurance Co.
Continental Reinsurance Corp.
Fidelity & Casualty Co. of New York
Firemen’s Insurance Co. of Newark, NJ
Glens Falls Insurance Co.
Kansas City Fire & Marine Insurance Co.
Mayflower Insurance Co. Ltd.
National-Ben Franklin Insurance Co. of IL
Niagara Fire Insurance Co.
Pacific Insurance Co.
National Fire Insurance Co. of Hartford
Surety Bonding Co. of America
Transcontinental Insurance Co.
Transportation Insurance Co.
Universal Surety of America
Valley Forge Insurance Co.
Western Surety Co.
Counterparty credit rating A-/Negative/–
Financial strength rating A-/Negative
Continental Assurance Co.
Counterparty credit rating BBB+/Negative/–
Financial strength rating BBB+/Negative