National – Rating Roundup: CNA, Horace Mann, Southland

October 29, 2008

Contrary to the position taken by A.M. Best and Moody’s Investors Service, Fitch Ratings has revised CNA Financial Corporation’s rating outlook to negative from stable. However, Fitch affirmed the Issuer Default Rating (IDR) at ‘BBB+’; the Senior debt at ‘BBB’, and the ‘A’ insurer financial strength (IFS) ratings of CNA’s insurance subsidiaries. Fitch said the “negative rating outlook reflects the significant unrealized market value losses that have impacted almost all insurers due to unprecedented market volatility.” It also “reflects uncertainty as to the timing and extent of any recovery in market values and concerns related to ongoing market volatility that has the potential for significant further reductions in capital if market values decline further, and additional impairments are recognized. CNA recorded a change of $3.4 billion of generally accepted accounting principles (GAAP) pre-tax unrealized investment losses in the first nine months of 2008 (including $1.9 billion in the third quarter). The losses consisted mostly of fixed maturities, including asset-backed securities; corporate bonds; tax-exempt and below investment grade securities, due to the significant falls in global credit markets from widening credit spreads and sub-prime related issues. In addition, through the first nine months of 2008, the company posted $840 million of pre-tax investment impairment losses primarily from problem credits, including $584 million in the third quarter. As a result, GAAP shareholders’ equity has dropped 24percent thus far in 2008 to $7.7 billion at Sept. 30, 2008 from $10.15 billion at year-end 2007.”

Fitch Ratings has downgraded the debt, long-term issuer default ratings (IDR) and insurer financial strength (IFS) of Horace Mann and its subsidiaries as follows:
Horace Mann Educators Corporation’s (Horace Mann) insurance subsidiaries – Horace Mann Insurance Co. -Teachers Insurance Co.
Horace Mann Property & Casualty Insurance Co. – Horace Mann Lloyds – Horace Mann Life Insurance Co.
— IFS rating downgraded to ‘A-‘ from ‘A’ – Horace Mann – IDR downgraded to ‘BBB’ from ‘BBB+’ – $199.5 million senior notes downgraded to ‘BBB-‘ from ‘BBB’. The rating outlook is stable. Fitch said its “rating actions reflect a decline in capital profile of the company during 2008 caused by realized and unrealized investment losses, catastrophe losses and increased financial leverage. Horace Mann recently reported estimated third quarter investment losses of approximately $50 million, which included exposure to Lehman Brothers, Fannie Mae/Freddie Mac, AIG and other financial institutions, as well as $34 million to $38 million of catastrophe losses. On a year-to-date basis, realized investment losses totaled about $60 million and catastrophe losses were approximately $65 million. This compares to full year 2007 losses of $3 million and $24 million, respectively. ”

A.M. Best Co. has revised the rating outlook to negative from stable and affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Alabama-based Southland National Insurance Corporation. Best said the “negative outlook reflects Southland National’s recent decline in capitalization due to impairments in its investment portfolio and lower after-tax operating earnings. In addition, challenges associated with market expansion in the current economic environment may hamper the company’s ability to achieve stability in its operating results in the near to medium term. Furthermore, Southland National has recorded fluctuating operating results over a five-year period and has experienced an increase in expenses as well as a decline in direct premium income. A.M. Best also notes the declining financial flexibility at Southland National’s parent company.”

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