S&P: CNA’s Ratings ‘Unaffected’ by Asbestos Deal with National Indemnity

July 16, 2010

Standard & Poor’s Ratings Services said that the ratings on CNA Financial Corp. (BBB-/Stable/–) and its core insurance operating companies (A-/Stable/–) are “unaffected by the company’s announcement that it has entered into an agreement with National Indemnity Co. (NICO; AA+/Stable/–) under which all of CNA’s legacy asbestos and environmental liabilities will be transferred to NICO.” [See IJ web site – https://www.insurancejournal.com/news/national/2010/07/15/111615.htm ].

CNA will pay NICO a reinsurance premium of $2 billion and will transfer to NICO the right to collect third-party reinsurance receivables with a net book value of approximately $200 million. In exchange, CNA will cede approximately $1.6 billion of net asbestos and environmental pollution liabilities to NICO under a retroactive agreement with an aggregate limit of $4 billion.

S&P noted that the “aggregate reinsurance limit will also cover credit risk on existing third-party reinsurance related to these liabilities. Further, the agreement establishes a $2.2 billion collateral trust for the benefit of CNA and provides a guarantee of NICO’s obligations by its parent, Berkshire Hathaway (AA+/Stable/A-1+).”

It also transfers “potential adverse reserve risk for liabilities that are highly correlated with an uncertain and volatile legal environment surrounding asbestos and environmental claims, thereby reducing CNA’s reserve risk,” S&P continued.

The rating agency also indicated that it expects “capitalization and financial leverage metrics to remain consistent with expectations following the close of the transaction. Notwithstanding the clear benefits, the economics of the transaction result in reduced investment income as well as a reduction in the reported level of statutory surplus.

“The ratings and outlook on CNA Financial and its core operating companies reflect the group’s strong competitive position in the U.S property/casualty commercial lines insurance market, strong management team, and strong financial flexibility. These strengths are offset partially by the company’s below-industry-average underwriting performance, largely stemming from the CNA Commercial segment and the noncore life and group run-off operations. Investment portfolio and capital volatility, though markedly improved, remain a modest rating concern.”

Source: Standard & Poor’s

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