Fitch Downgrades CNA Ratings

Fitch downgraded the insurer financial strength rating (FSR) of Continental Casualty Company Pool (CCC Pool) from “AA-” to “A+.” The related Rating Outlook remains Negative. The CCC Pool is Chicago-based CNA Financial Corporation’s (CNA) largest property/casualty operation, and maintains a large market presence in commercial lines. In addition to recent operating challenges noted above, the CCC Pool maintains a conservative asset portfolio and a strong surplus position, which has been aided by favorable gains on two equity investments during recent years.

In addition, the insurer FSR for the Continental Assurance Company Pool (CAC Pool) was downgraded from “AA” to “AA-.” The CAC Pool’s Rating Outlook has been changed from Negative to Stable. The short-term insurer financial strength rating for the CAC Pool has been affirmed at “F1+.”

Further, Fitch downgraded CNA’s senior debt rating from “A-” to “BBB+.” The related Rating Outlook remains Negative.

According to Fitch, the rating actions reflect Fitch’s opinion that operating results have not improved in recent periods at a rate that is commensurate with its expectations. Operating income has shown significant improvement in recent periods from poor results recorded in 1998 and 1999, and management continues to take necessary actions that is expected to further enhance earnings going forward.

However, Fitch added that unfavorable reserve development from prior accident years continues to impact underwriting results, thus limiting the favorable impact of the strong rate increases implemented in recent periods in the company’s property/casualty insurance lines. CNA’s recent results creates uncertainty regarding how long it will take the company to generate stable underwriting results which are not impacted by prior year development.

The rating action on the CAC Pool reflects that it is part of an organization that maintains weaker credit credentials following today’s rating actions. Also considered is the CAC Pool’s strategic role in the overall operations of CNA. The CAC Pool’s ratings reflect strong capitalization, good asset quality and effective implementation of asset/liability management techniques. Fitch has favorably viewed that management has allowed the CAC Pool’s statutory surplus to build by not removing any dividend in recent years, and we do not expect any dividends to be taken in the near term. Also taken into consideration are recent full-year statutory operating earnings, which have been negatively impacted in recent years due to reserve charges, run-off health business losses and first-year sales expenses.