Fitch Ratings has affirmed CNA Financial Corporation's property/casualty (p/c) insurance subsidiaries' Insurer Financial Strength Ratings (IFS) at 'A+' (Strong).

Fitch also affirmed CNA's senior unsecured debt at 'BBB+' and Long-Term Issuer Default Rating (IDR) at 'A-'. The Rating Outlook for all of the ratings is Stable.

Key Rating Drivers

The rating actions consider CNA's favorable financial performance, capital, and debt servicing capabilities and financial flexibility. Offsetting the positives is CNA's exposure to the runoff of the long-term care (LTC) business and a modestly elevated expense ratio compared to peers.

Fitch views CNA's financial performance and earnings as strong. For 1H22, CNA reported a combined ratio of 91%, versus 96% in the prior period, and 96% for FY 2021. The improvement for 1H22 results comes mostly from fewer catastrophes, particularly in the commercial segment, and, to a lesser extent, improvements in the expense ratio and modestly higher favorable development. On an accident-year basis, excluding catastrophes, the combined ratio improved modest by 60 basis points to 91% in 1H22 over the prior period.

CNA's capitalization and leverage are very strong with a financial leverage ratio at 20% as of June 30, 2022. CNA's capital is evaluated on both risk-adjusted and non-risk adjusted basis. At YE 2021, CNA's Prism Score was 'Extremely Strong', including material unrealized bond gains in capital, and 'Strong', excluding such gains, which is consistent with Prism life methodology, as the majority of bond gains come from CNA's LTC business.

The run-off LTC business is backed by investments that are primarily dominated by high-quality fixed income securities with an average credit rating of 'A' and a duration of 9.7 years as of 1H22. These assets more closely match the duration of the LTC liabilities than does the traditional non-life assets, but expose the company to more interest rate sensitivity than pure non-life peers. As of YE21, the company had a net unrealized gain position of $4.4 billion, and, as of 1H22, that position changed to a $1.8 billion loss. This volatility validates Fitch's approach in scoring CNA's Prism score excluding bond gains.

Similarly, as the company looks to implement FASB ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts, which will affect both LTC and fully-ceded single premium immediate annuity business, there will be further volatility in the company's equity. The net impact of these changes would have been a $2.2 billion - $2.5 billion decrease in accumulated other comprehensive income (AOCI) as of Jan. 1, 2021, but due to increased interest rates as of June 30, 2022, the transition impact would have been a $0.4 billion - $0.7 billion decrease in AOCI. Fitch adjusts equity to look through this accounting volatility.

Fitch believes CNA's reserves are moderately redundant in p/c lines but potentially deficient in LTC. Fitch's concerns with LTC are focused on uncertainties regarding utilization and morbidity trends, ability to obtain necessary rate increases, expectations for ongoing low interest rates and long-duration claims. Given market-wide uncertainties linked to the LTC business, Fitch believes CNA's LTC reserves, and those of many other LTC insurers, may require future strengthening.

CNA is majority owned by Loews Corporation (IDR A/Stable). While CNA benefits from Loews' financial flexibility and investment expertise, Fitch's ratings on CNA and its subsidiaries are not currently uplifted due to ownership.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A material reduction in LTC exposure.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Adverse development of LTC reserves of more than $1 billion;

Sustained GAAP underwriting loss;

Sustained adverse GAAP reserve development in excess of 3% of prior year's equity;

Sustained GAAP ROE of 6% or lower;

A reduction in the overall assessment of capital factor to 'a+' or lower.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONS

Entity / Debt

Rating

Prior

Transportation Insurance Company

Ins Fin Str

A+

Affirmed

A+

Columbia Casualty Company

Ins Fin Str

A+

Affirmed

A+

Continental Insurance Co. (The)

Ins Fin Str

A+

Affirmed

A+

Continental Casualty Company

Ins Fin Str

A+

Affirmed

A+

Surety Bonding Company of America

Ins Fin Str

A+

Affirmed

A+

American Casualty Company of Reading, Pennsylvania

Ins Fin Str

A+

Affirmed

A+

CNA Financial Corporation

LT IDR

A-

Affirmed

A-

senior unsecured

LT

BBB+

Affirmed

BBB+

Continental Insurance Company of New Jersey

Ins Fin Str

A+

Affirmed

A+

Western Surety Company

Ins Fin Str

A+

Affirmed

A+

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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