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 its Long-Term Issuer Default Rating (IDR) at 'A-'. The Rating Outlook for all of the ratings is Stable.

Key Rating Drivers

Very Strong Capital Position: CNA's capital position remains very strong. Traditional risk metrics, such as operating and financial leverage, are consistent with higher ratings per Fitch's guideline ratios.

Fitch also utilizes its Prism model to assess capital with specific charges for long-term care (LTC), and CNA scored 'Very Strong' based on YE 2022 data when excluding unrealized gains/losses and 'Strong' when including all unrealized gains/losses.

Uncertainty from LTC Exposure: CNA stopped selling individual LTC policies in 2003 and group policies in 2014, and existing groups closed to new members in early 2016, accruing approximately $14 billion in GAAP LTC reserves as of YE 2022. For the industry, LTC is a problematic product line that has been characterized by rate inadequacy, large increases in reserves and poor estimates of critical assumptions.

However, the company took several credible steps to offset risks including policy buyouts, rate increases, and unlocking of the GAAP reserve assumptions in Q3 2020. The average age of individual block is approximately 81 years old. Risk related to the LTC exposures reduces the potential for future positive ratings actions.

LDTI Affects Financials: In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. This is commonly referred to as Long-Duration Targeted Improvements (LDTI), which went into effect with 1Q23 financial statements.

This accounting method applies to CNA's runoff business. The impact of LDTI adoption on YE 2022 stockholders' equity was negative $277 million. With the adoption of LDTI, shadow adjustment for gains on bonds backing these liabilities has been retired.

Strong Earnings: The overall combined ratio of 93% for full year 2022 improved 3 pp over prior year and was the lowest in over a decade and each major segment: specialty, commercial, and international improved year-over-year. The company has actively targeted reducing its expense ratio. It was 31% at YE22, an improvement from 2016's 35%. A long-term expense ratio in the high 20% to 30% range would be optimal for the company given its size of premiums written.

Modest Inflation Impact: The non-life book of business would be modestly impacted by a severe increase in inflation as prices are reset annually on most lines of business. The LTC product would be more exposed to inflationary trends as the process for obtaining rate often requires regulatory approval. Favorably, the inflationary environment has increased investment yields, which partially offsets increased costs, particularly in the LTC book of business given the longer liability duration.

Top-Tier Business Profile: Fitch views CNA's business profile as very strong, and companies with similar profiles are typically rated in the 'AA' category. CNA offers commercial p/c coverage, including surety. Products are distributed through multiple channels, targeting small, medium and large businesses.

Loews' Ownership Net Positive: CNA is a publicly traded company that is approximately 92% owned by the Loews Corporation. Loews has provided capital support to the company in the past. Fitch believes Loews continues to have the willingness and ability to provide further support but rates CNA on a standalone basis and views a near-term need for support as unlikely. The company benefits from Loews' financial flexibility and investment expertise.

RATING SENSITIVITIES

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

A material reduction in LTC claims exposure and maintaining capital and profitability metrics.

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

If LTC reserves experience more than $1 billion in adverse development;

Sustained GAAP underwriting loss;

Sustained 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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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