CNA Profit Up, But Charge Prompts Downgrade

Additionally, two other ratings firms took steps that could lead to downgrades: Standard & Poor's Ratings Services said it placed counterparty credit and financial strength ratings for CNA and its affiliates on "CreditWatch" with negative implications, while Moody's Investors Service placed CNA ratings on review for a possible downgrade.

The Chicago-based insurer said the $308 million charge deals with unfavorable net prior year development in the property-casualty operations.

This "significant unfavorable net prior year premium and loss development," the company noted, was recorded mostly for workers' compensation and directors and officers coverage, as well as a recent adverse arbitration decision involving a single large property and business interruption loss from 1995.

CNA also pointed out the company is launching a new cost-saving initiative to cut some $200 million in expenses.

The plan, the insurer explained, would include downsizing its work force by some 5 percent and lowering commissions and acquisition costs, prinicipally related to workers' compensation. This "expense reduction initiative" would be implemented over the next year, the company stated.

Commenting on the $308 million charge, Stephen Lilienthal, chief executive officer at CNA, said he was disappointed with prior year development recorded in the second quarter, but "we continue to focus on our strategic underwriting efforts to obtain profitable growth."

Mr. Lilienthal also noted that CNA's current gross accident year results continue to improve. "Gross accident year loss ratios for property-casualty operations have improved by roughly 7 points compared to 2002," he observed.

"Gross written premiums are up 7 percent over the first six months of 2002. Underwriting discipline remains strong, rates continue to be robust, and our $200 million expense reduction and streamlining will position us for strong results going forward," Mr. Lilienthal said.

But the New York-based Fitch Ratings, which lowered several ratings at CNA, including senior debt ratings of CNA and its Continental Corporation to "triple-B-minus" from "triple-B," remained concerned about the continuing volatility in the company's reserves.

"Given the multiple charges taken in the past five years to strengthen reserves, Fitch believes CNA's reserves have exhibited levels of volatility inconsistent with the prior rating category. As such, this continued reserve volatility was the main consideration in the downgrade," the ratings agency said.

Fitch pointed out, for example, that between 1998 and 2001, CNA posted $2.7 billion in adverse prior year reserve development. The firm also expressed its concern that CNA's ongoing reserve study, which is expected to be completed during the latter half of the year, could prompt even further reserve charges.

Moody's Investors Service is another ratings agency that's keeping a close watch on CNA. Although it did not downgrade the insurer today, the agency has placed its "Baa2″ senior debt ratings at CNA on review for possible downgrade. This review by the New York-based Moody's also includes ratings for CNA's p-c insurance units, whose insurance financial strength rating is currently at "A3."

"The magnitude of the reserve deficiency indicated in today's disclosure, and the possibility that reserves might still be deficient following the charge, precipitated the ratings review," Moody's commented.

S&P also expressed its concern about the possibility of additional reserve charges at CNA when the insurer's reserve study gets completed.

"Standard & Poor's expects that the studies might result in an addition to reserves larger than the amount recognized in the second quarter," the agency said, adding that it expects to either affirm or change the ratings on CNA by the middle of the fourth quarter.

A.M. Best Co., however, remained more optimistic. The Oldwick, N.J.-based insurance ratings agency said its ratings on CNA remain unchanged because "the charge does not have a material adverse effect on A.M. Best's view of the group's financial strength."

"The ratings of the insurance subsidiaries had already contemplated a sizable reserve deficiency," Best stated.

Also, given the support provided to CNA by its majority owner, Loews Corporation, A.M. Best "does not foresee a possible charge arising from the reserve review as being likely to have a negative impact upon the financial strength ratings of the insurance underwriting subsidiaries or the ratings of the existing debt securities," the firm stated.